October 13, 2020
The decade of transition got off to a start nobody could have predicted – or wanted. Less than year into the 2020s, the world is reeling from the shock of COVID-19, a pandemic which has taken both lives and livelihoods and severely hit the global economy.
13 minutes
The United in Science report, a study from the United Nations (UN) and other global institutions, concluded that as large parts of the world became locked down during April, daily emission rates plummeted by a steep 17% compared with the same period in 2019. However, since the partial lifting of lockdowns, levels have increased once again and in June were just 5% below last year. For the whole of 2020, it is expected emissions will drop by between 4% and 7%.[i]
But the analysis warned that 2016 to 2020 is expected to be the warmest five-year period on record as climate change continues to tighten its grip.
For the environment, the recent emissions retreat is certainly a positive. But as António Guterres, Secretary-General of the United Nations highlighted: Never before has it been so clear that we need long-term, inclusive, clean transitions to tackle the climate crisis and achieve sustainable development. We must turn the recovery from the pandemic into a real opportunity to build a better future.
To deliver on the 2015 Paris Agreement of limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C, we need to dramatically cut emissions and move the global energy sector away from fossil-based fuels, towards greener, renewable alternatives.
Read more: We must not sacrifice an environmental crisis just to resolve an economic one
As a business AXA IM is a committed partner in this transition – we have already pledged to exit all coal investments in OECD countries by the end of this decade, and throughout the rest of the world by 2040. But we know more must be done.
Despite all the challenges the world is facing, we believe a ‘green recovery’ is possible. Policymaker action is helping this cause with numerous governments announcing climate-friendly rehabilitation initiatives - even China, the world’s biggest emitter of carbon dioxide, has pledged to become carbon neutral by 2060.
Looking at the current state of play, AXA IM’s CIO for Core Investments, Chris Iggo, believes the pandemic has very much sharpened the focus on climate change and environmental, social and governance (ESG) issues. Looking ahead, he expects investors are most likely to reward those companies that are meeting the challenge of making their businesses more sustainable.
Chris Iggo
Former CIO for AXA IM Core Investments
Green bonds, ESG integration, impact and dedicated carbon reduction investment strategies will all be vital elements in investors’ contributions.
He says: “It is quite astounding how rapidly the carbon transition is impacting business strategy through the need to disclose more data on carbon emissions, to sign up to targets that align with the Paris Agreement, and to use carbon pricing as a tool to properly reflect the economics of their business. Being able to demonstrate how COVID-19 has accelerated the carbon transition will be critical in the discussions between company managers and investors.
Taxes may need to rise because of the COVID-19 recession – part of this could be a more active role for carbon taxes which would help shift demand away from carbon intensive activities to alternatives. However, achieving the Paris Agreement will require substantially more investment in alternatives, carbon capture and efficiency. Green bonds, ESG integration, impact and dedicated carbon reduction investment strategies will all be vital elements in investors’ contributions.
Gilles Moec, AXA Group Chief Economist adds: “Public authorities – at least in Europe – have come to regard supporting the green transition as a way to spur economic growth, in contrast with a popular approach purporting an inconsistency between the two objectives. In many core countries of the European Union where public opinion is traditionally hostile to fiscal activism, environmental concerns are high on the agenda.
We think that reconciling economic growth and the green transition is better achieved when the policy instrument shifts to investment projects combined with carbon tax, rather than the usual combination of tax and production subsidy.
Below four AXA IM ESG experts assess whether the crisis will help accelerate the energy transition, and outline what they think the investment implications could be.
I believe that the pandemic can ultimately influence the speed of energy transition for the better. Take the example of the car manufacturing industry - electric vehicle sales have been resilient in 2019 compared to other auto business lines. This trend should continue despite the COVID-19 outbreak.[ii]
This is an interesting point - the question of mobility. This angle of accelerating energy transition, by accelerating the need for new sources of energy, in my view has been a direct result of the coronavirus crisis. Overall, one third of the energy transition will come via investments in renewable energy such as windfarms and solar technology. The pandemic will not be the only catalyst – we still need a greater effort. But there is very much an economic rationale here in terms of delivering cleaner, cheaper energy.
The question though, is also how the supply of energy may evolve. We need to continue to incentivise firms to not only stop capital expenditure in fossil energy but also to increase and speed up their investment plans in low-carbon renewables.
We have started to see some changes in the demand-side sectors, especially around mobility, transportation and in real estate. But we still need to continue raising our expectations on the energy supply mix firms – namely oil and gas companies which have a huge responsibility and shifting energy offering.
Here we have seen a very steep drop in prices and companies are starting to take into consideration the importance of shifting their energy mix, but it’s quite correlated to the economic situation – we need to consider that and look at how we can better support this industry in terms of the transition. Energy transition may speed up as a result of this pandemic but when the economy is collapsing, everything is collapsing.
Lise Moret
Former Head of Climate Strategy
We need to continue to incentivise firms to not only stop capital expenditure in fossil energy but also to increase and speed up their investment plans in low-carbon renewables.
