The coronavirus has induced a global crisis that knows no borders and has impacted billions of lives, as well as the economy and the society we live in. It’s clearly shown how systemic risks can have exponential impacts, and how unprepared and unresilient our systems can be, even for a crisis we know will happen. Does that sound familiar to you?
It sounds very familiar to me when looking at the challenges we will face due to climate change, biodiversity loss and societal or demographical changes. And add to this the potential highly critical situations that these might trigger.
The crisis has shown how we need to join forces to create solutions that will allow us to manage the impacts. It’s an interesting lesson we’re learning at the moment.
The investment and financing business will play a significant role in the aftermath of COVID-19. We’re already seeing the regulators respond to this by proceeding towards steering the economic turnaround by adding greater resilience into the system and considering all aspects of ESG (e.g. reducing emissions, efficient infrastructure, financing innovation and digitalisation).
For asset and wealth management businesses, it means harnessing the opportunity and deciding on whether you want to be a frontrunner, catch up over time with the leading group or wait and see how the regulator will steadily incorporate ESG requirements into the business-framing environment. Sustainable finance is still going strong in the EU. ESG-focused investments have so far clearly outperformed throughout the COVID crisis. Supranational organisations are continuing to push the ESG agenda forward.
What should you consider?
- The trillions spent on recovery will be directed towards ESG – green recovery packages. The infrastructure, business and technology investment that follows should be aligned with the critical climate and sustainability commitments that governments also need to meet in the next decade. China is to extend subsidies and tax exemptions for new energy vehicles. The UK is increasing the tax paid by owners of large utility vehicles and adding incentives to increase the uptake of electric cars. The recovery plan in Germany will likely not allow subsidies for combustion engines. These are only a few examples.
- At a time of cheap oil, revisiting and redirecting expensive fossil fuel subsidies could also be a prudent move. Infrastructure and technology projects that can boost job creation and incomes in clean energy, building energy efficiency and sustainable transport are win-win situations. And they are a stark contrast to investments that bet on declining technologies and create underperforming or even stranded asset costs in the next decade or two (e.g. new coal-fired power plants – see “half of all coal plants are expected to be unprofitable this year”).
- The EU has already confirmed that the COVID-19 crisis won’t stop Europe from developing bolder 2030 climate targets, and that green finance will be a “key focus” of the post recovery phase.
- Companies in financial distress due to the COVID-19 crisis - and which are also high emitters, like those in aviation, oil and gas and shipping - may find that conditions are imposed requiring them to demonstrate resilience to climate risks, including their ability to transition effectively to a decarbonised future. There is a higher risk of lower returns.
- The harsh lessons from this crisis are likely to accelerate efforts, in a post-pandemic world, of markets and boards to price in systemic risks (in particular climate risks: physical and transition risks). This will include accelerating climate risk governance and disclosure, and the wider prominence of ESG.
In summary, ESG is on the rise and will influence your business more than ever.