The Sustainable Capitalism Wake-Up Call

Gordon Power, chief executive and chief investment officer of Earth Capital, wrote an op-ed recently on how a more sustainable capitalism will emerge from COVID-19:
The main concern that is paralysing the financial markets right now is uncertainty. Investors and the business community are questioning how long this crisis will last, and when consumer and investor confidence will return, with no end in sight.

But while none of us can predict the future, when it does return, one possible outcome is that the crisis could cause an unprecedented shift in capital — potentially for the better. Why? Because coronavirus is a test of which companies will be most resilient to another global crisis: climate change.

Over the last few years, we have seen financial institutions and global companies promise to adopt environmental and social initiatives as the penny — the global climate threat — drops. Encouragingly, many of the world’s largest firms seem to be increasingly aware of the risk that climate change poses to their business models. Business news in the months leading up to the coronavirus crisis was dominated by pledges to cut emissions, promises to build sustainable portfolios, and the emergence of in-house ESG teams.

But while progress has certainly been made, global emissions have continued to rise to the highest level on record.

The clock is ticking to address the climate crisis. The required technology and awareness for change is already here: what is now needed is a wake-up call for this change to become reality. And Covid-19 could be that wake-up call.

Capitalism in its current form threatens value — and is more vulnerable to losing it. Sustainable capitalism, on the contrary, creates value and has proved to be more resilient to systemic risks. As markets around the world have plunged in the last few weeks, one of the main losers from the economic consequences of the pandemic has been fossil fuel-intensive companies. In stark contrast, sustainable infrastructure has demonstrated stronger resilience in these challenging times.

Once viewed with suspicion, funds with a sustainability mandate have proved their mettle, and now routinely outperform other funds. This could be the prompt that investors have been waiting for — a phenomenon that could see greater prevalence toward sustainable funds.

Transitioning to a low-carbon economy means dealing with growing physical risks such as extreme weather events and investing today to avoid future risk scenarios developing. Covid-19 has shown our dependencies on fossil fuel-intensive companies and is providing an unexpected stress test, enabling us to see how prepared they — and, indeed, all companies — may be for the climate change shocks that are on the horizon.

As environmental disasters, dramatic shifts in energy markets, and legislative changes emerge, those funds that have absorbed the Covid-19 shock are likely to demonstrate their resilience once again. Companies are sensitive to market signals, and as investors move to resilient low-carbon alternatives, all businesses will be forced down the same route regardless of size or sector.

We estimate that about 70–80 per cent of the cost of achieving the net-zero emissions target must come from the private sector. It is a big spend, but also a big opportunity. Contributing to a low-carbon, sustainable future could provide a greater pay-off to investors over the long-term.

The economic shock of coronavirus will have woken up investors to this new reality. When this devastating crisis is over, we can only hope that the world has learned the lessons necessary to ensure that our future is more sustainable — and more secure.
Recall, I recently discussed impact measurement in private equity, sharing insights from Jim Totty and Richard Burrett of Earth Capital.

Anyway, a friend of mine quipped last week: "Anybody talking about ESG these days?".

He was being facetious and basically telling me "nobody cares about ESG when it hits the fan," which is why I am bringing up Gordon Power's comment.

COVID-19 has been a gigantic wake-up call in more ways than one. It has shown how dismally unprepared the world was for a pandemic.

In the same vein, Gordon Power is warning us the world is woefully unprepared for a climate disaster, one we know is coming and one we better take seriously, especially now that this pandemic has exposed just how vulnerable we are to exogenous mega shocks.

Actually, these are more endogenous shocks, we created them and we and the next generation are going to live the repercussions of our decisions.

Gordon ends his comment by stating "we can only hope that the world has learned the lessons necessary to ensure that our future is more sustainable — and more secure."

I'm a lot more pessimistic but I too hope the world wakes up and starts to tackle big problems in an open, transparent and sustainable way.

By the way, even renewables aren't escaping the wrath of coronavirus. Anmar Frangoul of CNBC reports the coronavirus is hitting renewable energy supply chains and factories, and could slow the global energy transition:
Global renewable energy capacity hit 2,537 gigawatts (GW) at the end of last year, an increase of 176 GW compared to 2018, but the coronavirus continues to cast a shadow over the sector’s prospects for 2020, impacting both supply chains and manufacturing facilities.

