Craig Cameron, portfolio manager and research analyst at Templeton Global Equity Group, believes that there are substantial opportunities in 2023 in companies deemed undervalued that can also have a positive impact on climate change mitigation and adaptation.

As markets approach 2023, US-based investment manager Franklin Templeton believes that the global economic and geopolitical outlook remains highly uncertain, but the commitment to decarbonization is robust and the outlook for renewable energy remains bright. 

According to Merrill Lynch, net-zero emission targets were in place in countries accounting for 91 per cent of global gross domestic product. A notable development in Europe was that, in spite of higher economic growth compared to the prior period a year ago, the region’s emissions declined between August and October of 2022, Cameron said. 

This is a promising development, showing that recent efforts to decarbonize may be bearing fruit as well as confounding the idea that economic growth and emissions' reductions are mutually exclusive, he continued.
 
“Offsetting this is our general concern that the current global response is likely too little, too late for tackling climate change meaningfully, and our base case expectation is that without material, incremental regulatory intervention or societal shifts, the world will almost certainly overshoot the 1.5 °C warming goal set under the Paris Climate Agreement,” he said. 

“Tackling this important human-wide challenge has the potential to cause further trade barriers and restrictions between countries if the commitment and action toward mitigating climate change varies by region,” Cameron added. 

“Moreover, ongoing efforts to decarbonize are likely to intensify inflation pressures through the economic cycle as material bottlenecks and/or the imposition of higher taxes and regulatory requirements drive inflation higher. We believe the themes of decarbonization and deglobalization are interlinked and, in fact, magnify each other as we enter what may prove to be a very different macroeconomic environment than in the recent past,” he said.
 
Investment opportunities
Against this backdrop, Cameron sees value in companies that provide products and services to aid in the global decarbonization challenge. He found some in the industrials sector, including renewable energy equipment companies, and particularly those that benefit from the US IRA. He also found opportunities in companies that focus on energy efficiency solutions, particularly those benefiting from higher power prices in the short term and decarbonization efforts in the long term.
 
Elsewhere, in terms of portfolio composition, he is optimistic about the materials sector. In particular, he sees strong demand growth in metals which are needed to enable the transition to a low carbon economy, including nickel, lithium, copper and aluminium. 

Additionally, Cameron anticipates that sustainable packaging such as cardboard, aluminium and recycled plastic should continue to take market share from traditional plastic packaging, with the potential for both consumer tastes and regulation accelerating this trend.
 
Within the information technology sector, he identified opportunities in semiconductor companies through the year as valuations became more attractive. 

Regarding electric vehicles, he feels the opportunity set has broadened and the firm found value in transitioning automotive companies that are committing to meaningful change as well as auto suppliers geared toward the transition to greener production.
 
While the market consensus is focused on the near-term macroeconomic environment, the firm invests in companies for the long term, and feels that the case for investing in climate-change mitigation and adaptation has never been stronger. 

Broad declines such as those the market experienced in 2022 are painful, he said, but also provide the greatest long-term investment opportunities. He believes that the themes of decarbonization and deglobalization could define the years ahead. 

Amidst this backdrop, Cameron sees opportunities in companies deemed undervalued that can also have a positive impact on climate change mitigation and adaptation.