For investors concerned about climate change it’s the number one question: what impact will the Covid-19 pandemic and the massive economic and social response to it have on efforts to address the growing climate emergency? The answer, from speakers our recent London Stock Exchange and Principles for Responsible Investment webinar, was unambiguous.
“The ultimate outcome of this pandemic will be indeed to accelerate the energy transition,” said Mark Lewis, Global Head of Sustainability Research at BNP Paribas Asset Management. “The structural pressures that have been bearing down on the fossil fuel energy industry with increasing force over the last three or four years will still be there as we come out of lockdown.
“And these structural pressures will be exacerbated by behavioural changes that we've had to make during the lockdown,” he said, which will impact demand for fossil fuels generally and for oil in particular.
Lewis went on to set out how five “D” drivers towards a low-carbon economy – Decarbonisation; clean energy price Deflation; Decentralisation of energy generation; pressure to Detoxify air; and Demand destruction – are set to persist and accelerate.
He described the push to decarbonise the global economy as “the number one megatrend” influencing policy and regulation globally, backed by increasingly urgent scientific warnings, growing investor concern and ever-deeper action by corporates and individuals.
That action is made possible by deflation in renewable energy costs – the cost of solar power has fallen from $350 per megawatt hour in 2010 to below $50, he noted – and the emerging viability of energy storage, which will increasingly support a decentralised, low-carbon power system.
Meanwhile, the lockdown has radically reduced local air pollution, the world’s leading cause of death. Now that city-dwellers have seen what is possible as local air pollution is curbed, “the pressure on governments around pollution in big cities and detoxifying the air … is going to be immense,” he added.
Finally, fossil fuel demand destruction – particularly for oil, caused by the growth of electric vehicles – is set to continue. “People who think that we are destined to continue growing our demand for oil by 1 million barrels a day in perpetuity … should consider the case of the United States,” he says. There, oil demand peaked in 2005, despite the US population growing by 20 million people since that date.
These drivers will be supported by behavioural changes brought about by the pandemic, such as continuing homeworking displacing some commuting and ongoing reductions in business travel.
This argument was supported by Arne Staal, Global Head of Research & Product Management at FTSE Russell, who considered the question from three perspectives. First, while he noted that the unprecedented fiscal response would strain government resources, he also observed that “the disruption to the status quo provides an opportunity to ‘build back better’ and achieve green growth.” He observed that the EU offers a clear example of where economic stimulus is being directed towards environmental ends.
Secondly, he said that the response of the markets has been very uneven, with sustainability-orientated indexes outperforming the wider market. “Our analysis finds that the performance differential comes from the underweighting of high carbon-emitting industries, which have been most impacted by the pandemic and the lockdown,” he said. “This points to structural changes that are accelerating the move to renewable energy and the stranding of high-carbon assets.”
Thirdly, Staal noted growing interest among investors in understanding climate risk. “Our experiences at FTSE Russell indicates that institutional investors and asset owners are accelerating their drive for climate risk to be integrated into the design of their core portfolios,” he said, adding that retail investors are also becoming much more focused on sustainable investing climate and ESG.
Speaking to the role of the EU, Martin Spolc, Head of Unit, Sustainable Finance at the European Commission, said that the European Green Deal is “priority number one” for the Commission. He noted that €340 billion of additional investment is required to meet the EU’s climate and energy targets for 2030, creating an urgent need to combine public investment with private capital.
The European Green Deal – which sets out how the EU will become climate neutral by 2050 – is central to the bloc’s post-Covid recovery plans, he said. “We don’t see any trade-off between speedy recovery and supporting the sustainability transition … We believe the green agenda can considerably accelerate the recovery and vice versa.”
However, ensuring the growth of a green economy is going to be a painstaking endeavour, cautioned Rhian-Mari Thomas, the CEO of the Green Finance Institute, a newly formed independent research body created by the UK government. “The barriers to greater green investment vary by jurisdiction by sector and by sector … making generic calls for action is not the way forward,” she said.
Instead, business, policymakers, investors, academia and civil society need to work together to identify the hurdles to investment in each sub-sector and collaborate to develop the solutions.
“Value is going to be driven increasingly by identifying leaders and laggards by sector,” she added. “For financiers and investors to make those assessments, we’re not only going to need better data and disclosure as set out by the [Taskforce for Climate-related Financial Disclosures], but also greater clarity on the policy pathways, with clear policy support for scientifically feasible and deployed transition paths by sectors.
“That will enable the financial markets to innovate, to create new financial products and mechanisms … and new financial vehicles such as infrastructure banks or banks for nature,” she said.
The comments were made on our webinar - COP26: Sustainable Recovery & investor collaboration on Covid-19 recovery - which you can listen to again here
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