Coronavirus has sharpened investors’ focus on sustainability, according to the latest proprietary analysis from HSBC Global Research published just ahead of Climate Week in New York City in September.
|Climate change has great impacts on our world's developments|
Stocks of large companies with stronger environmental, social and governance (ESG) ratings have outperformed the global average by 4.7% since mid-December 2019. For climate-related stocks the gap is even bigger, with performance 13% better than the global average over the same period.
These findings underline that sustainable investing strategies are mainstream today – and that it is more important than ever to understand how climate and other ESG issues are reshaping industries worldwide.
Despite – or because of – the pandemic, 2020 has seen a number of climate-rated developments that could have an impact over years to come. Here, we highlight six to watch:
1. European Green Deal
In December 2019 the European Commission released its overall plan for the ‘European Green Deal’, a multi-year project with the aim of becoming the first climate-neutral continent by 2050. New policies to encourage a circular economy, ensure more sustainable industries, and cut pollution were announced in 2020. More are set to follow, and will affect every part of the economy.
While Covid-19 shifted policymakers’ priorities to some extent, the European Green Deal puts sustainability at the heart of Europe’s plan for economic recovery.
2. Oil and climate
The oil and gas industry faced significant disruption from Covid-19 in 2020, but also took a step forward in its climate ambitions – particularly among large European producers. Six European companies now aim to make their own operations ‘net zero’ by 2050, coupled with long-term strategies that seek to reduce the intensity of carbon dioxide emissions from other sources. Some are ramping up their spending on developing renewables.
These plans are set to fundamentally change the shape of significant industry players within 10 years, in our view. Some institutional investors, however, want to see meaningful emissions reductions in the next five.
3. Middle East ambitions
In the Middle East, North Africa and Turkey fossil fuels play a major role in many economies. The region is also vulnerable to the physical effects of climate change, from heatwaves to floods. These challenges are significant. But we view evidence of growing investment in clean technology as positive signals.
Every country in the region has a renewable-energy target: in some cases, these are ambitious. Sustainable cities are being built in Abu Dhabi and Saudi Arabia. The launch of an ESG index in Dubai in June 2020 was the latest sign of an emergent sustainable finance sector.
4. Sustainable consumers
Before the pandemic, a growing number of consumers were motivated by ESG concerns. Coronavirus has raised new challenges. Plastic pollution has grown. Some consumers may now need to prioritise affordability over sustainability.
But the radical reshaping of shopping trends amid global lockdowns could boost sustainable consumption in other respects. The trend to online has accelerated, opening up new ways of marketing sustainable products. Local sourcing has risen in popularity for some, reducing the emissions footprints from transportation from some products. And altered travel and work plans mean accelerated development of cleaner urban transport, including bicycles and e-bikes.
Covid-19 has also underlined that communities and economies worldwide are vulnerable to changes in the environment. As the global population grows further, the planet is losing its biodiversity rapidly. In economic terms, WWF estimates the cost of inaction on ecosystem decline at US$9.87 trillion over 2011-50.
There is a risk that biodiversity gets pushed to the background as policymakers and companies focus on tackling the pandemic. But if anything, the pandemic should accelerate the focus on sustainable investing. While governments focus on the immediate response to Covid-19, we think private investors can step up and play a pivotal role in directing capital to protect the planet’s ecosystems.
This year has also seen a rise in interest in hydrogen technology. The colourless, odourless gas can be burned for heat energy or converted into electricity with only clean water emitted – and could play a key role in the low-carbon transition.
The trouble is that the vast majority of hydrogen produced today comes from carbon-intensive processes. But we think that in the future wind and solar power could be used to produce the gas more sustainably and propel a ‘green’ hydrogen economy. The industry is on the cusp of being able to mass-manufacture electrolysers, with standardisation and scale set to drive rapid cost declines. The journey to green hydrogen, in our view, is already underway.
Ashim Paun is Co-Head of Global ESG Research, HSBC.