We still must deliver the message to policymakers that they need to encourage this transition, for example via subsidies. The hit to global GDP, forecast to contract by -4.4% this year, is likely to be temporary, and indeed the International Monetary Fund expects 2021 global growth to reach 5.2%.[iii] But that means the drop in global carbon dioxide emissions will be short-lived too. For all our progress over the years, we have not successfully decoupled economic growth from carbon emissions, at least not yet.
To put the potential 2020 coronavirus effect in a broader climate context, global greenhouse gas emissions would need to fall by more than 6% every year this decade, to limit warming to a maximum of 1.5˚C above pre-industrial temperatures. If negative emissions technologies are excluded or fail to become available at scale, then the required emissions reductions for 1.5˚C would be even higher, at 15% every year until 2040. From 2021, annual emissions cuts should be more than 7% and emissions need to peak as soon as possible.[iv]
Read more: COVID-19: Greening the recovery
However, the expected recovery will give us a chance to embed industrial and societal shifts that support the energy transition. We believe that the coronavirus outbreak should harden policy thinking around climate change, and the need for decisive and collaborative action to tackle global, existential threats. It should help encourage public stimulus for green initiatives and should strengthen key themes for investor engagement.
For us as investors, this means continued engagement with firms – and this equally applies to the wider investment community, and the transition is opening many new potential – and sustainable - investment opportunities. Consumers are demanding cleaner energy and companies need to rise to this, or risk being left behind.
When the coronavirus crisis took hold there was a fear that one of the knock-on effects would be a significant slowdown in the financing of green projects. But this has not been the case. Earlier this year, the European Union unveiled a recovery deal, which included some €550bn dedicated to green initiatives – representing the biggest single climate pledge ever made.[v]
In September, France, which has set itself the ambitious goal of becoming the first major low-carbon economy in Europe, announced a €100bn post-COVID-19 rescue package, of which a third is earmarked for projects dedicated to climate-related strategies.[vi]
Climate change has not been forgotten and I believe plans to tackle its threat will indeed accelerate. The debt being raised right now is possible because interest rates remain very low, and markets are awash with liquidity. But at some point, this will need to be repaid and to do that, we need this debt to be sustainable. This means we need to invest in projects that account for the fight against climate change and invest in renewable energy, clean transportation and green buildings – as well as biodiversity preservation. All the recovery plans taking place are taking these elements into account and this is very positive.
Read more: Climate change, biodiversity and epidemics: Lessons for the next global crisis
I expect we will see more investment going into how we want to generate growth in the future – by investing and accounting for climate risk. Investors want to do good with their money, but they also want a good financial return. Recent years have witnessed the green bond sector enjoy robust growth with ever more issuers and deals coming to the market. In 2019 issuance climbed by more than 50% year-on-year, up from $171.2bn to $258.9bn – a new market high - while the number of issuers went from 347 to 506 according to the Climate Bonds Initiative.[vii]
Within our own, more focused green bond universe, we witnessed 75% growth last year – from $100bn to $175bn, while the number of issuers jumped by almost 70%. We expect issuance in 2020 to grow by another 25% to reach circa $220bn.
Johann Plé
Fomer AXA IM Green Bonds Strategy Manager
We believe issuers that have a credible sustainable strategy should be better prepared to face climate risks and opportunities, hence should have better fundamentals in the long run compared to others and perform better.
The green bond market disappointed during the first half of 2020 - issuance was barely in line with 2019, albeit for very understandable reasons. But we expect issuance to increase and we are very optimistic for the sector. Recently, we have seen Germany raise €6.5bn from its first ever green bond while numerous international brands have also introduced their own offerings.[viii] For example, carmaker Daimler launched its first product, which was more than four times oversubscribed.[ix]
There is a very good dynamic of diversification within the credit sector and the sovereign segment is on the rise; all positive factors for the market’s growth and liquidity. For investors this is good news as it means more opportunities in terms of how they can generate an impact and potentially better return prospects.
We believe issuers that have a credible sustainable strategy should be better prepared to face climate risks and opportunities, hence should have better fundamentals in the long run compared to others and perform better.
Ultimately, we believe the onset of COVID-19 will likely speed up and intensify investor demand for more transparent and sustainable products. The coronavirus crisis has highlighted that it is not just financial risk that matters; non-financial risk, such as what we have endured in 2020, can also have a massive macroeconomic impact.
While an abundance of industries and companies have endured severe disruption during 2020, the experience of the renewable sector has been markedly different. We have found that firms have consistently demonstrated resilience, in terms of demand, new business and potential projects. This has manifested itself in their capital expenditure plans where they are bolstering either renewable capacity or the infrastructure that supports them.
For example, data shows that despite having to battle with the pandemic, US solar project developers installed nearly three times as much solar power capacity during the second quarter as they did during the same period in 2019.[x] But more broadly, we have detected a shift in corporate language. There is a real desire to do the right thing by staff and stakeholders in terms of supporting energy transition. It seems more than ever consumer brands want to be able to promote carbon neutrality at a product level.
