Studies have shown that daily global carbon emissions declined 17 per cent between January and early April 2020. It is not clear how long or severe the pandemic will be, which makes it difficult to predict how emissions will be affected long-term, but estimates vary between a reduction of 4.4 to 8 per cent by the year’s end. Even the lowest estimations would mark the largest annual decrease in carbon emissions since World War II. If past crises are any indication, the environmental gains may be short-lived. The massive reduction in economic activity and travel during lockdown has been forced, and a return to ‘normal’ economic activity is an imperative for many people, so it is likely that these declines too will be temporary. But the scale of the response to Covid-19 and the reduction in pollution levels that have resulted give a hopeful glimpse of a cleaner future, pointing in the direction of where the world has to go, and fast.
Another positive pattern to emerge over the last few months is the resilience of ESG investments. There have been numerous reports indicating that ESG funds have, so far, been more resilient to the economic shock created by the lockdown. MSCI in particular has indicated a marked out-performance. Given a significant reduction in travel, it’s not difficult to see why this might be. Oil and gas is a major sector that ESG funds tend to avoid, and with the oil price having fallen so sharply (-50 per cent year to-date) it has not been a good sector to be invested in. ESG funds can also be light on their exposure to consumer stocks and airlines, areas that have been hard hit in this market sell off.
Resilience is also partly thanks to a very strong performance from the technology companies which are often found nestled in ESG portfolios. Technology companies often have intrinsically strong social and environmental attributes, when compared to many other businesses operating in traditional industries. Their products are often sold as a service on a subscription basis, meaning the environmental impact of producing a physical product is negated.
While there are some concerns over the energy consumption of the data centres the tech giants use to power their sites, with healthy margins and vast profits being generated, many are investing millions in solving this problem. The UN secretary general, António Guterres, said recently that governments should not use taxpayer cash to rescue carbon-intensive industries and fossil fuel companies, but instead offer direct economic rescue packages for the Covid-19 crisis to businesses that create green jobs and cut greenhouse gas emissions. Such a proactive decarbonisation drive from governments and private investors alike would continue to play well into the environmental theme running through ESG funds.
The shift towards a decarbonised economy is already underway. In May 2019, the UK went two weeks without burning any coal to produce electricity, the longest stretch of coal-free electricity since the first coal-fired power station came online in 1882. Globally, 75 per cent of new electricity generating instillations in 2019 were renewable. It is this transformation that is likely to provide investors with outstanding opportunities over the next 10-20 years.
However, it will take a great deal of investment, determination and vision to fully achieve. It is estimated that to meet the 2015 Paris Accord target, to keep the rise in global temperature to +1.5 per cent, it will require investment of $2.4 trillion every year until 2030. And, history shows us that the make-up of equity indices change over time, as sectors develop and grow, whilst others fade. My expectation is for sectors related to decarbonisation, energy efficiency, resource management and waste management to dominate the future and be the drivers of outstanding returns for investors.
The crisis has provided an opportunity for governments to support businesses which are already working towards a sustainable future.
I’m optimistic that the pandemic will drive the sustainability agenda forward. The relentless pursuit of economic growth and wealth has been paused, giving time for reflection. Society and people are more important. These sentiments may bring fundamental changes in what’s valued most. And investing in full knowledge of the impact you have on the environment and society has to be the way forward, and when that investment is made with the intention of bring about positive change, we all win.