• Deirdre Cooper: co-Portfolio Manager

Will COVID-19 derail the transition to a low-carbon economy?

At first glance, it may seem that the coronavirus pandemic has derailed the global environmental agenda – certainly in the short term. While economies are closed, the massive investment required to decarbonise the way we produce and consume has been delayed. However, as the world emerges from the crisis, we see increasing evidence that the transition may accelerate.

Fiscal stimulus will accelerate climate-related policy

The level of stimulus put in place by governments around the world is unprecedented. It has been implemented multiple times faster than it was in the Global Financial Crisis and its size, as a percentage of GDP, is also unprecedented. In the eurozone, monetary stimulus is 30%+ of GDP and fiscal stimulus is 17%; in the US, the numbers are similar with a slight bias towards monetary policy.

As those programmes are rolled out, we expect that in many regions decarbonisation will be front and centre in terms of the focus of that fiscal stimulus. In Europe, for example, the Green Deal – due to be implemented this year – is the key policy underpinning the acceleration in the energy transition. Despite delays caused by the pandemic and lockdown, in a Europe struggling for growth, fiscal policy dedicated to decarbonisation remains a key lever for driving economic activity.

In the US, while decarbonisation is clearly not top of the agenda for the Trump administration, the country is on track to produce more electricity from renewable energy than from coal this year for the first time on record, according to projections made by the US Energy Information Administration. This transformation is partly driven by the Coronavirus pandemic, and comes despite the Trump administration’s three-year push to revive the ailing coal industry by weakening pollution rules on coal-burning power plants.

To date, China has introduced some small measures to support the sector, but we believe that once the cost of renewable generation becomes cheaper than coal, Chinese clean-energy policy will accelerate significantly.

The pandemic has not put the brakes on technological change

When it comes to technological drivers of decarbonisation, the pandemic has not changed the pace of technological change, nor the downward direction of the cost curve for clean technologies, which has declined dramatically. In the last decade, solar costs have declined more than 80 percent, and the cost of building large wind farms has dropped in excess of 40 percent. If anything, the lockdown has intensified the move away from fossil fuels, with the demand for electricity and fuel falling sharply. And, because coal plants often cost more to operate than renewables, many utilities in countries with a more equitable mix in their power grid than South Africa, are cutting back on coal power first in response.

Consumer behaviour is changing

And finally, consumer behaviour seems to be moving in a more conscious direction, with a growing belief that this crisis may be followed by a pause in conspicuous consumption in favour of more sustainable consumer choices. Even before the pandemic, a survey published by Accenture identified a 429% increase in consumer preferences for sustainably-sourced products, and a 107% increase in consumer desires for eco-conscious products.

Similar trends are taking place in the investment industry. Last year, Ninety One surveyed 2 000 investors to find out what investments they would like in their pension funds². Over 80% said they would like to invest in environmentally sustainable funds, even though only a small fraction of that number have those products in their pensions today.

Investors are looking for real action from companies. They want to see what their strategies are for addressing environmental, social and governance (ESG) issues; and how executive compensation, for example, is aligned with incentivising sustainability targets. This, in turn, is putting asset owners under more pressure to ensure that their allocations properly integrate ESG considerations.

Ninety One Global Environment Fund¹ requires decarbonisation to be the main driver of revenue growth

Ninety One’s Global Environment Fund only holds companies whose products and services help the world avoid carbon emissions, and we require decarbonisation to be the main driver of revenue growth.

Decarbonisation is arguably the single biggest investment that the world has had to make in peacetime. The numbers dwarf any other investment opportunity today and it is imperative that listed equities play a part in funding the transition to a low carbon economy. Asset managers have a responsibility to engage with company management teams to ensure this happens in a meaningful and measurable capacity.

In fact, according to the UN’s Intergovernmental Panel on Climate Change, in order to stay within a 1.5°Celsius increase in global temperatures by 2100 US$2.4 trillion needs to be invested per annum in the low carbon economy: currently just a quarter of that is being invested globally.

Ninety One’s decarbonisation universe consists of over 700 securities totalling $6.5 trillion in market cap. Interestingly, this universe is poorly represented in major equity indices. For example, only one-third of these companies are included in the MSCI All Country World Index (ACWI), and account for only 10% of its weight.