Embracing ESG is not a vague distant goal, but something that immediately strengthens the resilience of our societies and companies.
At the start of the year, sustainability was at the top of the political agenda, with new climate initiatives ranging from the organisation of the COP 26 to the launch of the Green Deal in Europe. Sustainability was on the trajectory to the mainstream, with asset managers prioritising the integration of material environmental, social and governance (ESG) factors into existing investment solutions, while the development of new sustainable investment solutions continued to accelerate in response to ever-growing investor interest.
However, the COVID-19 crisis has unfortunately changed the priorities, with policymakers having no choice but to focus on crisis management and to redirect already scarce financial resources to support their economies. And, unlike many policy interventions in recent years, this public support has often been extended without any ESG requirements.
Has the pandemic slowed down the momentum for sustainable investing in the financial industry? Market flows suggest otherwise. In the U.S., for example, Morningstar reported almost USD 10 billion of inflows to sustainable open-end mutual funds and exchange-traded funds in Q1 2020, already over half the total for the whole of 2019.
For investors, we believe the crisis will ultimately accelerate the ESG agenda, with wide-ranging repercussions. Environment is, of course, only one aspect of the equation. The crisis also highlights the importance of social and governance factors, as companies with more of a longterm focus have proven to be more resilient so far.
In this piece, we analyse the implications of the COVID-19 crisis through the lens of sustainability, identifying both short-term repercussions and some fundamental long-term shifts in how ESG factors will be considered in the context of investment.
ENVIRONMENT: Loss of momentum outweighs short-term benefits, but long-term commitment remains intact
When thinking about the environmental impact of the COVID-19 crisis, the first conclusion is often that it is positive. Satellite images from the European Space Agency (ESA) and NASA show a substantial drop in nitrogen dioxide concentrations in many countries. In Europe, for example, ESA data shows levels were down 50% from mid-March to mid-April, vs. the same period a year ago, in cities such as Paris, Rome, Milan and Madrid.
Lockdown measures have forced many people to work from home, abandoning their daily car commute to the office. Industrial activity and coal consumption for energy generation have fallen substantially – down 13.5%1 and 8.9%2 in China, for example.
However, these short-term environmental benefits come with an important loss of momentum in the fight against climate change.
The COVID-19 crisis has led to the cancellation of many climate demonstrations and, more importantly, to the postponement of the COP 26 Climate Conference to 2021. This is a significant setback as the clock is ticking for the climate. The US National Oceanic and Atmosphere Administration recently announced that, according to its most recent measurements, 2020 could well be become the warmest year on record. We cannot afford to lose an additional year.
The short-term reduction in greenhouse gas emissions could also be overshadowed by a rapid rise in fossil fuel consumption as economies start to reopen and recover over the medium to long term – with low energy prices potentially exacerbating the increase. This was true for the 2008 financial crisis, when emissions initially fell to from 32 gigatonnes (2008) to 31.5 (2009) before rising again to 33.2 in 2010.
However, technological advances offer some hope. First, the cost of producing electricity from renewable power such as wind and solar is becoming increasingly competitive, as is the cost of battery storage (see Exhibit 1), which should help to contain the rise in greenhouse gases as economies recover. In addition, the significant volatility in oil prices just in the last few weeks adds to the pressure on oildependent nations to diversify their revenue sources, boding well for a greener future. The International Energy Agency predicts that revenues will drop by as much as 80% in 2020 vs. 2019 for the largest producers.
EXHIBIT 1: LITHIUM-ION BATTERY PRICE SURVEY RESULTS: VOLUMEWEIGHTED AVERAGE
Constant 2018$ per kWh
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