1.2: Capitalising on Covid – Short-term gains or the opportunity to enact a longer-term investment strategy?

 To continue the bad clichés, 2020 has been far from business as usual. While there is some progress towards society returning to normality there seems to be an understanding that economically there will to be shocks. The drops in national economies are huge. Although it is likely that that this is just a shorter-term shock, it will take some time for economies to fully recover and with this there is a risk that countries are going to become lenient in regard to enforcing green policies. While there is a growing push from supranational institutions to tackle climate change, situations like the US unilaterally leaving the Paris Climate Accord highlight the structural weaknesses of attempting to regulate from the top. To compound the risk to environmentally conscious policy making the current Covd-19 crisis provides an excuse for governments to ignore their long-term commitments favouring a cheaper, short-term fix. Is this where business leaders and investors can step in?

            In my last blog, I discussed how the EU is strategizing in the face of the Covid-19 in the short-term with huge financial relief packages while maintaining a green focus for long-term growth. In this, part two I am going to discuss some of the different avenues that businesses can and should take to capitalise on the commitments made by governments towards an environmentally conscious recovery while still prioritizing share-holders’ interests.

Changing attitudes in business

 Innovation has always played a key role in the ever-expanding economic system. Without being able to quickly adapt to perpetually changing market conditions it is obvious most businesses would simply die over time. While this has been a race to reduce costs, and increase profits within the quarterly cycle there is a growing call for there to be a change of culture and attitude within all fields of business over the past decade.

            As there has been a push in society for greener production methods and products, businesses with customer facing arms have been fairly quick to respond. This is because it’s becoming clearer to companies how there is a growing movement of ethical consumption.[1] People are increasingly making their spending choices not just on quality and price of a product but by how a product is made, who makes it and where the constituent parts/materials come from. 

            There are positive trends towards a greener and cleaner future emerging but there is plenty more to do.[2]Individual consumers can’t really change how materials such as concrete and steel are produced amongst other heavily polluting industries. They lack the power to do so as individuals. This is where asset managers and owners in the investing world can step up to the plate. There is growing evidence that the green surge being egged on by supranational institutions is now taking hold within the world of investment as well. Green issues are becoming the most serious issues for asset managers and their clients yet the infrastructure needed to communicate this to companies is not yet fully developed.[3] [4]

Furthering ambitions?

 Despite the concerns that the Covid-19 shock is bringing to all aspects of finance it is important for investors and business to start thinking in the longer term. Covid-19 is arguably a consequence of a strained environment coming into ever closer contact with expanding human activity.[5] The severity of the pandemic’s impact on economies and societies is yet to be fully realised but there is no doubt that there is a shock coming.

            The impending doom and gloom that Covid-19 casts over economic forecasts however is still not fully realised and reactionary measures may not be the most prosperous response in the medium to long-term.[6] The risk to good stewardship credentials can be on the line in the current climate and the need for trust in investors and the businesses they support is difficult but necessary. Including a green perspective and governmental response from my previous blog, the EU ETS hasn’t experienced the shock in prices that one may have expected due to Covid-19. Most likely due to being purchased before the crisis and an impending review that will determine how strict or lenient the ETS is to become. This is poor timing in its own right but adding the pandemic into the mix will most likely lead to the review being more lenient than it could and ideally should be. It’s unfortunate that investment cycles have already been laid out before the review. Business has to holds its breath through the review and Covid-19 turbulence to see to what’s best to do in the long-run. If the ETS is too lenient then there won’t be enough of a stick incentive for businesses to change their ways for the greener good particularly with a large economic downturn on the horizon. On the other hand, if it’s too harsh we might see member states revolting and anti-supranational sentiments (anti-EU movements in this case) expanding and undermining the progress already made and that expected to be made on the path to a carbon neutral 2050.[7]

            This begs the question: What can be done in the private sphere to promote green and responsible stewardship during such rapid change in the short-term. Both business and the public sphere want a prosperous future and have the power to help each other achieve this. The EU’s announcement that it is borrowing €750 billion is going to be a huge confidence boost to markets however it falls to the member states to distribute large portions of it. While businesses may be tempted to cut corners, investors in the interest of good stewardship must continue to emphasise the importance of environmentally friendly development to businesses. Communication between investors and investees needs to be modernised and simplified. There are early signs of systems being explored but such communication channels are still being developed but enthusiastic engagement from both parties is needed.[8] On top of this and more immediately it is important that investors don’t let businesses slip away from environmentally friendly practices or developing them. The crisis provides an excellent cover for slipping away from their long-term commitments blaming the short-term disruption.[9] This goes for governments too. Large scale investors can use their public voice to hold both government and businesses to account for slipping standards. As the environment is one of the top priorities for investors currently this should be a popular option considering the underdeveloped nature of other communications methods. It is important to note that this strategy doesn’t necessarily have to be combative and that gentle encouragement in the public domain can go a long way.

            So in brief conclusion there is hope for a green recovery in the midst of Covid-19. Although the extent of the Covid-19 pandemic is yet to be fully realised economically most institutions and investors are still focused on promoting green recovery. While this is positive it’s important for us not to take our eye off the ball metaphorically for business and literally in relation to the planet’s well-being. Moods can rapidly change as has been seen with the US’s withdrawal from the Paris climate accord and if times get tougher it may be more appealing for business to cut corners and for investors to seek shorter-term gains. Opportunities are also being missed now due to slowing investment. A brief study by the Climate Friendly Materials Platform found over €30 billion worth of clean production and recycling projects that are short of investment and are keen to speed up their ability to produce.[10] Continuing to monitor the situation alongside greater transparency between all stakeholders; business, governments and everyday citizens restructuring the discourse to understand that we are stewards of capital in the long-term and that irresponsible short-term stewardship may indeed lead to greater disruption further down the line. Environmentally conscious and longer-term investing is a can that should be recycled not kicked down the road.

[1] https://www.theguardian.com/sustainable-business/consumer-behaviour-companies-sustainable-living

[2] https://www.cnbc.com/2020/02/14/esg-investing-numbers-suggest-green-investing-mega-trend-is-here.html

[3] https://www.ey.com/en_uk/assurance/how-stewardship-can-best-be-undertaken-by-investors-and-companies-alike

[4] https://www.blackrock.com/us/individual/literature/publication/blk-esg-investment-statement-web.pdf

[5] https://www.thegef.org/news/gefs-response-covid-19

[6] https://www.unpri.org/download?ac=10266

[7] https://ec.europa.eu/clima/policies/strategies/2050_en

[8] https://www.ey.com/en_uk/assurance/how-stewardship-can-best-be-undertaken-by-investors-and-companies-alike

[9] https://www.unpri.org/download?ac=10266

[10] https://www.climatechangenews.com/2020/07/24/green-eu-recovery-depends-member-states/

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