Coronavirus has already caused a catastrophic health and economic emergency and the exit is still unclear. My growing fear now is that if we try to beat this pandemic with outdated policy responses, we risk worsening the climate emergency too.
This is not inevitable however. If we make the focus of our recovery efforts the switch to a sustainable economy (something we will have to do quickly anyway) then amid the misery of coronavirus, we can build something meaningful from the rubble.
As we approach Earth Day on 22 April, a rare silver lining from this tragedy is the effect it has already had on the environment. Alternative data sets show car journeys plummeting. Photographs show the usual haze of pollution sitting over major cities finally lifting. Wildlife is making a tentative comeback. And most importantly, carbon dioxide emissions look set to fall noticeably in 2020.
A green agenda in retreat
That’s the good news. Now for the cold shower. Without structural changes, these benefits do little more than buy us time – a blip on the ever-rising graph of emissions that will resume its upward march as soon as the virus has been tamed. Meanwhile, society pays for blue skies and birdsong with lost jobs, shuttered high streets and, of course, the lives of virus victims.
The truth is that despite the pain inflicted by this crisis, tackling the climate emergency and committing the funds needed to pay for everything from renewable energy to carbon sequestration will require a level of ambition and the mobilization of public and private capital on a scale never seen before. We cannot let this become a debate between sustaining livelihoods or sustaining the planet. It must be both.
Advocates of a more sustainable approach should instead focus on the decisions being taken in government offices and company boardrooms as we speak.
It’s only been three months since I was hearing bold pledges of climate action in Davos, yet today, environmental, social and governance (ESG) considerations risk being forgotten.
Some nations are backsliding on environmental commitments to support their industries. Others are using the pandemic as a cover to roll back green regulations. We will see later this year whether countries reaffirm their commitments to cutting greenhouse gases under the Paris Agreement, but right now it feels like progress on sustainability is in real danger.
A re-set moment for humanity
And yet … this is also a moment of incredible opportunity.
The pandemic is providing humanity with a re-set moment: a stark reminder about our fragility as a species and a sharp lesson about what happens when we mess with nature. It is also a moment when the old rules about the role of the state no longer apply. Governments across the planet are re-writing the economics textbook with a level of state intervention and spending not seen since the Marshall Plan.
We can therefore attack the twin challenges of COVID-19 and climate change simultaneously, not sequentially. After all, when again will we be at a moment when governments are injecting such unprecedented sums into the economy just as the world needs up to $7 trillion a year of renewable investments to hit 2030 development and climate targets.
European Carbon prices are under pressure from #COVID19 crisis stoking worries over economic slowdown and allowances demand.
“This is the first real test of the Market Stability Reserve’’, said our lead analyst @i_sorhus in FT:https://t.co/yrrIaA51Kn
— Refinitiv Carbon (@RefinitivCarbon) April 14, 2020
It would be naïve to suggest a global consensus around this approach will be easy to forge. As Ian Goldin, Professor of Globalization and Development at the University of Oxford, pointed out on our recent webinar, our multilateral order is fractured. However, it is worth hoping that if more enlightened nations make a stand – as some are already doing – then others might be cajoled or shamed into action. There’s lots they could do, for example:
- Central banks could prioritize the purchase of bonds issued by green-tech, renewable energy companies and energy companies with transitional plans rather than those who score poorly on ESG metrics.
- Financial assistance today could be conditional on hitting environmental targets tomorrow. A number of governments are already attaching non-environmental conditions to airline bailouts for example. That conditionality could easily be extended.
- Governments could commit, or further commit, to emission trading systems. China is set to start its own later this year – dwarfing Europe’s. New mechanisms to regulate the European market are already providing some support to prices, data models from Refinitiv Carbon show.
- To ensure sustainability-focused companies remain sustainable financially, governments could consider supporting those that need it, via tax breaks or credits. Some of these companies will eventually be pivotal actors in the green transition, so we should protect them now.
- Employers and governments could incentivize people to continue with lockdown habits that help the environment. For example, Refinitiv is already talking with colleagues about the measures we could adopt after the crisis, including virtual working, to cut down on air miles and emissions from commuting.
- Regulators and industry groups could encourage or mandate greater disclosure of ESG data so markets have the transparency they need to efficiently channel capital towards sustainable investments. It’s worth noting that of the 7,300 listed firms in our ESG database, 57% still don’t disclose their direct and indirect CO2 emissions. The task to create a single, commonly accepted set of ESG metrics is now a priority, as is fully embedding climate risks in risk management models.
- Companies are reassessing the sustainability of their supply chains in the wake of lockdown-induced shortages. By simplifying and shortening lines they will not only reduce risks to business operations, but also lower emissions. The crisis has also exposed the financial cost of treating staff and suppliers poorly, and the dangers of turning a blind eye to criminal activities – not least the illegal trafficking of wild animals. Any system redesign around ESG metrics must take account of companies’ broader supply chains too.
Not just a ‘nice to have’
We have already noticed a significant increase in the number of our clients accessing ESG data from our platform since the start of this crisis.
A growing band of corporate leaders increasingly recognize that it’s in their long-term financial interest to avoid the spiraling costs, going concern risks and dislocated markets resulting from the destruction of climate change. They also understand that concerned governments and regulators are increasingly going to price in more of these externalities, raising their cost base.
While some governments might today hesitate on imposing higher carbon costs in order to to shelter industries from further economic pain, they remain policymakers’ most likely tool to drive down emissions in the long run. Carbon pricing has already pushed Europe’s coal-fired power stations to the verge of extinction.
But the switch will be driven just as much by investors, whose appetite for green investments has increased by about a third in two years. Also by financial institutions, which are effectively penalizing environmental back-markers by factoring higher carbon prices into M&A valuations and lending decisions.
The changes Refinitiv has just made in how we score companies on their ESG performance will give analysts, investors and lenders an even clearer picture of who is stepping up on sustainability … and encouraging a new approach from those who aren’t by marking them down for a lack of transparency.
As a group, specialist ESG funds have out-performed their non-specialist peers since this crisis began – in large part because they are less exposed to the tumbling oil market. Data from Refinitiv Workspace shows that the world’s 1,600 listed fossil-fuel producers saw a median price fall of 25% in the year to 15 April, versus a 7% loss for their renewable energy peers – a reminder of both the risks to carbon-intensive business models but also the investment opportunity in alternatives.
Reasons to hope
There is only a small window in which to act: policymakers are quickly deciding where and how to deploy capital to rescue battered economies. Meanwhile, the planet continues to heat up.
And yet I am hopeful. The level of collective action and our willingness to change old habits to #flattenthecurve during this pandemic has been inspiring. People are saying they want things to be different when we emerge from lockdown. We are becoming familiar with new sensations like cleaner air and a stronger sense of community. The groundswell for lasting change is growing.
I suspect global leaders, in both public and private spheres, sense this too. Humanity has shown it can act decisively and in its self-interest in the face of a global crisis. Now it must do it again to prevent what would be an even greater crisis.
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