It may be a cliché to state that we live in uncertain times but in 2020 we as a planet have experienced financial and social upheaval not seen for over a generation. Covid-19 has changed a significant portion of society’s actions. Such a drastic change in lifestyle, even in the short term, it is almost certain that Covid-19’s legacy will last far longer than the immediacy of trying to tackle the pandemic through economic and human loss.
While it is understandably vital to limit the disruption to economies that Covid-19 and the global shutdown has brought, the crisis comes at a time when there is another increasingly pressing crisis demanding attention. The climate crisis threatens the world in a longer term with similar levels of economic and social disruption and increasingly over the past few decades there has been a realisation that this crisis is a long-term issue.
In this, the first of a two-part blog, I am going to outline the European Union’s (EU) approach to green recovery, including the recently released multiannual financial framework (budget) and Next Generation EU recovery instrument, and Emissions Trading System. While looking at how lawmakers are acting in this blog, in part two I am going to discuss how investors can use this as an opportunity to help revolutionise corporate attitudes to the environmental issues facing the planet. The need for action on climate change and environmental protection is quickly becoming the primary concern of both governments and asset managers who are seeking to maintain growth in a world with diminishing resources, space and time.
The Top-down approach to tackling climate-change: The EU’s new strategy
The EU’s approach to environmental issues has been (despite patchy in places) one of the most ambitious attempts to address the crisis around the globe. While the EU has been a driver of the discourse on climate change and the need for a more sustainable future, many argue that its show stopping 2020 climate campaign to reduce emissions of member states by 20% of the levels emitted in 1990 failed to be ambitious enough. In 2007 the EU announced the strategy and by 2010 many of the member states were over halfway to achieving this goal suggesting there is a lack of ambition within the policy. Although initially criticised, it’s modest success has meant the EU is becoming increasingly ambitious in its attempts to prevent a climate crisis further unfolding. This can be seen with the long-term European Green Deal.Stating the general aim of the EU to be carbon neutral by 2050 the plan outlined last year is now already looking likely to take a back seat to the recently published budget and the Next Generation EU instrument in the wake of Covid-19’s intervention.
The latest strategy the EU is rolling out is the Next Generation Recovery Instrument (NGRI) which, alongside the revised seven-year budget, aims to provide adequate funds for growth in member states tying 30% of the funding to be committed to projects that protect and improve the environment. The commitment of €750 billion to the instrument almost doubles the EU’s budget until 2027 and shows the EU’s push towards sustainable growth both economically and environmentally. This emphasises how quickly environmental issues are becoming prioritised and integrated into all areas of policy. It goes further stating the remaining 70% of funding is subject to a ‘do no harm’ principle meaning projects funded cannot degrade the environment further. This is somewhat questionable as there isn’t any particular check and balance system to police spending by the member states inevitably weakening its effectiveness.
Beyond these short comings there have been drastic cuts (sometimes over 50%) to several projects designed to promote research and development towards cleaner industries and job opportunities for regions that have developed around heavily polluting industries. Cuts to the Just Transition Fund (originally €40billion) stands now at €17.5billion.Reducing these funding sources for regions is counter intuitive to longer term strategy and promotes short term solutions over meaningful environmentally friendly economic development. Especially in regions which are going to need it most going forward. With this in mind it could be considered that the EU is removing part of the carrot for member states to fully commit to deeper, long-term growth. On the other hand, the stick, which manifests itself in the Emissions Trading Scheme (ETS), is becoming an increasingly dominant tool in managing industrial emissions and is clearly a mainstay of EU policy on climate change prevention.
Cooperation, coordination or control?
The Commission’s recent report underlines the need for huge private investments within the Covid-19 recovery process and makes sure to emphasise that it is a joint effort but one that must respect the EU’s commitment to being green.Yet one of the primary interactions the EU’s climate policy has with business is through the ETS. This is a market mechanism that monitors greenhouse gas emissions emitted by industry by charging for emissions permits placing a cap harmful emissions and fines companies that exceed their limits. The scheme was initially met with scepticism with Greenpeace’s deputy political director claiming it’s “precisely the sort of measure that destroys public confidence in environmental policies”. This was largely down to the large exceptions offered to many industries and entire member states in some cases. The stick nature of the mechanism forces industries to find cleaner methods of production and has to some extent been a success. Despite the cap being incrementally lowed, several member states have begun to take the policy further than the EU’s initial scheme creating a patchwork of different strategies. The different approaches that the member states have undertaken shows even without the stress of Covid-19 on national economies there are different attitudes to the severity of the climate crisis. In addition to this the drop in manufacturing and transport across the bloc because of Covid-19 could undermine the ETS significantly. A market based mechanism based on greenhouse gas emissions will see a huge drop in prices and as a result will slow development towards cleaner tech and more cohesive strategies. Although businesses bought their credits before the crisis meaning prices are fairly stable at the moment the longer-term impact of recession threatens the stability of the system.
Which then begs the question what else can be done to limit climate change. There are increasingly productive discussions on the improvement of circular economies, reducing e-waste and also improved recycling and reusing strategies. But these conversations are, as is the nature with multinational coordination, slow.
The public sphere is creating a foundation for climate friendly growth to some extent but there is certainly scope for a greater level of action. This can be seen as an opportunity for the private sphere to take the ball and run. Larger multinational companies can go above and beyond in order to make a clear environmentally friendly strategy for themselves while encouraging skittish investors. While we are seeing the beginnings of this next week’s blog will explore potential positives and also issues with a business led approach and why it is becoming increasingly important to develop a culture of longer-term thinking within business rather than appeasing the quarterly report monster.