Headwinds materialized in 2022 for ESG investing. The war in Ukraine caused energy prices to surge and energy stocks to soar, while defense spending became crucial to war efforts, posing a philosophical challenge to ESG investing. Yet, the case strengthened for an energy transition over the long run to reduce tenuous geopolitical dependencies, and policymakers acted accordingly.

The United States made its largest federal commitment to climate in history in the Inflation Reduction Act, targeting $369 billion in spending on tax credits for clean energy and electric vehicles and targeted investment toward clean energy technology and projects. It puts the United States on track to reduce carbon emissions by 40% by 2030, compared to 30% without it. Combined with last year’s infrastructure bill, this could create many opportunities in areas like batteries, electric vehicle charging stations, smart grids, energy efficiency and clean manufacturing. Public investment and incentives can reduce barriers to entry for the private sector and spur innovation.

Looking ahead, although sustainable investing has become deeply politicized, it presents opportunities for risk management and growth for all investors – regardless of their politics. Environmental, social and governance data can be used as additional inputs in the risk management process and are highly customizable to express a range of views. While areas like e-commerce, streaming and social media are pillars of technology, these areas may not be able to repeat past growth in the future. Instead, investors will have to unearth new opportunities for innovation. Some of these may intersect with sustainability, like renewable energy, green technology, cybersecurity and democratizing health care and medicine. The time horizon is long, but in the years ahead, near-term ESG headwinds should give way to long-term investment opportunities.

U.S. carbon emissions are expected to fall further by 2030 because of the Inflation Reduction Act

%, change from 2005 levels

Source: Rhodium Group, J.P. Morgan Asset Management. The high, central and low emissions scenarios reflect uncertainty around future fossil fuel prices, economic growth and clean technology costs. Past performance is not a reliable indicator of current and future results.  Data as of December 5, 2022.