We must decide: in a post-Covid world, will we put emphasis on sustainability to achieve a green recovery or dust ourselves off and continue as before?
The coronavirus has disrupted business-as-usual. Economies around the world have crashed, unemployment is at an all-time high, startups are facing a cash crunch, stock markets are at historic lows, the poor have been left to fend for themselves and companies are looking for ways to cut costs. These disruptions have thrown a lot of uncertainty into the picture and consequently certain unfortunate compromises have been made, including from an environmental and social perspective. In a way, the pandemic has shone a spotlight on the existing vulnerabilities and fractures within our societies. But one of the questions that has been on people’s minds is: will sustainability be put on the back-burner until economies recover, or should it be enforced especially now to rebuild our world? Let’s explore what is really been happening on the ground as a result of the pandemic.
Coronavirus as an excuse to dilute regulations
The immediate response among governments and companies has been to dial down their sustainability meters. For example, in the US, the Trump administration has suspended its enforcement of certain environmental laws during the ongoing coronavirus outbreak and it has decided not to expect compliance on the routine monitoring and reporting of pollution indicators nor to pursue penalties for breaking these rules. This means that polluters are able to ignore environmental laws as long as they can claim these violations were caused by the Covid-19 pandemic in some way. What makes matters worse is that no end-date has been set for when the relaxations will end.
In Brazil, the government has sacked key environmental officials weeks after they coordinated an operation to expel intruders from indigenous reserves in Pará state over fears they could spread Covid-19. They also dismantled rules shielding indigenous reserves, effectively legalising land grabbing. The new rule, yet to be approved by Congress, allows farmers squatting in areas up to 2,500 hectares within government-controlled reserves to legalise their occupation. Environmentalists and indigenous leaders fear the pandemic is being used as a smokescreen for passing the law.
In India too
Moving east towards India, the situation is also grim. Some Indian states have pushed for a dilution of labour laws for the next two to three years in order to ease business. Some of these “reforms” include giving employers the freedom to hire and fire workers as they please, doing away with labour inspections, instituting 12-hour workdays without overtime pay, using Corporate Social Responsibility (CSR) expenses to cover salaries and not recognising labour unions. The changes in labour laws, some of which violate International Labour Organisation (ILO) conventions that India is a signatory of, have come at a time in which low wage labourers are already facing an uncertain future.
India is also seeking to dilute environmental safeguards for certain high impact sectors like dams, mines, airports and highways by amending its Environmental Impact Assessment notification. The draft proposal aims to ease processes for business by doing away with public hearings for many projects and relaxing rules for the expansion of projects, among other things.
The Indian environment ministry has also proposed to give clearance for large infrastructure projects over video conference. Such is the haste to “to help clear proposals for seamless economic growth” that no thought has been given to the fact that parties affected by projects may not be able send evidence due to lack of internet access and third party independent consultants can’t conduct field visits due to lockdowns. Some of these projects include the rebuilding of India’s parliament, a 2,400-megawatt coal power plant in Talabira, Odisha state, where Adivasi tribes have opposed the expansion of coal and uranium mining in a tiger reserve in Telangana.
The urgency to re-open plants closed due to the lockdown has also led to serious and avoidable mishaps. For example, a toxic gas leak in a plant owned by South Korean company LG Polymers killed 11 people and injured many others. It is said to have happened because authorities at the plant didn’t follow safety procedures and were in a hurry to re-open up the plant once restrictions were relaxed. In fact, the company didn’t even have a valid Environmental Clearance from the government for the manufacturing plant.
Similarly, seven workers of a paper mill that was gearing up to resume operations in Chhattisgarh’s Raigarh district fell ill after inhaling poisonous fumes while cleaning an open tank filled with waste. This incident was also attributed to the authorities’ negligence in following strict health and safety protocols. In another case in Tamil Nadu, a boiler exploded at a thermal power plant and burnt several workers. These incidents show that loosening of labour protections can prove disastrous for a country that still hasn’t forgotten the heartbreaking images of the industrial accident in Bhopal in 1984, when a pesticide plant released toxic gas and killed 4,000 people.
It’s easy to guess that these dilutions were years in the making, slowly and steadily chipping away at collective sustainability goals. However, the coronavirus has helped accelerate this downward trajectory and given a cover to carry out these measures while the world is busy looking away at more urgent matters. It’s interesting to note that government leaders who already had a pattern of disregarding environmental and social issues are the ones at the forefront of this tendency.
