COVID-19: Accelerating the energy transition and driving climate-friendly investment opportunities
Six AXA IM ESG experts assess whether the Covid-19 crisis will help accelerate the energy transition and outline what they think the investment implications will be.
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.
Despite all the challenges the world is facing, we believe a ‘green recovery’ is possible.
Gilles Moec, Group Chief Economist, AXA IM
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 previous 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 now 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.
Chris Iggo, CIO for Core Investments, AXA IM
The pandemic has very much sharpened the focus on climate change and environmental, social and governance (ESG) issues. Looking ahead, we expect investors are most likely to reward those companies that are meeting the challenge of making their businesses more sustainable.
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 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.
Lise Moret, Head of Climate Strategy – Impact and Responsible Investment, AXA IM
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.[i]
I believe that the pandemic can ultimately influence the speed of energy transition for the better. Let’s take the example 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.
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 sustainable investment opportunities. Consumers are demanding cleaner energy and companies need to rise to this, or risk being left behind.
Johann Plé, Green Bonds strategy manager, AXA IM
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 non-financial risk can have a massive macroeconomic impact.
Even though there was a fear that one of the knock-on effects of the crisis would be a significant slowdown in the financing of green projects, figures prove the contrary. 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.[i] And, 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.[ii]
Climate change has not been forgotten. The debt being raised right now is possible because interest rates remain low, and markets are awash with liquidity. But at some point, this will need to be repaid and 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, green buildings and biodiversity preservation. All the recovery plans taking place are taking these elements into account and that is exactly what we were expecting.
As for the green bond market, we have seen Germany raise €6.5bn from its first ever green bond while numerous international brands have also introduced their own offerings.[iii]
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.
Amanda O’Toole, Clean Economy strategy manager, AXA IM Framlington Equities
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.[i] 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.
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 and I believe this will present a plethora of potential investment opportunities.
Lise Renelleau, Sustainable Investment Solutions, AXA IM Rosenberg Equities
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.
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 China has now committed to a net zero target.
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.
(1) COVID-19: Greening the recovery, AXA IM April 2020
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