For example, in January Microsoft announced plans to become carbon negative by 2030, and to remove/offset its historical emissions by 2050, i.e. it will be net zero throughout its existence.[xi] This is a huge commitment and since then other technology giants, such as Facebook, have come out with similar plans.[xii]
Amanda O'Toole
Former AXA IM Clean Economy Strategy Manager, Framlington Equities
The pandemic has certainly highlighted the strength of demand in the clean technology space and how broad-based it is. From an investment perspective, we believe this is very important.
But there is very strong demand driven by the economic rationale, in terms of customer retention, for cleaner energy sources. This is supported by a regulatory and political desire for a cleaner energy generation mix as it’s usually the cheapest source of energy to build.
The pandemic has certainly highlighted the strength of demand in the clean technology space and how broad-based it is. From an investment perspective, we believe this is very important. Take the electric vehicle sector, where in Europe more than 400,000 automobiles were sold in the first half of 2020, marking a 57% increase on the same period in 2019. This is the first time European sales surpassed China in some five years.[xiii]
And while the auto sector will not escape the crisis unscathed, industry estimates expect a strong electronic vehicle rebound.[xiv] Given the sector’s surrounding infrastructure and supply chains, I believe this will present a plethora of potential investment opportunities.
Read more: Can electric vehicles drive a green recovery?
Notably, the other pillar which has stood up very well is 5G investment- and while it is less directly associated with the energy transition, clearly this technology supports smart cities and factories, in terms of efficiency. And again, it boasts a wide supply chain – and diverse set of potential investment opportunities.
Overall, I believe energy transition acceleration is been driven by a consumer and corporate focus on ‘good citizenship’. Nevertheless, I also think government commitment to supporting the energy transition is helpful. We need to support the development of renewables and clean technology. As the market develops and opens, innovation in the sector gains greater traction.
The COVID-19 crisis will hopefully trigger a change in mentality, in that society becomes more galvanised in terms of taking on climate change. Right now, it is not just young people calling for action – investors and asset owners are demanding it too.
The pandemic has been a shock to investors, but also a powerful reminder. It has shown us that forward-looking, agile companies are potentially best placed to deal with crises. Of course, from an investor’s point of view 2020 has been a major economic challenge, but so is the climate crisis; parts of the world have been besieged by drought, fires, hurricanes and floods.
As an investor, we know time is not on our side when it comes to climate action. Given the structural transition at play, we need to take a forward-looking view on low-carbon solutions, more than ever. Many governments are taking the opportunity to finance the recovery in a climate-aware manner, and this can only be a good thing. Greater levels of sustainable investment are vital. And as a sustainable investor we aim to manage the risks associated with climate change but equally we want to take advantage of the possible opportunities that the energy transition presents to us.
Read more: Carbon reduction: Moving away from carbon footprint towards carbon footpath
In my view, the argument that climate action is going to go against investment performance is misguided. There is no shortage of research highlighting that the incorporation of ESG factors can potentially lead to better performance. One report concluded that some 90% of 2,200 empirical analyses found there was a relationship between ESG and financial performance – and in the main, this was a positive relationship.[xv] Additionally, we find the structural relationships between ESG credentials and companies help us assess future profitability and business risk of individual firms.[xvi]
In our experience, the companies which are ahead of their peers in terms of tackling climate change have been a lot more resilient than those that are lagging on this front. There is a clear sense today that the need for change is understood by both companies and investors and is supported by the prevailing winds. We are witnessing greater levels of companies and governments committing to energy transition - even Beijing has now committed to a net zero target.
Lise Renelleau
Former AXA IM Director, Sustainable Investment Solutions, Rosenberg Equities
In our experience, the companies which are ahead of their peers in terms of tackling climate change have been a lot more resilient than those that are lagging on this front.
The companies leading the way today will likely to be the leaders of tomorrow. As such, for investors there are opportunities to take today. But it’s not just about ‘buying the best’. Our analysis shows less than 15% of market indices have reduced their carbon footprint by more than the 7% per annum required to reach a 1.5⁰C climate scenario.[xvii]
Therefore, we need to invest in transitioning companies, those trying to move away from polluting fossil fuels. The key aspect for any investor is to think about this from a long-term approach, in absolute - and transition – terms, to stay ahead of the curve in terms of climate-related policy and regulation, which will impact firms.
Our experience shows demand for sustainable investing has increased. Individual investors and companies are looking for solutions which will allow them to invest in a sustainable manner; strategies focused on delivering the kind of resilience that is necessary to navigate uncertain market conditions related to both COVID-19 and climate change. There is a disruption, and structural change is occurring. In the past ESG investing was more about mitigating risk but today, especially within the climate universe, it is also about seizing potential opportunities. Fundamentally, investors’ long-term financial objectives are aligned with immediate climate action.