However, there are some green shoots
We’ve all seen the videos and posts about how wild animals have taken over urban spaces in some parts of the world. Air and water pollution has decreased in some of the “dirtiest” cities in the world. According to an article in Nature Climate Change, global carbon emissions declined by 17 per cent between January and early April compared to average levels in 2019, and could decline anywhere between 4.4 to 8 per cent by the end of the year’s – which would be the largest decrease in carbon emissions since World War II.
In India, these fell by an estimated 15 per cent during the month of March and are likely to have fallen by almost a third in April. Overall, CO2 emissions fell by 30 metric tonnes of CO2 equivalent (1.4 per cent) in the fiscal year ending March, in what is likely the first annual decline in four decades. All of this puts into perspective just how much work is needed to align countries with Paris Agreement targets and limit global warming to 1.5 degrees Celsius because these emissions reduction would only be temporary.
In the financial world, stocks and indices with a high environmental, social and governance (ESG) rating have outperformed the rest of the market during this economic crisis. Companies worldwide with a stock market value exceeding USD 500 million US dollars and earning at least 10 per cent of their turnover from climate themes outperformed the FTSE All World index by 5.1 per cent between 10 December 2019, when the first Covid-19 cases became evident, and 24 April, according to research by HSBC. From a long-term perspective, highly-rated ESG stocks outperformed the benchmark by 74.5 per cent and climate-related stocks did so by 66.1 per cent over 13 years.
This outperformance isn’t only due to the fact that ESG investors avoid highly polluting sectors like oil, gas and coal, but that they select companies that are adaptable and have best-in-class corporate governance practices, good employee conditions and a robust risk management system that anticipates operational risks. Companies are also beginning to understand the importance of issues under the “S” in the ESG acronym, realising the effect they have on corporate reputation and share price. For example, when Amazon announced that it would spend 4 billion US dollars on virus-related expenses including protecting its staff, its shares went up by 28 per cent after going down 7 per cent at the initial announcement. Investment management company Federated Hermes also noted that companies with poor or worsening social practices consistently underperformed their peers by 15 basis points a month, based on data collected since 2008.
Companies’ track record with good employment conditions, social safety nets and access to health services inform their reputation as an employer for many years to come. For instance, companies that are voluntarily cutting executive pay where employees are being furloughed or being laid off will be held in good stead by employees, society and markets. Crisis-proof companies will see greater loyalty from their staff and be more able to attract new recruits after the crisis. Conversely, staff may leave employers that they felt abandoned them during it. These factors (along with standard financial criteria) will form the basis for investors looking for resilient companies during such volatile times.
A green recovery, sustainability after Covid
A ‘green recovery’ is our bridge to a more resilient future. (Kristalina Georgieva, Managing Director of the International Monetary Fund)
Even though across G20 countries the vast majority of the 300-plus substantial policies approved thus far have been “rescue” measures, as opposed to “recovery” efforts impacting emissions, some countries are pushing for recovery packages putting “green” conditions on at-risk companies. In France, for example, Finance Minister Bruno Le Maire said that the 7 billion euro package to aid ailing airline Air France was “not a blank cheque” and stressed that support for the company is contingent on it agreeing to ambitious new emissions goals and becoming the world’s most environmentally-friendly carrier. Specifically, he said the airline would have to halve carbon emissions per passenger and per kilometre compared to 2005 levels by 2030, and emissions from domestic flights would also have to be halved by 2024. Similar packages have been proposed by Canada and Germany.
Spain also proposed a draft law to cut the country’s carbon emissions to net zero by 2050 and pledges to make its electricity system 100 per cent renewable and ban all new coal, oil and gas extraction projects with immediate effect, as well as end direct fossil fuel subsidies and make all new vehicles emission-free by 2040. The government has said that the “energy transition is going to become an important driving force for generating economic activity and employment in the short-term during the recovery process and in a manner consistent with what the country needs in the medium and long-term”. In contrast, in the US, Republicans opposed a push to attach airline aid to emissions mandates, and climate provisions were dropped from the huge recovery package approved in late March.
