The COVID-19 pandemic could lead to long-term behavioral changes that benefit the environment and drive interest in sustainable investing, says Hamish Chamberlayne, Head of Sustainable and Responsible Investment.
- The economic slowdown brought on by the COVID-19 coronavirus is leading to new consumer and corporate behaviors that could result in lasting change, with positive outcomes for the environment.
- We do not believe falling oil prices will slow the transition to a low-carbon economy. On the contrary, we think oil price volatility is a negative from an investment perspective and could help make renewable energy more attractive.
- We think the COVID-19 crisis will serve to underline the appeal of sustainable investing, with potentially better outcomes for investors, the environment and society alike.
Global stock markets have declined sharply as the COVID-19 pandemic has brought economic activity to a standstill. The extent of the upheaval is illustrated by the drop in commercial air traffic, which declined by more than 60% during the last week of March.1 Not since World War II has there been such a synchronized dislocation to the global economy.
But this is a very different sort of crisis. Everything is quiet. Cities are becalmed. There are few cars on the roads, and skies are empty of planes. One noticeable consequence has been a significant drop in pollution. Carbon dioxide and nitrogen oxide emissions have declined dramatically in recent weeks. Some people would say we have been given an accidental glimpse into a low-carbon future. But it is a pyrrhic victory given the human cost of this crisis. The social impacts are multifaceted, and governments are struggling with how to weigh the consequences of different policies.
COVID-19: A Positive for the Environment?
Still, there have been some positives amid the turmoil. For one, the crisis is highlighting the benefits of last decade’s technological progress. The digital economy has enabled many people to continue day-to-day life with only modest inconvenience while some businesses are seeing an increase in demand for their services.
One of the big questions we are asking ourselves is whether the pandemic will change the way we organize our economies and daily lives over the long term, leading to lasting environmental positives. In addition, there are questions about the impact and duration of pandemic-related government policies. We do not profess to know the answers to these questions, but we do believe some future paths are clearer than others.
For one, many governments around the world have responded to the crisis with gigantic fiscal stimulus packages, some representing as much as 20% of a country’s gross domestic product. This stimulus will have to go somewhere. As such, while some sectors may take time to recover, we believe there will likely be parts of the economy that come back strongly.
We also think digitalization will continue to accelerate. The resilience of the digital economy thus far, with many companies seeing increasing demand for their services, has served to underline the idea that many people and businesses can lead lower-carbon lives. The whole point of digitalization is that it enables greater productivity and a more efficient use of our precious natural resources.
Oil Volatility and the Appeal of Alternative Energy
We also believe the transition to a low-carbon economy is a trend that will continue and possibly even accelerate. A common question we get is around the potential for low oil prices to derail sustainable investment or slow the transition to a low-carbon economy. We believe this is unlikely. In our view, the volatility of oil prices is a negative from an investment perspective and could help make renewable energy more attractive.
Furthermore, in some countries, regulation continues to support alternative energy even amid the pandemic. In early March, the European Union took a significant step forward in its commitment to a net-zero carbon economy with the release of a draft of the European Climate Law. We would also not be surprised to see allocations from large fiscal stimulus packages toward clean energy. An increasing number of companies in power generation, transportation and manufacturing have committed to multiyear investment plans aligned with the transition to a low-carbon economy. In the coming decade, we expect to see an enormous increase in renewable-energy generation capacity, breakthroughs in battery technology and broad consumer uptake of electric cars.
Consequently, we believe this will be the decade in which we see the prospect of peak oil demand. Even as some areas of the economy could experience little change – the need for essential health services, driven by aging populations, has only increased due to this crisis, while there remains a great need for insurance and risk management services – population growth and urbanization will likely continue and with it, the need to invest in sustainable infrastructure, public transport, energy-efficient buildings and water technology.
Overall, we think the COVID-19 crisis and volatility in oil prices will serve to underline the attractiveness of sustainable investing, with potentially better outcomes for investors, the environment and society alike. Against this backdrop, we think companies with resilient compounding growth characteristics will most likely be those firms sitting on the right side of sustainability trends.
1Flighttradar24.com, data as of 4/2/20.
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