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Covid-19: Investors, Companies & Climate Change

Covid-19: Investors, Companies & Climate Change



Covid-19 is a terrible human tragedy, but it is also an economic one. JPMorgan reckons it will have pushed the world economy into a 12% contraction over January to March with the most brutal global equity collapse since the Great Depression.

This economic contraction has led to an immediate suspension of sustainability initiatives in some corporations; but that may be very short-term, as investor pain today forces new corporate behaviours tomorrow.

Investors have been hurt, not all stocks have faired equally badly. Most exchange-traded funds focused on companies with above-average scores for environmental, social and governance (ESG) practices have outperformed the market this year, according to research from Bloomberg Intelligence. So far in 2020, 59% of U.S. ESG ETFs are doing better than the S&P 500 Index while 60% of European ESG ETFs have beaten the MSCI Europe Index.

This is important because it tells us that many investors, including the likes of Larry Fink and Black Rock, increasingly understand the link between ESG factors and long-term value creation and protection. Unsustainable business practices are increasingly unpopular amongst investors for sound financial reasons.

Pandemics, like Covid-19, are just one very tangible result of unsustainable social, economic and business practice. They don’t exist in isolation and they are not one-offs. They result from the same systemic problems challenging all companies. And they cost investors a lot of money.

As Philipp Hildebrand, at BlackRock puts it, “This pandemic is more of what risk expert Michele Wucker had called a “Grey Rhino”, a highly obvious, highly probable, but still neglected danger. It’s a risk that most of us simply have not paid enough attention to. Climate Change of course, is another obvious ‘Grey Rhino’”

In fact, pandemics, like Covid-19, are more closely related to climate change than we might at first think. According to the United States Agency for International Development, “nearly 75 percent of all new, emerging, or re-emerging diseases affecting humans at the beginning of the 21st century are zoonotic” — meaning they originate in animals. These include AIDS, SARS, H5N1 avian flu and the H1N1 flu… and Covid-19. More and more wild animals, which may have carried diseases without effect for years, are coming into contact with humans, often because of climate change.

Scientists think that climate change, with its increase in sudden and extreme weather events, may have played a role in the 2014 Ebola outbreak in West Africa. And a number of diseases well known to be climate-sensitive, such as malaria, dengue fever, West Nile virus, cholera and Lyme disease, are expanding their footprint, as climate change results in higher temperatures and more extreme weather events.

And it’s not just the animal borne viruses that climate change is spreading. Researchers from China and the U.S. embarked on a field trip to Tibet in 2015, and discovered 28 previously undiscovered virus groups—in a melting glacier.

Terrible though all this is, what matters for corporations is that this connection between the two is increasingly recognised by investors. Black Rock’s Philipp Hildebrand again “in fact, the relationship between the two Rhinos – Climate Change and Global Diseases – is well established and growing. Rising global temperature extends the reach of vector-borne illnesses, and localized air pollution and environmental degradation increase health risks for local populations.”

As the current crisis unwinds, awareness of the interconnectedness of climate change and pandemics will only grow.

Governments, wanting to avoid further economic disasters like Covid-19, may pass tougher environmental legislation; badly needed bailouts may be withheld from some heavy emitting industries; and, some vulnerable corporations risk seeing their corporate assets nationalised to align with climate policy.

Smart investors, aware of this growing threat, will try to act first; and public corporations, wanting access to their capital, will be working to improve their ESG ratings through strengthening their public sustainability commitments and accelerating their initiatives.

There are numerous sustainability standards and initiatives that can improve a corporation’s ESG rating, but perhaps the most significant is the Science Based Targets initiative (SBTi) which requires corporations to deliver against emissions reduction targets that are aligned to the Paris Accord on climate change. Nearly 1,000 major global corporations are signed up to the SBTi already and the number continues to grow.

Importantly, the SBTi requires corporations to address emissions reduction in their supply chains as well as their own direct footprint. In our experience of working in the supply chains of corporations like Asda-Walmart, Honda and Interface, this means that even smaller private companies, not directly subject to public investor pressure, will feel the need to change at the insistence of their customers. And so, investor pressure will be felt the length and breadth of the value chain.

Covid-19 is a wake-up call for the global investment community. The growing body of scientific research into pandemics clearly connects the latter directly to climate change. Covid-19 may be an all-consuming, short-term distraction for businesses as they work out how to survive, but as soon as the situation stabilises, we can be sure investors will re-emphasise ESG ratings and sustainability with greater energy than ever before.

Many corporations, needing access to capital, will respond in order to get ahead of the investment community. So Covid-19 is likely to encourage leading companies to put their foot down on the sustainability accelerator, not take it off.

First published by Martin Chilcott on LinkedIn.