While an increasing number of investors are interested in allocating to decarbonisation, many are worried that the climate-change fight could fuel inflation.
According to Angela Ashton, director and founder of Evergreen Consultants, decarbonisation is the most popular theme among investors today.
But some of their burning questions relate to how decarbonisation could impact inflation and economic growth and whether the goals of decarbonisation, lower inflation and strong economic growth are compatible.
A report from the Network for Greening the Financial System (NGFS), which is a group of 83 central banks, recently showed that if the green transition failed, there would be a massive hit to growth, not including the impact of various weather events.
“There is also agreement that the more orderly the transition, the more stable it will be in an economic sense,” Ms Ashton said.
“For example, carbon prices jumping around a lot would generally not be helpful from an economic point of view. It would give mixed signals on pricing and ultimately lead to difficulty in transition. Delaying the transition is similar.”
The idea, according to Ms Ashton, is that while inflationary pressure from decarbonisation is real, as a result of increased spending on new energy technologies, delaying the transition is likely to have a greater impact on inflation at the time it starts.
“Overall, decarbonisation is likely to be both positive for growth and negative for inflation. This is not necessarily bad in an economic sense,” Ms Ashton said.
“However, it does mean that policy makers are going to have to be more mindful of inflation and making sure it doesn’t get out of control now.
“It’s another reason why central banks need to be very vigilant at the moment and are likely to stick to the interest rate increases they’ve foreshadowed, even in the face of other issues such as Russian-Ukrainian war.”
Last year, a study by Boston Consulting Group in junction with the World Economic Forum found that decarbonisation doesn’t have to be costly.
According to the study, it is possible to decarbonise major global supply chains with readily available technologies at low costs.
Noting that costs are often cited as a major reason why companies do not bring down their emissions, the study found this argument to be “increasingly flawed”.
Moreover, it suggested that decarbonisation would only add 1 per cent to 4 per cent to end-consumer costs in the medium term.
