ESG and COVID-19

COVID-19 is affecting the ESG investment landscape in a number of different ways. Many firms may feel that these issues can wait due to far more pressing concerns, and that there is less immediate pressure to tackle problems like plastic and pollution. Not to mention the fact that the unpredictable and fast-paced changes in demand make advice planning very tricky, which limits firms’ ability to implement any sustainability agenda.

For others, they view the actions taken by people and governments during the crisis as proof that widespread change is not only possible quickly, but that there are proven benefits to the environment – leading them to ask if we could be on the start of the road to a more sustainable future.

Consumers may be more inclined to support products and brands that have stepped up during the crisis to protect their staff whilst also helping their communities. Firms are also showing a new ability to be flexible with staff and, whilst adjusting may be a struggle, it does offer firms an alternative future that can have a range of benefits which could result in lower operating costs and routes as to how they can be more open, socially aware and environmental.

According to research carried out by DWS Research Institute, part of Deutsche Bank, initially, the effect of the crisis on investments appear negative, with one of the most concerning being how the current trends will impact clean energy investments. The recent collapse of energy prices, which started prior to the COVID crisis with a market share argument between Saudi Arabia and Russia and has recently climaxed with carbon-based energy prices going negative for the first time in history, has placed downward pressure on climate technologies such as Solar and Wind and, the report suggests, is likely to lead to less market penetration for electric cars.

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. This temporary policy, for which the EPA has set no end date, would allow any number of industries to bypass environmental laws. In addition, the Federal government has announced that vehicle emissions standards will be less onerous, keeping less fuel efficient, more polluting cars on the roads.

In the UK, ex-Chancellor Philip Hammond, speaking on a webinar organised by Chatham House, suggested that the crisis could reduce emphasis on addressing climate change, at least in the short term.

When climate talks in Madrid ended in disappointment at the end of last year, all eyes were on the COP26 climate summit in the UK this November to put the Paris climate ambitions back on track. Now that has been delayed until 2021 and the worry is, as the economic recovery from COVID-19 gathers pace, that CO2 emissions will jump higher, as they did in 2010.

The EU’s Technical Expert Group on Sustainable Finance (TEG) warned in a recent statement that, if the EU’s coronavirus recovery strategy does not align itself with environmental objectives, the bloc will emerge from one crisis only to sink into another one with “catastrophic” consequences, arguing that the EU’s Sustainable Taxonomy, the Green Bonds Standard and the Paris-Aligned and Climate Transition Benchmarks should guide the use of public and private capital for the recovery.

However, the sector has also seen positives accruing from this crisis, boosting a sense of urgency. According to research from Schroders, China’s carbon emissions dropped by around a quarter over a four-week period in February and both industry and transport, which create more than one third of global greenhouse gas emissions, have virtually ground to a halt. It looks likely that 2020 will mark only the fourth year in three decades in which global emissions fell, and it will quite possibly be the largest reduction ever seen.

Crucially, Morningstar data shows that sustainable funds across Europe saw inflows of €30bn in the first quarter of 2020, amid a period that saw some of the worst stock market falls in history, with €148bn pulled from the overall European fund universe. Further, in a recent UK survey, Opinium found that 48 per cent of the public agree that the government should respond “with the same urgency to climate change as it has with COVID-19”, with just 28 per cent saying it shouldn’t.

So, the momentum for growth in the ESG sector is increasing but a greater awareness of the upsides and potential pitfalls is also necessary, and this is where the advice sector should take the initiative. Training is essential – even the language used in the sustainable finance/ESG sector is sometimes hard to understand and, with a raft of new regulation arriving within the next year, mapping out an ESG-motivated investment pathway for clients’ needs to be carefully thought through.

Following on from the publication last October of PIMFA’s Sustainable Finance A to Z Guide – a comprehensive jargon-buster for the sector – we will shortly be launching both an ESG microsite full of information alongside our very first  ESG Academy, in partnership with Morningstar, to promote a ‘best practice’ approach for the advice and wealth management community as the sustainable investment initiative gathers momentum. Based around three modules, this will address the fundamentals of ESG, how to research and evaluate ESG data methodologies and approaches, and a full training workshop on ‘talking ESG’ to clients.

As we begin to envisage what life will look like post COVID-19, the global environmental gains resulting from this enforced lockdown could simply fade from our memories. Alternatively, we can embrace the need to rebuild our economies on a sustainable basis. If there is a greater threat than this pandemic, it is surely a failure to protect our planet – and, ultimately, ourselves – from climate change.