COVID-19 & Sustainability

COVID-19 & Sustainability

Summary

 

Climate change is a slower-moving threat of equal or greater proportion

than the COVID-19 - flattening both curves is essential.

 

  • Business and political leaders are doing their utmost to respond effectively during extreme uncertainty

  • Climate change and sustainable legislation and policymaking is slowing down because of this

  • The spread of viruses comes from biodiversity loss - we must decouple economic growth and use of  natural resources

  • There is a current CO2 emission drop but oil prices are low, increasing risk of severe rebound effects (CO2 emissions spiking in the economic recovery phase)

  • Sustainable and ESG investments seem to be outperforming others by 2-3%

  • Stimulus packages must account for sustainability, for example, low-carbon and resilient infrastructure

  • The world is able to take on large scale changes

  • Now is the time to double down on a more sustainable future

Introduction

 

It is hard to imagine a place on Earth inhabited by humans unaffected by the ongoing COVID-19 pandemic. This crisis, due to the pandemic, will make 2020 a unique year that will see fundamental changes to our society and how we live our lives and interact with each other. 

 

The global economy and other individual economies are grinding to a halt. People’s jobs and livelihood are at severe risk and executives and leaders are doing their utmost to respond effectively to ensure a continuum to their businesses in a time of this extreme uncertainty. Governments are responding and pushing out economic stimulus packages. Decision-makers must stay calm, focused, and respond to the challenge today while also understanding the broader context of COVID-19. 

 

From Johns Hopkins COVID-19 center, 30 March 2020

 

Despite this extreme economic uncertainty, the key risk of climate change and sustainability must not be forgotten. Climate change is indeed a slower-moving threat of equal or even greater proportions than COVID-19. Given how fast-moving the COVID-19 crisis is, it is understandable that the political and global risk of climate change is receiving less focus by political leaders. However, these dual threats are interconnected and should be studied and actioned as such.

 

The following sections will act as a guideline to explain how COVID-19 interacts with climate change and sustainability.

 

Biodiversity loss

 

An obvious place to start in describing the interactions between the COVID-19 crisis and sustainability is to start at the origins of viruses. Multiple sources have stated that the COVID-19 has been traced back to ‘wet markets’ in which multiple species of animals are crammed together and interact with species which they would normally not do in nature. The purpose of these markets are to offer, often, rare animals for sale to be eaten or utilized in some other ways.

 

David Quammen, the author of Spillover: Animal Infections and the Next Pandemic, a prescient book about exactly such an event as we are seeing now, recently wrote in The New York Times:

 

“We invade tropical forests and other wild landscapes, which harbor so many species of animals and plants — and within those creatures, so many unknown viruses. We cut the trees; we kill the animals or cage them and send them to markets. We disrupt ecosystems, and we shake viruses loose from their natural hosts. When that happens, they need a new host. Often, we are it.”

 

 

Research spanning decades supports this suggested link between disease outbreaks and climate and biodiversity loss. Deforestation has been connected to 31% of disease outbreaks such as Ebola, Zika, and Nipah. Our insatiable demand for resources and increasing land footprint has led to increased deforestation, reducing the natural barriers between humans and virus-carrying host animals.

 

So what can we do? Humanity’s consistent demand for wood, minerals, and other resources are the leading causes of this deforestation. We must therefore decouple our economic development from the extraction of natural resources and move towards a more circular, sustainable economy.

 

(current) CO2 reduction and (definite) rebound effects

 

Some may respond to this by saying, “but won’t COVID-19 end up having a positive impact on the environment?” There have been many headlines circulating discussing the decreased pollution caused by this standstill economic state and the return of animals to the streets and waters due to this reduced pollution and human activity.

 

There is truth to these headlines. NASA has shown that NOx emissions (a noxious gas, only detected near emission sources such as road traffic and industry - both major sources of CO2 emissions) have significantly reduced in typically heavily polluted areas. See examples from China in the picture.

 

A picture from NASA

 

While this momentary drop in emissions is good for the climate, this emission drop comes at great human suffering and social anxiety due to COVID-19. In other words, the reduction is happening for all the wrong reasons. Additionally, there lies a high likelihood of a rebound effect, i.e. that the emissions will reach much higher levels after the crises, particularly with the recent drastic drop in oil prices due to the ongoing Russia-OPEC price war and the impact of COVID-19.