The economic recovery is an opportunity for us to shift the global economy on a more sustainable track, but only if we use stimulus funds for investments that yield long-term structural emissions reductions and avoid those that will cause a rebound in global emissions. (Jonas Nahm, Assistant Professor of Energy, Resources and Environment at John Hopkins University in the US)
Climate Change > Pandemic
The climate emergency mirrors the Covid-19 crisis, just in slow motion and much graver, says the Oxford Smith School of Enterprise and the Environment. The uncertainty around these types of events means that populations and investors alike don’t adequately prepare for them, investment bank JPMorgan stated in a recent note to its clients. So what does this mean for the future of sustainability?
Firstly, it’s important that more science-backed conversations occur comparing the impacts of Covid-19 to the potentially worse impacts that climate change will unleash upon us, if left unchecked. Subsequently, it would be a good time to address two biases affecting humans when it comes to climate change and sustainability: myopia and optimism. Companies need to get serious about stretching timeframes in their risk management models so that they reflect on the likelihood of climate change related disasters in the next 30 years rather than just in the short-term. They should also conduct scenario planning and analysis, such as providing worst case scenarios for what could happen in the future, like the one recommended by the Task Force on Climate-related Financial Disclosures (TCFD), and how they plan to tackle them if they were to occur.
Secondly, people shouldn’t be swayed by the common rhetoric that sustainability should be off our radars for a little while until everything goes back to “normal”. Because the truth is that normal wasn’t good enough. In fact, one could argue that the virus exposed just how broken our society was. We need to actively create a new normal for ourselves where governments, investors, corporations and individual citizens work together to steer us into a green new world and prepare for the inevitable climate crises of the future.
In particular, governments need to be better prepared for climate change impacts by creating task forces appointed specifically for this eventuality. These shouldn’t only be responsible for preparing for climate change shocks at a national level, but also for pushing for the decarbonisation of the economy. Countries are already seeing extreme weather changes, floods, water scarcity, famines and migration of people due to climate change and these will only increase in the future. Adaptation and mitigation measures need to be implemented to prepare for these inevitable changes.
If the preparedness of governments to Covid-19 and the ensuing chaos are any indication, significant steps need to be taken to better protect our world from climate change. Along with green recovery packages and pushing companies to be good corporate citizens, governments must also consider this a good time to introduce carbon pricing given the lower costs of renewables. Electric vehicles, renewable energy, climate-smart agriculture, improving cycling infrastructure and retrofitting of buildings are some other examples of steps that governments can take on.
Investors need to look at the crisis wrought by the coronavirus as an indication of what could potentially happen should a climate disaster strike; as well as factor the likelihood of extreme events in their portfolios. The good thing is that ESG has already proven to be resilient compared to other asset management strategies (as explained above) during the pandemic and institutional investors, especially pension funds and insurance companies, need to start thinking more from a long-term perspective as they are generally long-term investors and stewards of capital.
Investors will also start looking for resilient companies that can withstand a crisis like Covid-19 or whatever the future brings. Therefore, businesses need to more seriously incorporate material ESG factors into their day-to-day operations to be truly prepared. This makes business sense too. Research has demonstrated that when companies focus their sustainability efforts primarily on material, social and environmental factors, they significantly outperform the market, with alpha of 3 to 6 percent annually.
Companies who are thinking of the ESG risks of the future will be best placed to weather the storm when it comes. With risk also come opportunities. Companies that are trying to solve the crises of the future will be rewarded with competitive advantage. This could mean creating new products that address emerging social needs or open currently un-served customer segments and enhancing productivity in the value chain through finding new efficiencies or increasing the productivity of employees and suppliers.
Along with adopting a sustainable lifestyle in their personal lives, individual citizens need to make concerted efforts to demand their pension funds, mutual funds, government representatives and employers integrate ESG practices. Finally, while doing all this, governments must also ensure that people losing jobs due to this transition to a cleaner future are shifted into greener sectors with appropriate skill training – so that no one is left behind.
It’s crucial that economic recovery plans advance climate action. Unless countries take swift action while rebuilding their economies, the vicious cycle of bailing polluting companies out, therefore putting our future at risk due to climate change, and then bailing them out again when climate impacts hit them will continue. So the answer to the previous question about whether sustainability will take centre-stage or be left high and dry is largely dependent on whether we as a society are ready to transform the dysfunctional status quo.
And by asking ourselves serious questions and acting now, we can take the opportunity presented to us to prepare ourselves for climate change-induced shocks. The pandemic has given us a preview of what our future might look like and it’s vital that we pay heed to it. Our choice is whether we want to treat this as a pause or a reset.
This article was originally published in lifegate dated 23 June 2020.