Stockholm (NordSIP) – As the world grapples with the health, economic and moral implications of the Coronavirus, sustainable investment professionals have been doing their best to understand what the pandemic means for environmental, social and governance factors. To answer this question, NordSIP spent the last week talking with researchers, bankers and asset managers about what they think COVID19 means for climate-related investments and the Paris Agreement’s goals.
While much remains uncertain, there is a rising hope that this crisis might lead people to change their behaviours, wake up to the long-term threat posed by global warming and rebuild the economy more sustainably once the immediate threat has passed.
Impact on Green Financial Markets
“It has been difficult to price anything in bond markets over the last three weeks due to the market volatility related to the Coronavirus,” Bo Holm Søndergaard, Head of SRI Bond Marketing at Danske Bank, tells NordSIP. “High levels of volatility mean that both issuers and investors are less inclined to act in these markets when it comes to new issues.”
“Financial markets have endured severe blows,” Dr Hens Steehouwer, Head of Research at Ortec Finance, agrees. “The results from our models show that for a representative portfolio, short-term returns are extreme and fall in the worst 1% of the probability distribution, equivalent to a one in ten years event when we think about monthly returns. But from a medium-term perspective, the recent market developments are far less extreme, with current portfolio values falling in the central 50% of the projected probability distributions of 3-years ago.”
“The turbulence has inevitably spilt over to green bonds,” Søndergaard adds. “Green bonds are underperforming, similarly to what is happening to regular bonds by the same issuers. However, the market has not completely dried up. There were some climate-related issuances as late as last week, including Engie, and we have also seen multilateral development banks use social bonds to fund Covid19-related activities.”
“Yields are up for corporate bonds, and there’s a higher premium that issuers have to pay to come to the market and issue bonds. Corporate bonds have experienced far more pressure than Sovereigns, Supranationals and Agencies due to COVID19 and countries closing down their economies,” Søndergaard says.
Impact on the Environment
While the painful short-term economic landscape is clear, the same cannot be said for the longer-term effects of this pandemic on the environment. “We don’t yet have a definite quantitative answer for the effects of COVID19,” Steehouwer told NordSIP. Nevertheless, based on his experience, the Head of REsearch was able to provide some insights into how the Coronavirus might affect global warming pathways, GDP and financial portfolios.
“From a purely environmental perspective, the pandemic has a huge impact on economic activity,” Steehouwer says. “Countries and sectors coming to a sudden standstill cause emissions to fall. The long-term effect on the emissions is difficult to ascertain, but it is unlikely that it will help much if countries revert back to their previous pathway once the crisis has passed.”
Andrew Howard, Head of Sustainable Research at Schroders, also emphasises the direct effect of the pandemic on the environment. “In the short term, lower global activity will mean lower emissions; the worst-affected countries have seen double-digit percentage drops in carbon emissions as the crisis has worsened.”
Looking beyond direct effect, Steehouwer notes that the dynamics become more uncertain. “From a behavioural point of view, COVID19 could have a positive or a negative effect. Clearly, the urgency of the task at hand could push media and political attention on climate change to the back of people’s priorities, beyond depleting the state treasury. But it could also be a wake call that helps people understand what it means to be affected by a systemic shock which is disrupting the global economy and affecting all regions and sectors to a more or a lesser extent. It could offer people a parallel to what it would look like when the carbon bubble bursts.”
Howard is optimistic that the pandemic will eventually have a positive effect on the choices we make. “Looking beyond the immediate impacts of the crisis, the prospect of changes in corporate and individual behaviour look more positive. Changes in working environments and business practices to make working from home more common, to replace air travel with video conferencing or to shorten supply chains could all help drive a sustained reduction in global emissions. If farsighted governments align the fiscal stimulus programs, many are planning with climate goals, the benefits could be far bigger still, kick-starting the green investment agenda that has been mooted but not yet actioned.”
“The pandemic is a wake-up call to all market participants, policymakers and individuals of the fragility of our complex, interconnected world,” according to Andrew Parry, Head of Sustainable Investment at Newton Investment Management, part of BNY Mellon Investment Management. “The growing threats to humanity from climate change, however, make the social cost of Covid-19 pale in comparison, yet decisive, collaborative action remains elusive.”
Post-Coronavirus Reconstruction Hopes
“While the immediate response of the authorities has been to rightly limit the social fall-out from the current crisis, it is nonetheless an opportunity to secure a healthier and more resilient future for the environment that should not be missed,” Parry adds. “So far, of the tens of billions of US dollars deployed globally to stimulate economic activity, there has been little direct contribution to the climate transition.”
However, Howard is hopeful about the post-COVID19 recovery. “Where all of this leaves the prospects for climate action, and temperature rises will become clearer with time. We expect the benefits to the climate to outweigh the headwinds. Still, the possibility that the current crisis could mark the start of a reconstruction process needed to rebuild the infrastructure that underpins the global economy in a cleaner mould offers a tantalising ray of hope in the current storm.”
Steehouwer agrees. “The aftermath of this crisis will present a perfect opportunity to lay the foundations for a net-zero emission, resilient and socially inclusive post-COVID 19 future. In that way, the future bursting of the carbon bubble could be prevented altogether.”
Impact on Climate-Reform Agenda
Despite some concerns that the pandemic may fuel environmental deregulation, Thomas Kansy, of Vivid Economics and of “The Inevitable Policy Response” (IPR) was optimistic about the impact of the Coronavirus on political reforms and meeting the Paris goals. “Although in the short term the Coronavirus overwhelms all other factors, IPR’s Forecast Policy Scenario (FPS) focuses on longer-term cost and policy trends,” he told NordSIP. “For now, IPR’s expectation remains that by the mid-2020s will be the moment when the top-down view will push for more action and an acceleration of reforms to achieve the Paris Agreement’s goals.”
“The energy mix we have forecasted stems mainly from policy and prices. The forecast for electric vehicles was also policy-based,” Kansy says. “We don’t see any change in those two yet.” Changes in these expectations caused by the Coronavirus remain to be seen. “It is still too early to call the effect of Corona. The virus changes some of the overall demand for transport, but the magnitude of this effect is quite uncertain, as we don’t yet know how people will adjust their way of life. It could be that by 2021 everything is back to it was in 2019.”
However, Howard expressed some concern about medium-term international implications. “The crisis throws into question the prospect of a global climate summit in November, at which global leaders were meant to commit to vital tougher national targets, which could coincide with a rebound in economic activity and sharp rises in emissions,” he concluded.