 

COVID-19 was already estimated to have a drastic impact on 2020’s oil demand due to a significant decrease in factory outputs and transportation demand. Negotiations of how to handle this drop in demand between the OPEC and Russia fell apart, which led to Russia flooding the market with cheap oil during a time of low demand, further plummeting prices.

 

The concern is that similarly to after the 2008-2009 financial crisis, wherein 2009 global emissions dropped by 1.4%, the following year when the recovery period started, emissions shot back up by 5.9%. And this trend has shown itself historically since 1960, shown in the graph below. If low oil prices encourage a fossil fuel focused recovery, the globe’s recent efforts to decrease GHG emissions will likely suffer from this rebound effect.

 

Hover the legends to better see the impacts of different crisis on annual emissions.

 

As well-stated by Axios, “Global carbon dioxide emissions are likely to drop this year, due to the global economy faltering. That’s not a silver lining to the novel [COVID-19]. It’s like a person who loses weight while sick. It’s a byproduct of a bad situation and by definition should and will not last”. 

 

With the knowledge of this risk of rebound effects, it is important to maintain the dialogue on how to reduce emissions to avoid following in history’s footsteps and exposing ourselves even further to the coming climate crisis.

 

The ESG premium holds true

 

Empirical research has demonstrated positive links of good ESG (Environmental, Social, and Governance) performance of companies to their abilities to, for example, attract the best employees, attract debt and equity at a lower cost, charge a premium on its products, negotiate better energy contracts, lower operating expenses, lower volatility of its stocks, and create shorter- and longer-term value, among other aspects.

 

According to a McKinsey survey published in February 2020, 83% of C-suite leaders and investment professionals say they expect that ESG programs will contribute more shareholder value in five years than today. In addition, they said that they would be willing to pay a 10% median premium to acquire a company with a positive record for ESG issues over one with a negative record.

 

According to both ISS ESG and MSCI, two global leaders in ESG investment analysis have pointed out that during forecasted zero earnings growth due to COVID-19 times – ESG will be put to the test. According to ISS ESG has managed to outperform by 2-3% year-to-date in a comparison of three indices using ISS’s own data sources. According to MSCI its ESG leaders index is outperforming in each sector of its parent index. MSCI further stated that factors such as quality and general financial strength have been linked to its ESG leaders and are holding true at the moment.

 

As policymakers, lenders, and investors consider how to allocate the funds being dispersed through incoming stimulus packages, they should not disregard sustainable and ESG investments. This could be implemented, for example, by lenders implementing conditions of ESG performance directly linked to interest rates or payback terms, ESG conditions for accepting financing from stimulus packages and investors doing thorough due diligence on ESG performance before reconstructing their investment portfolios.

 

EU legislation/policy making slowing down

 

Great work has been achieved over the last five years in terms of climate and sustainability legislation, regulation, and related work although there is still much to be accomplished. Gathering bans are shutting down climate protests worldwide, and EU climate legislation and progress towards an EU Green New Deal and a sustainable investment taxonomy will likely be placed on the backburner as all political focus needs to be placed on the issue at hand - COVID-19. Society has shown a willingness to listen to scientific experts about the dangers of COVID-19, we need leaders to take similarly science-backed actions to address the climate crisis.

 

In early March, the European Commission proposed the European Climate Law, a long-term framework with the ambitious goal of Europe achieving carbon neutrality. As governments are forced to put billions of Euros back into the economy through stimulus packages, it will be up to these stimulus packages, coming legislation, and investors to be consistent with promises made in pre-COVID-19 legislation and agreements, such as the Paris agreement.

 

The opportunity: stimulus packages

 

It is now apparent that we need to reduce our need for natural resources, that CO2 emissions will most likely spike again due to rebound effects, and that ESG and sustainable investments seem to be outperforming and are economically viable. Opportunities for a further push for sustainable investments are emerging. These opportunities can be found in the spread of four key trends currently unfolding: potential large-scale unemployment, government stimulus packages, historically low interest rates, and volatile & plunging oil markets.

 

It is well reported that COVID-19 is leading the global economy into a recession, although speculations of a looming economic recession were already circulating before the rise of COVID-19. Governments across the globe are now launching massive stimulus packages in response to keep their economies functioning.

 

With historically low interest rates in place globally, which may be lowered even further in some countries, investing long-term could prove to be sound. This long term view is what has typically made renewable energy and sustainable investments less attractive, because of their longer-term benefits and high upfront costs as opposed to short term payback. Add in the perspective of the current volatile oil market and an opportunity begins to emerge.

