The coronavirus pandemic, the subsequent supply-chain disruptions, and the Russian invasion of Ukraine have led to levels of price inflation not seen since the 1970s. Europe could well run out of gas this winter, and if supplies grow critically short, entire industries may be ordered to shut down so that households have heat. In the United States, where sensitivity to petrol prices is great, inflation has become an albatross around the neck of President Joe Biden. Over the summer, he was the least popular American president at that point in his term since Jimmy Carter, though a recent string of legislative victories has improved his standing in the polls.¹ Biden faces legislative elections in November that will determine whether the Democratic Party retains control of Congress. If the Republican Party takes over, it is likely to try to weaken or defund the new climate law.

Likewise in Europe, it is not clear how well the new climate targets will survive public distress over inflation. The wild run-up in gas prices has already sent governments scrambling for new supplies of gas, sometimes requiring them to sign contracts running for decades. A flood of investment money from Europe may flow into unlocking gas and oil reserves in Africa.² In principle, the current turmoil surrounding supplies of fossil fuels ought only to strengthen the political commitment in Europe to move away from them as rapidly as possible. But will it work that way in reality?

All of these questions have profound implications for investors, of course. Generation Investment Management remains as committed as ever to its founding principle of approaching the investment landscape through the lens of sustainability. As the coming year unfolds, we will be paying close attention to several issues:

• How does the political climate develop in response to the ongoing economic distress? We have seen a rise in right-wing populism around the world in response to recent economic hardship. The populists are rarely committed to climate action, and indeed are often committed to rolling it back.
• Do the fears of fuel shortages in Europe lead to a large new wave of investment in long-lived fossil-fuel assets, like gas pipelines? If that happens, it will make achieving the world’s climate goals all the harder — or require that these new assets be shut down long before the end of their useful lives, creating a risk on the balance sheets of the companies and financiers behind these assets.
• Will the countries of the European Union move from rhetoric to action regarding their newly strengthened goals for clean energy? If we do not, within a year, see the beginning of a wave of new national laws designed to streamline the permitting of renewable-energy projects, we will know that this push has been bogged down.
• As emission cuts lag, we are increasingly worried about the risk of a disorderly transition away from fossil fuels. We have already seen episodes of disorderly capital flight, as when nearly the entire American coal industry went through bankruptcy reorganisation in the decade from 2010 to 2020. A rushed and disorderly transition, if it comes to that, will make risks hard to predict, assets hard to price, and could become chaotic enough to pose systemic risks to the economy and the financial system.
  
• Oil and gas companies are reaping bumper profits due to the high prices provoked by the Ukraine war. Many of them now claim to be committed to the energy transition, and these high profits give them a chance to prove it by stepping up their investments in green energy. Will they do so, or will they show their words to be empty by spending the money on share buybacks and stock dividends?
• Will we see fresh leadership from the World Bank, the International Monetary Fund, and other development banks to tackle the problem of creating a just transition for the world’s poor people? Their intervention is badly needed to create a path for renewable-energy development in poor countries at reasonable interest rates, so that hundreds of millions of people gain access to clean electricity and modern energy services.