Written for ESG Clarity – editorial panel contribution

Tribe’s Amy Clarke explains how investing with climate in mind can act as an inflation hedge

In 2023, our ongoing relationship with higher inflation defined the economic landscape. Between September 2022 and March 2023, the UK faced seven months of double-digit inflation, which peaked at 11.1% in October 2022.[1] Notably, food prices increased by 17.3% in June 2023, while housing and energy rose by 12%.[2] The last time overall inflation rose comparably was in 1992, when inflation reached a peak of 8.4%.[3]

Expectations about inflation swiftly changed in the past twelve months. The Office for National Statistics (ONS) suggested that inflation in October 2022 was the highest in over 40 years.[4] That said, by 2025, the Bank of England expect inflation to be down to 2%.[5] This uncertainty has created challenging market conditions for businesses and investors alike.

What’s driving inflation?

Covid-19 and the war in Ukraine triggered price hikes and heightened inflation in recent years.[6] In the UK, labour shortages post-pandemic and the EU Common Market departure further worsened inflation.[7]

A Bloomberg survey from June 2023 revealed that 90% of professional investors believed corporate greed was a key driver of inflation.[8] US corporate profit margins increased from 11.3% in the first half of 2021, to 19.2% one year later.[9] Inflation has steadily declined since, falling to 15.1% by the end of 2022, which is comparable to the time immediately following the Global Financial Crisis.[10]

Not all who increased profits caused inflation, but all who caused inflation increased profits

It’s crucial to recognise that not all price increases are the same. Price increases in essential sectors—industries supporting food, shelter, and energy[11] —are systemically significant in causing inflation.[12] This means a few companies controlling vital resources (energy, power, and food) can trigger nationwide inflation hikes by extracting excess profits, commonly known as corporate greed.[13]

In the UK, in 2022, 90% of profit increases were limited to just 11% of publicly listed companies.[14] Further examples of this include oil and gas companies, some of whom doubled their profits between 2021 and 2022.[15] Some food companies saw profitability increase from £265 million to £1.8 billion between 2019 and 2022.[16] Similar patterns were observed in energy companies, mining firms, and food and commodity giants after Russia’s invasion of Ukraine.[17] 

These companies represent firms that heavily influence conventional energy and food systems. The concern lies in these firms extracting excess profits, rather than reinvestment into sustainable solutions. As we focus on the transitions needed to better serve people and planet, alongside shareholders, equity and resilience must be the foundations and lens through which we evaluate investments.

Does a worsening climate influence inflation?

Extreme weather and rising energy prices raised UK household food bills by an average of £605 since 2021. Record-breaking temperatures, droughts, floods, and crop failures accounted for 60% of this increase.[18] The persistent and worsening effects of climate change on agricultural production, and therefore inflation, were evident in 2023.

Stability and certainty are keenly associated with a low inflation rate. The breakdown in climatic stability beyond 1.5⁰C of warming will increase crop failure and extreme weather events, leading to higher uncertainty and instability. The International Monetary Fund (IMF) found that weather events exacerbated by climate change, like droughts and storms, contributed to higher inflation.[19] This will have a stronger negative effect on developing countries disproportionately impacted by the climate crisis.[20]

Climate-linked inflationary effects have been observed in the consistency of production and ability to trade. For example, droughts intensified under more dramatic warming scenarios, causing severe consequences. In 2022, Italy faced their worst drought in 70 years, resulting in a one-third reduction in rice production.[21] Rice prices nearly doubled in the following 12 months.[22] Drought conditions have also led the Panama Canal, one of two vital global trade routes, to restrict vessel traffic at the end of 2023. Ports in Panama, Nicaragua, Ecuador, Peru, El Salvador and Jamaica suffered the most from the restrictions, affecting up to 25% of their total maritime trade flows.[23]

The War in Ukraine demonstrated how conflict can drive inflationary energy prices. As the production and trade of essential resources, such as food, become more unstable, conflict becomes more likely.[24] The climate crisis is forecasted to have a strong relationship with increasing levels of conflict.[25]

Looking forward: The role of investors

Preventing worst-case climate change scenarios while funding climate adaptation can serve as a hedge against inflation. Investing in societal stability and considering corporate governance’s role in mitigating predatory price increases can inform inflationary hedging. Combining these efforts with monetary policy is crucial in preventing runaway inflation.

With that in mind, as investors, we need to:

  1. Discourage short-term profiteering to enhance long-term stability through active ownership; and
  2. Invest in resilience, particularly in the renewable energy transition, to mitigate climate and inflation risks.

The lessons are clear, and the evidence is stark: investing in our future is a critical pathway to help hedge against inflation.

[1] Inflation rate for the Consumer Price Index (CPI) in the United Kingdom from January 1989 to December 2023, Statista

[2] Ibid.

[3] Ibid.

[4] Consumer price inflation, UK: December 2023, Office for National Statistics

[5] When will we get back to low inflation?, Bank of England

[6] Ibid.

[7] Ibid.

[8] Fed Will Keep Rates High Thanks to Inflation Fueled by Corporate Greed, Investors Say, Bloomberg

[9] Corporate Profits in the aftermath of COVID-19, Federal Reserve

[10] Ibid.

[11] Essential sectors are defined as “Petroleum and coal products”, “Oil and gas extraction”, “Utilities”, “Chemical products”, “Farms”, “Food and beverage and tobacco products”, “Housing”, and “Wholesale trade”.

[12] Inflation in Times of Overlapping Emergencies: Systemically Significant Prices from an Input-output Perspective, UMass Amherst Economics; Systemic inflation drivers (and what to do about them), Financial Times

[13] Fed Will Keep Rates High Thanks to Inflation Fueled by Corporate Greed, Investors Say, Bloomberg

[14] The biggest study of ‘greedflation’ yet looked at 1,300 corporations to find many of them were lying to you about inflation, Yahoo Finance

[15] ExxonMobil posts record annual profit of $56bn in 2022, Offshore Technology

[16] Revealed: How powerful companies are amplifying inflation through their profit margins, IPPR

[17] Ibid.

[18] Extreme weather has driven UK food bills up by £351 since 2021, leaving some Brits unable to eat., Euronews

[19] Eye of the Storm: The Impact of Climate Shocks on Inflation and Growth, International Monetary Fund

[20] IPCC Sixth Assessment Report, Chapter 11: Weather and Climate Extreme Events in a Changing Climate, IPCC

[21] Rice fields dry up as Italy’s drought lingers on, AP News

[22] Food and Price Monitoring and Analysis (FPMA) Tool, Food and Agriculture Organization of the United Nations

[23] Climate Change is Disrupting Global Trade, International Monetary Fund (IMF) Blog

[24] Dangerously Hungry: The Link between Food Insecurity and Conflict, Center for Strategic & International Studies (CSIS)

[25] Conflict and Climate, United Nations Climate Change