 

This picture from the IMF and Bloomberg is not directly related to this article

 but is intended to illustrate impacts of stimulus packages.

 

This access to cheap capital and the need to advance low-carbon and climate-resilient infrastructure in a time of high fossil fuel-volatility presents an opportunity to move the needle in terms of sustainability that has been a struggle to accomplish over two decades of climate talks. Compared to the previous crisis in 2008-2009, solar, wind, and electric vehicles were all still in early stages. In our current recession, however, these sustainable technologies have already become competitive in terms of environmental benefits and price.

 

In Iceland, for example, now could be the time to double down on sustainable investments such as improved public transit systems (e.g. “Borgarlínan”, the proposed capital region BRT system), EV charging infrastructure, electrification of fishing fleets, resilient infrastructure, Carbon Capture and Storage (CCS), hydrogen production, and further circular economy projects - projects that will promote sustainability as well as provide a large amount of both blue- and white-collar jobs unrelated to tourism to keep Iceland’s economy and commitment to sustainability on track.

 

“In the coming months, governments will have a chance to alter that outcome. They could insist, for instance, that any bailout of airlines would be tied to far more stringent reductions in aviation emissions. "Governments now have to be really cautious on how they re-stimulate their economies, mindful of not locking in fossil fuels again." said Prof Le Quéré.

 

The world is able to take on large scale changes

 

The climate crisis and the COVID-19 crisis are both victims of exponential growth and limited capacity to manage the consequences of this growth. For COVID-19, there has been a clear understanding of the need to implement social distancing to stay within the carrying capacity of the healthcare system.

 

Less understood, likely due to the longer-term timeline where the exponential factor is measured in years and decades as opposed to days and weeks, is that this need to flatten the curve is the same for climate change. We are at the very brink of crossing the carrying capacity of the planet to keep global warming below 1.5°, and at most 2°, which are the maximum limits scientists agree we can reach to not face dire consequences related to climate change.

 

 

Similar to COVID-19, climate change is an issue without borders or partisanship and the impacts of them will be felt globally, and failure to act by one country can impact the fate of other countries.

 

This COVID-19 crisis has shown however that the world can make rapid and consequential  decisions, with changes to behaviour and financial stimulus packages when the consequences of inaction are high enough. When dealing with exponential threats, the cost of inaction could potentially result in human suffering down the line that could have otherwise been avoided, i.e. insufficient hospital beds and workers for COVID-19 vs. deaths and monetary costs from droughts, floods, extreme weather events, and wildfires due to climate change.

 

Conclusion: short and long term

 

Business and political leaders are doing their utmost to respond effectively and ensure a continuum to their businesses in a time of this extreme uncertainty. This will be no easy challenge and one that will require cooperation across all parts of society. As stimulus packages and action plans are developed it will be important that they are constructed with the sustainability of the environment, society, and capital in mind.

 

Governments globally should be prepared to double-down on their sustainable efforts to flatten the curve of our constantly growing output of CO2 emissions to stay within Earth’s carrying capacity, reduce reliance on natural resources, and remaining consistent with green policies discussed pre-COVID-19. By doing so, we can come out of this crisis even stronger and more resilient to next crises, together creating a more sustainable future.

How can CIRCULAR Solutions help?

 

CIRCULAR Solutions is a leading independent Nordic sustainability & ESG consulting and services firm. We provide a unique approach to sustainability based on robust, in-depth, and scientific best practices across sectors and industries and with municipalities and governments.

 

  • Strategies: we help build holistic and material sustainability/ESG strategies and policies using robust, in-depth, and scientific best practices.

  • Products & services: we help executives gain a better understanding of life-cycle impacts as well as structuring initiatives for a more responsible value-chain and product design.

  • Impact reporting: we help with engaging and authentic storytelling to help communicate sustainability initiatives to maximise internal and external stakeholder engagement.

  • Sustainable finance: we help identify sustainable investments, prepare sustainable financial instruments (bonds, deposits, loans, etc.), ESG risk assessments for due diligence, TCFD and ESG integrations and disclosures, and more.

 

CIRCULAR’s vision is to accelerate the transition to sustainability by enabling decision making with improved business intelligence, creating value for the economy and society.​ 

 

 

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