In focus

Sustainability

Climate change and coronavirus: where next?


David Brett

David Brett

Investment Writer

Much of the world is in lockdown to prevent the spread of coronavirus and industry has all but ground to a halt.

The economic implications of the lockdown will be felt deeply but the effect on meeting climate change targets could also be profound.

We chatted to two experts in the field, Andrew Howard, Head of Sustainable Research, and Isabella Hervey-Bathurst, an investor in climate change themes.

They explained what the climate change goals are and why, where we are on the path to meeting them, and what impact the current crisis might have on future policies and investments. 

First of all, I know the  Paris Accord is central to what we’re going to talk about – what exactly is it?

Andrew Howard (AH): The Paris Accord was an agreement that was signed in December 2015 by global leaders around the world. Virtually all of them at the time agreed to taking collective action to   limit long-run temperature increases to around 2 degrees Celsius over the pre-industrial levels of the late 1800s.

It was a line in the sand moment, 20-odd years in the making. It outlined the temperature rises that might lie ahead, the actions that leaders were prepared to take and the outcome that they would be able to live with.

So far temperatures have already risen by just over 1 degree, relative to pre-industrial levels. So we’re just over half way towards the overall target.

How can we gauge where we are on the path to 2 degrees?

AH: Schroders built a Climate Progress Dashboard to provide an objective gauge of how far and how quickly different things will need to change to get us to 2 degrees.

There are 12 different measures including political efforts, business strategies, technological change,  and fossil fuel productions.

So, for example, we look at how many more electric cars will need to be on the road? How much more renewable energy will need to be generated? And how quickly oil, gas or coal production need to drop in order to get us to a 2 degree world.

What is the dashboard telling us?

AH: The dashboard is updated quarterly. The last update suggested we are heading for around a 3.9 degree long-run temperature rise. It is fairly clear that there is still a lot more that needs to be done

We have begun a journey but there are a lot more steps to take. And there will be a lot more disruption ahead if we’re going to meet those commitments in Paris

What effect, if any, has Covid-19 had on meeting climate change goals?

AH: In the sort-term it has had a pretty significant impact on industrial activity, economic output and, in particular, carbon emissions. It looks extremely likely that in 2020 we’ll see carbon emissions decline relative to last year. It will be only the fourth year in three decades in which carbon emissions actually fall on a global basis.

However, when we look at past crises, when emissions have dropped, that has often been temporary followed by a bounce back in the following year.

Looking at the Climate Progress Dashboard specifically, the overall effect has been relatively muted.

Which industries might emerge stronger from the crisis?

Isabella Hervey-Bathurst (IH-B): It is instructive to look back at how industries fared during and after the global financial crisis, but it is not a perfect tool to gauge how they might emerge from a crisis.

But when we looked, what was striking was just how much has changed for clean technologies and for climate policy since 2008.

For example, electric vehicles. Back in 2008 there were just two electric vehicle (EV) models on the market in Europe and the top selling EV sold about 330 units. Fast forward to 2020, there are now 70 EV models on the market in Europe and the best-selling EV in the world sold more than 300,000 units last year.

Renewable energy is another industry that has seen a huge amount of change. Back in 2008  renewables were highly dependent on subsidies. This left them at risk when government finances became very stretched. After the crisis we saw subsidies withdrawn in a number of geographies.

Since then, costs have fallen dramatically and at the start of 2020 renewables have become the cheapest form of new energy generation in two thirds of the world. So, renewable energy is now largely cost competitive. That’s a stark difference from the time of the last crisis.

Political and corporate will has evolved too. Climate commitments have become much more firmly established in policy planning and corporate strategies. Because of that, it seems climate change investors are on a much firmer footing now than they were back in 2008.

What effect could Covid-19 crisis having on corporate policy?

IH-B: The most immediate challenge is dealing with the crisis. But a lot of people are asking what does the world look like afterwards?

We have seen dramatic changes already. People are working from home where they can and meetings and conferences have become virtual ones. It will make businesses re-evaluate the necessity of what they would previously have considered “business as usual” practices. And this could just be the start.

We think it is quite possible that we could see some more permanent changes in how we work, and that could be good for the climate.

Could Covid-19 be a turning point for climate change?

AH: It may well be the starting point but it is difficult to be definitive. Society is going to go through huge amount change, which will underscore the  importance of political action and leadership.

Climate change is part of that discussion in a way that it wasn’t 10 years ago and hasn’t been in previous crises. There are a lot of reasons to be hopeful and there is a good chance that policymakers and corporations will come through.

What role can investors play as stakeholders in facilitating change?

AH: The role of an active, responsible investor is to engage with the companies in which they are invested.

There are undoubtedly short-term challenges to deal with and they can be very acute in many industries. But investors can play a key role in longer-term planning by engaging companies in discussions about what their response will be.

As an investor in climate change are there reasons to be optimistic?

IH-B: Yes. What we’ve seen, particularly in Europe, is a continued momentum behind the idea of the Green Deal, which is a roadmap for making Europe's economy sustainable.

The European Commission and various industry groups are coming together to push the idea that the climate plan should not be derailed by the current crisis.

Combined with the fact that so many of the important trends that we look at are on a much firmer footing than they were ten years ago, I am really encouraged.

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