Covid-19 will have a long-lasting impact on the ESG investing landscape including a greater focus on social issues and less carbon intensive work practices, but also carries significant risks to clean tech investments, according to a research note from DWS Investments.
The note, entitled How covid-19 could shape the ESG landscape for years to come, was written by Michael Lewis, head of ESG thematic research, and Murray Birt, senior ESG strategist, at the asset management group.
The pair said the coronavirus pandemic has hit the world economy at a “critical time” for ESG investing but has also served to highlight the strategic importance of sustainable and impact investing.
“We believe the covid-19 pandemic will have profound and long-lasting effects on the rapidly developing ESG market. In our view, the pandemic is illustrating the financial materiality of ESG,” the note said.
They said there are “clear risks” for the ESG investment universe, the most obvious being how recent macro trends will impact clean energy investments.
“The collapse in energy prices as well as carbon prices have placed renewed pressure on climate technologies. While we have seen a dramatic improvement in the cost advantages of clean technologies such as wind and solar over the past decade, lower oil prices and the covid-19 crisis are leading to downward revisions in terms of the number of solar and wind projects.”
There are also concerns there will be lower sales of electric vehicles and impact on energy efficiency measures such as “retrofitting homes and offices”. There may also be delays to the development of biofuels and plastic recycling deployment.
Lewis and Birt highlighted in the US, the Environmental Protection Agency (EPA) has stated that power plants, factories and other facilities will not need to meet environmental standards during the coronavirus outbreak, and although this is a temporary policy, the EPA has set no end date.
Additionally, the delay of the COP26 climate summit, initially scheduled to take place in the UK in November but has been delayed to an as yet unknown date in 2021, could potentially mean Paris climate ambitions are pushed down agendas.
The pair added the quick response to prop up markets and economies by governments and central banks could mean a rapid reversal in the drop of carbon dioxide emissions; it has been predicted global CO2 emissions will fall by as much as 5% this year, but when the economic recovery comes these emissions “will simply leap higher”, as was the case in 2010 following the Global Financial Crisis (GFC).
There are also social concerns about the response to the crisis which has included – much like during the GFC – interest rate cuts, quantitative easing programmes and fiscal stimulus packages.
The note said: “The major financial winners since the GFC ten years ago have been the super-rich helped by rapid asset price inflation such as in real estate and equities. We cannot afford this to be the outcome of this crisis. We expect addressing inequality will need to become an even greater priority for governments. Companies must play their role and not leave it for taxpayers to foot this bill yet again.”
However, Lewis and Birt also encountered a number of potential positives that could evolve out of these difficult times.
They said the current crisis may put companies under the microscope as “we may see increased efforts by asset owners and managers to integrate social aspects into ESG investing, an area that has often been overshadowed by climate risk integration”.
“This should eventually mean better data capture in terms of scope and depth as it relates to social issues…These capture labour rights, human rights and other social and environmental issues into the ESG integration process,” they said.
It will also likely highlight the correlation between corporate reputation and financial performance.
“How companies respond and support their employees and customers during this crisis could have important implications for company performance. This can also extend to how companies are altering their production lines.”
It also could potentially serve as a warning, and therefore a chance for companies to plan for any climate change shocks.
“The crisis may also shine a light on what and how an acute shock may result in a rapid shift in economic value, similar to what we could see happen with climate change,” they said.
“This provides real-life experience of stress-testing techniques that have been developing for climate risk for some time, but will have new dimensions to consider such as the restrictions placed on the free movement of people, goods and services.”
Remote working and less travel as countries have locked down and implemented social distancing to limit the spread of covid-19 has also shown companies ways to adapt “carbon intensive activities enjoyed before the crisis” and the research note said the pair expect virtual meetings and conferences to continue, meaning less air travel and “greater scope for more flexible hours and working from home”.
The duo were also pleased to note the incorporation of cleaner systems in fiscal stimulus programmes.
They said: “In China, we are already witnessing the government strengthening regulations regarding the proper treatment of sewage and industrial waste. We expect this will provide even greater impetus in the area of Chinese clean tech and energy investments.
“Attention is now turning to fiscal stimulus programmes in Europe and the US. At the end of March, EU heads of state concluded an EU summit which will prepare a recovery plan that includes the green and digital sectors, which will mean long term stimulus will incorporate clean energy, transportation and smart infrastructure.”
In conclusion, Lewis and Birt said it should not be forgotten that “this crisis has its origins in biodiversity loss, rapid urbanisation, rising population levels and as humans come into closer contact with animals through deforestation and bushmeat market”.
As a result, they predicted covid-19 will entrench the “strategic importance of sustainable investments” particularly focused on healthcare, education and financial inclusion.