Three reasons why the return on equity for shareholders will decline – Natixis

The return on equity (RoE) is now very high. But economists at Natixis think it will have to decline in the future for three reasons.

The need to make long-term investments with low returns

“It will be necessary to make long-term investments (for example for the energy transition), the return on which is low; it will therefore be necessary to accept a lower return on equity, both for these investments to be made, whether by the public sector or the private sector and because making them will reduce the return on equity.”

The rise in energy prices due to the energy transition

“The energy transition will lead to a sharp rise in energy prices; to avoid the resulting loss of purchasing power, wages will have to compensate for this rise in prices, i.e. wages will have to be re-indexed to prices, which will reduce capital income. The same applies if purchasing power is maintained by public transfer payments financed by taxation of capital income.”

The internalisation of externalities 

“Governments will want to reduce the negative externalities that result from corporate behaviour (climate, offshoring, redundancies, etc.). If companies internalise these externalities, the return on their equity will decline.”