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News 8/14/2020

Climate change, the Green New Deal, CO2 commitments - will the recession sweep ESG themes aside?

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Jean-Baptiste Rouphael & Marc Lavaud
ESG Analysts at ODDO BHF

 

The health crisis and prospect of a recession are pushing ESG themes to the side-lines, for both companies and the public authorities. Yet they might come roaring back in an environment transformed by the experience of falling growth. For companies with exposure to energy- and climate-related issues, their decisions whether or not to maintain their decarbonisation budgets will be a sign of how serious their commitments are. In these straitened times, the choice to persevere might pay off for leaders in the sector.

Greenwashing revealed by CO2 commitments in a time of crisis

In a time of crisis, CSR is not just about solidarity initiatives or scrapping dividends. Companies in sectors with high exposure to energy- and climate-related issues must decide whether to maintain their investment and R&D budgets dedicated to lowering the carbon footprint of their production systems and finding low-carbon solutions. How they choose will be a sign of how serious their intentions were prior to the crisis. For the moment, companies in the oil sector have maintained their capex for diversifying into renewable energies. There are, however, doubts about whether companies in the steel, cement or airline sector will maintain their CO2 commitments since they have been so badly hit by the crisis and are in need of cash. In Europe, the trajectory taken by the automotive industry or energy companies will depend greatly on whether the CO2 price mechanisms are maintained in Europe. The leaders of the various sectors (IAG, PSA, Iberdrola, etc. - see benchmark below) have everything to gain from sticking with their strategies despite today’s headwinds.

Stimulus plans: jobs before climate

The crisis is undermining Europe’s ambitious Green New Deal. The European Commission was trying to bring eastern European countries on-board with its strategy of achieving carbon neutrality with the promise of a fair transition fund to ease the shift away from coal. All over the world, stimulus plans might drive CO2 emissions back up after a brief respite. China is preparing a stimulus plan as part of its strategy based on the new silk routes, boosted by the construction of over 200 coal-fired power stations. In both France and Germany, a commitment to maintaining jobs rather than re-directing growth models is likely to be the condition attached to rescue plans for companies with exposure to fossil fuels. At the same time, the return of state intervention will be a unique opportunity for governments to invest in the energy transition, particularly in technologies suffering from chronic under-investment from the private sector (energy storage, hydrogen, CO2 capture, etc.). It is just good sense to focus first on jobs and then the climate, but the decisions taken by public authorities and companies over the next few weeks could well shape the industrial and economic landscape for several years.

ESG - more than a luxury of bull markets

The crisis might divert investors’ attention away from the SRI questions which were taking on ever-increasing importance during the market’s ascent. But the current shock supports the use of extra-financial criteria to capture and manage financial risks: MSCI ESG indices for Europe, the US and Japan have outperformed since the start of the year. The health crisis is a reminder of the potential consequences of deforestation and unfettered climate change. Many companies have underestimated the risks raised by overly long and complex supply chains. Above all, the themes of relocating jobs, short circuits, low-carbon mobility or sustainable tourism might take centre stage again soon in a world transformed by the unprecedented experience of a fall in growth.

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