Pandemic will transform tenets of sustainable investing

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The writer is global head of sustainable investing at JPMorgan Asset Management

Covid-19 is a sustainable investing paradox. It has rightly diverted boardroom and policymaker attention to crisis management, slowing environmental, social and governance agendas. Yet it has tragically underscored how connected humans and societies are to nature. If one part of the ecosystem falls ill, the immunity of the system is compromised.

The virus is in part a symptom of our collective, chronic mistreatment of nature, in the sense that environmental degradation played at least a partial role in exacerbating our public health vulnerabilities. Equally urgent, the importance of social and governance factors in company and government management have been made all too clear.

This pandemic will transform the tenets of sustainable investing, accelerating some aspects and reshaping others.

Environmentally, much attention of late has been paid to lockdown-induced drops in pollution. Satellite images show substantial drops of nitrogen dioxide concentrations, dramatically halving in Paris and Madrid. But these fleeting benefits mask a worrying loss of momentum in the fight against climate change, such as the postponement of the COP26 Climate Conference, as well as an expected rapid increase in fossil fuel consumption post-crisis.

There are, however, reasons to be optimistic. The cost of producing electricity from renewable power as well as storing it is becoming increasingly competitive, which will soften the reality of greenhouse gas emission rises linked to the economic recovery.

With the recent volatility in oil prices, there has also been increasing pressure on oil dependent nations to diversify their revenue sources. This bodes well for a greener future. The International Energy Agency predicts revenues to drop by as much as 80 per cent for the largest producers.

On the policy front, postponement of climate mitigation policies should prove temporary as governments will need to step up their climate adaptation measures to be better prepared for the next crisis.

When it comes to the critical social dimension, Covid-19 magnifies inequality within societies. The US Bureau of Labor Statistics shows that 61.5 per cent of the workers with earnings greater than the 75th percentile have the ability to work from home, only 9.2 per cent of those earning less than the 25th percentile have the ability to do so.

Covid-19 also increases inequalities between countries, as poor emerging countries that rely heavily on remittances from their diaspora in rich countries are hurt the most. Remittances account for 10 per cent of Senegal’s gross domestic product and 62 per cent of these flows come from countries that have implemented lockdowns — meaning these vital flows are drying up.

In the long run, these social consequences of Covid-19 will shift supply and demand dynamics meaningfully. 

With greater job displacement due to increased automation, governments will face the risk of heightened populism arising from the huge disparities among workers. Corporations will need to step up their investments in skills training as well as improving the health and safety of workers. These measures will inevitably increase labour costs but should help a more skilled workforce grow sustainably over time.

When it comes to governance, the virus has been a giant stress-test of global corporate resilience. Defensive capital allocation strategies have been rewarded as ample balance sheet cash has suddenly become more prized than current dividend yields, which look vulnerable.

Exposed companies are right to hold higher cash reserves in this unprecedented crisis, but trickier moral questions about the role of capital allocation in healthy capital markets lie ahead. 

Covid-19 calls on us not to abandon the tenets of sustainable investing but to speed them up, in order to strengthen the resilience of our societies and companies.

While policymaker initiatives may be understandably diverted in the short-term, there is no time to waste for investors. Private investors can fill in the gap with a long-term perspective as governments are in crisis management mode. For all stakeholders’ sakes, it is time for investors to step up.

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