Going green also means increasing prices – KION546

By Paul R. La Monica, CNN Business

President Biden and Federal Reserve Chairman Jerome Powell have pledged to fight inflation. But the two could face an uphill battle to bring consumer prices down due to a factor many experts may not be making into the economy: the rise of ESG investing.

Investors are increasingly looking to support companies that support sustainable environmental, social and governance practices. But some may be unaware of the impact of the so-called “greening” of the global economy on inflation, according to a recent report by Seema Shah, chief strategist at Principal Global Investors, an asset management company. She called the phenomenon “en-flation”.

Shah said the increased focus of big business and governments on cleaner environmental policies could be inflationary in the short term.

“I don’t see why the Fed won’t recognize the ‘E’ in its inflation outlook any longer,” Shah said in an interview with CNN Business. “We will see more central banks considering climate change, and I suspect the Fed will as well. The green movement is not going to go away.

So what could the “green shift” be wrong on the inflation front?

On the one hand, Shah noted that higher costs for carbon credits, or the permits that companies can buy to offset emissions, could potentially be passed on to consumers.

She also pointed out that more companies will potentially have to pay penalties if they do not meet the UN climate targets, which could also cause companies to increase their prices in order to preserve their profit margins.

Businesses may also face higher costs for labor, capital spending, and other expenses associated with transitioning to a more environmentally friendly business model, Shah said.

Green monetary policy could mean more red for the market in the short term

Of course, this is a necessary price that businesses – and consumers – will have to pay now for the long-term good of the planet.

But it could come at the expense of short-term profits and shareholder returns if companies have to absorb some of these increased costs that they are unable to pass on to customers.

“Someone is going to have to bear these costs,” Shah said. “It’s either consumers or businesses.”

It is also a sign that inflation will not be “transient” as Powell, until recently, repeatedly asserted.

“The outlook for inflation is expected to remain elevated over the next 10 years due to the integration of ESG costs and a tight supply of oil and natural gas,” said Sébastien Galy, senior macro-strategist at Nordea Asset Management, in a recent report.

The ESG revolution is just one more reason the Fed will continue to struggle to control price pressures anytime soon – unless it begins to tighten monetary policy by raising rates. interest, said Phil Orlando, chief equity market strategist at Federated Hermes.

“Tightening the Fed is the right thing to do in light of ugly inflation,” Orlando said. “It’s not temporary or transitory. It is sustainable. “

Orlando predicts the Fed will need to hike rates twice next year and four more times in 2023 in order to keep inflation under control. And as long as businesses continue to spend more to be good stewards of the environment, it could push inflationary pressures even further.

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