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Covid can free markets to pursue green recovery

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By Jon Hay
17 Sep 2020

The Covid-19 pandemic has been a health and economic disaster — but it also creates opportunities, say responsible investing experts. The new environment means financial players can become more ambitious, socially and environmentally.

So said speakers at GlobalCapital’s Sustainable and Responsible Capital Markets Forum, held virtually this week. Four experts met to discuss ‘The Green Recovery’.

“I think this has been something of a stock taking moment for many in the industry,” said Alyssa Heath, head of EU and UK policy at the Principles for Responsible Investment in London. “It’s increased awareness of the extent to which we depend on environmental and social systems for our way of life.”

But rather than this being wholly negative, she said: “What I think is interesting is that there is probably more flexibility than people realise already for investors and corporates to act in ways that are beneficial to society and the environment.”

This was, she said, “a profound opportunity for cultural change as well as regulatory change.”

Julie Becker, deputy CEO of the Luxembourg Stock Exchange and founder of the Luxembourg Green Exchange, said “this deeper change for the better is not only possible, but clearly mandatory”. The large amounts of stimulus governments were producing needed to be “invested in sustainable projects to tackle climate change and to create  sustainable jobs for the future”.

Karen Ellis, director of sustainable economy at WWF UK, agreed that business as usual was not an option. “We are on a scary trajectory even before the pandemic, with serious climate change and the sixth mass extinction heading towards us. These are crises that we know are coming.”

What was needed, she said, was “a new kind of capitalism, one which delivers resilient and long term prosperity within the constraints of our planet, rather than just maximising profit and income in the short term,” as exemplified by targeting quarterly results and GDP.

But it was not just about thinking longer term, she said. “We need to get the value of nature properly incorporated in economic decision making, because that’s such a huge market failure, that we have still failed to address, despite knowing about it for many years,” Ellis argued. “And the pandemic has really meant the rules of the game are up in the air. There’s a lot of new involvement of government in markets that they may not have otherwise wanted to do.”

This was “a real opportunity for government to put in place the measures that will catalyse a faster transition to a low carbon economy.”

However, Mervyn Tang, global head of ESG research at Fitch Ratings in Hong Kong, emphasised that “ESG isn’t just one thing. It’s multiple different waves that are moving kind of in synch.”

In the Asia Pacific region, a lot of investors were focused on risk and return, he said. “You don’t need to really rethink capitalism to incorporate climate change and other ESG issues to your investment analysis.” Regulation and changing consumer behaviour would alter risk and return, he said.

This did not mean there was no debate on rethinking capitalism, however. He pointed to Japan, where the $1.6tr Government Pension Investment Fund “talked about this concept of universal ownership, which is ‘we own so much of the economy that it doesn’t matter about an individual asset outperforming. It’s about trying to make the economy grow as much as possible.’”

This, he said, produced a different view of capitalism, in which “I’m not just trying to do the best for me, I’m trying to do the best for everyone.”

So far, however, much of the stimulus provided has gone into propping up the old, polluting industries — an inefficient approach, because it will just add to the costs of climate change that have to be paid later.

Some governments, such as the European Union, have made high level commitments to the idea of ‘build back better’.

“What’s challenging is how that is put into practice and what conditionalities countries are willing to put on bailout funds and on long term investment and spending plans,” said Heath.

In the EU, members are debating the conditions for the Just Transition Mechanism, designed to help regions heavily reliant on fossil fuels. One option is that countries could only access the full funding if they agree to reduce emissions to zero by 2050.

Tang said that in Asia, which was more fossil fuel-dependent, there was more support for “building back greener” by installing green technology than for decarbonising existing systems.

There needed to be a “perception of just transition, not just within nations, but across nations,” he said.

Becker said this would “clearly require a political will to do things differently and to take the risks, as maybe not all steps are considered as positive by all citizens”.

At first, governments would urgently want to “stem the pain” the pandemic had caused the economy, by reducing job losses. But recovery should involve trying to stimulate jobs that would still be there in five or 10 years’ time, Tang said.

“There’ll be better and there’ll be worse options and it’s not going to be a completely easy step,” he said. “A perfect panacea for all our world’s problems is a pipe dream, but doing better policy is not.”

To hear the full debate, which includes many more ideas including whether Covid showed countries were capable of solidarity or not, and the need for an international natural capital financing mechanism, register here. The conference is free for issuers and investors and the content is available online for the next 30 days.



By Jon Hay
17 Sep 2020