Investment update
- Uncertainty over interest rates continues to weigh on market sentiment
- US economic data suggests the economy has remained strong despite monetary tightening
- Oil prices rallied significantly in the quarter due to major producers curtailing supply
The third quarter was another volatile period in the financial markets. Globally, shares and bonds both fell by nearly 4% (in US dollar terms) from July to September [1] as concerns about the future path of interest rates dominated market sentiment.
In developed markets, such as the UK, the EU and the US, economic data generally showed the rate of slowing down, increasing expectations that interest rates may have peaked.
This favourable news was, however, offset by other developments. Retail sales and gross domestic product (GDP) data from the US suggested that economic growth and consumer demand remained far stronger than the market expected, raising concerns that this could keep upward pressure on prices.
Meanwhile, the members of the Organisation of the Petroleum Exporting Countries (OPEC) plus other oil-producing countries, otherwise collectively known as OPEC+, announced ongoing cuts of 1.3 million barrels per day (bpd) in production output.[2] This was done to boost revenue from their principal export, given the finely balanced global oil demand and supply. As a result, oil prices have risen 30% since the beginning of July.[3]
On the other hand, the clean energy sector has experienced a sell-off, with oil prices accelerating to 100 US dollars a barrel. The primary cause has been the higher interest rate environment. Many companies agreed to long-term contracts, fixing the price at which they sell energy before developing their projects. Rising costs and supply chain difficulties have also hit the sector hard.
In summary, stronger US growth and higher oil prices have made the market nervous that even if rates have peaked, there may not be any cuts until next year. Consequently, prices for stocks and bonds have had to adjust to the idea that rates may be higher for longer.
Impact update
- UK government rolls back key climate policies needed to achieve
Net Zero
Reducing absolute greenhouse gas emissions to as close to zero as possible. This is done via reductions in core emissions (through process efficiencies and product adaptation) across a business's Scope 1, Scope 2 and Scope 3 footprint. - International Energy Agency (IEA) released a significant update to its Net Zero by 2050 roadmap, indicating solar and electric vehicle (EV) sales are progressing in line with goals
- The three-month period from June to August was the hottest on record, with an average temperature of 16.8 degrees Celsius
The UK Prime Minister, Rishi Sunak, made a significant statement announcing the decision to roll back[4] essential climate policies needed to deliver on net zero. Sunak declared that the UK would delay its ban on new petrol and diesel cars from 2030 to 2035, slow down the decommissioning of gas boilers, and enact a moratorium on new energy efficiency regulations. There has been a significant business response against these planned measures, including from us, through the Business Declares Coalition.
During this quarter, there has been a notable increase in global legal cases focussed on climate change. This poses a significant risk to the fossil fuel industry but also an emerging risk for governments. The UN Environment Programme reported[5] that climate litigation has more than doubled in five years and is now considered a vital tool for delivering climate justice. This quarter, we saw young people using this method of litigation to bring attention to climate change. For instance, a group of young people from Portugal are using the law to take 32 countries to trial before the European Court of Human Rights for failing[6] to take proportional action to avert the climate crisis. They argue that European governments have a legal obligation to take more radical and urgent action to reduce greenhouse gas emissions.
The International Energy Agency (IEA) released an important research update[7] to its Net Zero by 2050 roadmap. The update revealed that solar and electric vehicle (EV) sales are progressing in line with the goal of achieving net zero emissions by 2050. This is great news because these two areas combined need to deliver around one-third of the emission reductions required between now and 2030.[8]
Finally, it’s hard to ignore the heat and extreme weather this summer around the world. According to data from the European Union Climate Change Service,[9] the three-month period from June to August 2023 was the hottest on record, with an average temperature of 16.8 degrees Celsius. The result of this included flooding in central Europe and wildfires in various locations such as France, Italy, Portugal, and Canada. Additionally, the ocean recorded the warmest daily surface temperature on record. All of this is further evidence of the impact of human activity on the planet’s climate, emphasising the need to accelerate our support toward transitioning to a low carbon and fair economy.
Future focus
The annual
Principles for Responsible Investment (PRI)
Impact Investing
The Conference of the Parties (COP) 28 will take place from the end of November until mid-December in Dubai. International cooperation on climate change remains as important as ever. The world will be watching for evidence of this during the COP, both in terms of promises made and, more importantly, action taken.
[1] MSCI All Country World Index for stocks, Bloomberg Global Agg for bonds, Bloomberg
[2] Saudi Arabia, Russia extend voluntary oil cuts to year-end, markets jump, Reuters
[3] Bloomberg
[4] The UK’s rollback of climate policies will cost its citizens and the world, Nature
[7] The path to limiting global warming to 1.5 °C has narrowed, but clean energy growth is keeping it open, IEA
[8] Net Zero by 2050: A Roadmap for the Global Energy Sector, IEA
[9] Summer 2023 was hottest on record, scientists say, Reuters