According to figures from the International Renewable Energy Agency’s (IRENA) “Renewable Capacity Statistics 2020” report, new additions last year were slightly lower than the revised total of 179 GW added in 2018.

Looking at the bigger picture, however, the organization said Monday that renewables “accounted for 72 per cent of all power expansion” in 2019, with solar and wind growing by 98 GW and almost 60 GW respectively. Together, these two technologies were responsible for 90% of renewable additions in 2019.

In terms of other sources, hydropower growth was described as being “unusually low” last year. In a foreword to the report, IRENA’s Director-General Francesco La Camera explained that a number of large projects had “missed expected completion deadlines.”

Breaking things down geographically, the report shows that Asia was responsible for 54% of renewable capacity additions last year.

While the additions reported by IRENA may appear promising overall, this year looks set to pose a number of challenges for the renewables sector, many of them connected to the COVID-19 pandemic, which has caused issues with supply chains and forced some factories to shut.

There are also fears that the pandemic could negatively affect investments in clean energy, while the steep drop in oil prices is another factor that could potentially make renewables less attractive to some markets.

IRENA’s La Camera acknowledged the impact that the coronavirus pandemic would have going forward.

“As an existential threat, the multi-faceted fallout from coronavirus … now sits alongside climate change as a defining challenge of our time,” he wrote.
Challenges ahead

On Monday, Wood Mackenzie projected that 3 GW of solar photovoltaic and wind installations in India could be delayed due to the lockdown currently in place there.

“The timing of the lockdown is unfortunate as Q1 (the first quarter) is typically one of the busiest periods for wind project installations,” Robert Liew, a principal analyst at the research and consultancy firm, said in a statement.

“The lockdown will delay some projects until summer, and if the lockdown is extended past April, wind farm construction could be further delayed into the monsoon season, where wind installations are typically at their lowest,” he added.

Wood Mackenzie added that solar photovoltaic installations in India were “expected to be hit hard” because the sector was “heavily dependent” on Chinese photovoltaic module imports, which had experienced disruption because of the virus.

Globally, the wind industry is undoubtedly facing challenges. Toward the end of March, the Global Wind Energy Council said its forecast of continued growth across the next five years — more than 355 GW of additions — would “undoubtedly be impacted by the ongoing COVID-19 pandemic, due to disruptions to global supply chains and project execution in 2020.”

It was, however, “too soon to predict the extent” of the coronavirus’ impact on both energy markets and the wider global economy, the GWEC added.

On a regional level, the impact of the pandemic has already had an impact. According to industry body WindEurope, while “the majority” of wind turbine and component factories in Europe are continuing to operate, 18 manufacturing sites are currently closed. All these facilities are in Spain or Italy, which have been hit particularly hard by the pandemic.

A number of other factories, WindEurope says, “have temporarily paused activity as a precautionary step to strengthen sanitary measures within the sites and guarantee full compliance with government recommendations.”

Europe’s supply chain also “experienced some disruptions” in February related to components and materials coming from China. According to WindEurope, supplies are now “ramping back up again.”
Great article, shows you how renewables are being impacted by coronavirus and of course, the plunge in oil prices, but I expect growth in renewables will pick up strongly next year no matter where traditional energy prices lie.

The world is shifting, asset managers need to shift with it and start incorporating climate risk in their risk management framework.

And now they need to incorporate a pandemic in their models too (we will undoubtedly see another one over the next 20 years or sooner).

Lastly, a few tweets I posted on Twitter today (follow me here, been posting way too much lately):

Inequality is hitting home with this coronavirus and I saw something on Twitter which broke my heart today:

Think about it, a young lady with cerebral palsy helping older people load groceries into their carts and cars wasn't given any mask or hand sanitizer and she died from coronavirus. It's a cruel disease and particularly cruel to the most vulnerable in our society.

But there is hope too, there seems to be an effective treatment on the horizon using blood plasma from recovered patients:

We need treatments as well as serological tests to tell us who has had COVID-19 and has antibodies and is fit to go back to work:

Below, IHS Markit experts in clean energy technology recently sat down to discuss how coronavirus (COVID-19) could impact the renewables industry. This frank discussion is between IHS Markit experts Sam Wilkinson, Edurne Zoco, Eduard Sala de Vedruna, Francesco D’Avack, and Cormac Gilligan. Their experts cover topics including the solar supply chain and expectations for 2020, the disruption to demand on the wind industry, and how long renewable companies can survive.