Are environmental factors about to take a back seat? Are environmental factors about to take a back seat? https://stage-fii.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png https://stage-fii.federatedinvestors.com/daf\images\insights\article\question-mark-hand-landscape-small.jpg August 24 2020 June 4 2020

Are environmental factors about to take a back seat?

Possibly, at least in the early stages of the post-Covid recovery.

Published June 4 2020
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Have you seen the amazingly clear pictures NASA took from space of cities across the globe, their skies devoid of pollution’s fuzzy haze? It was awe-inspiring. Unfortunately, from our perch overlooking the global markets, we don’t think it will last in the near term. As the world struggles to get back on its feet from this virus crisis, it’s not difficult to envision environmental concerns potentially taking a temporary back seat to economic pressures even as social and corporate governance factors gain credence and come into greater focus.

The world is constantly trying to balance economic realities and aspiration. And the current reality is, it may take years for the economies of many communities, cities and countries to get back to where they were pre-Covid-19. One can make the case that, through policies such as remote working, dependent-care assistance and workplace protections, companies with solid and improving social and governance commitments have been and will continue to be more valuable as this pandemic plays out. Strong governance credentials and paying greater attention to supply chain management will surely increase the resilience of those companies during the current crisis.

Will cheap gas & fear of transit boost driving?

By comparison, the environmental pillar may be under some pressure in coming weeks and months. Aside from the pure survival instinct that businesses will have for self-preservation, there are a number of new environmental stumbling blocks to consider. Take transportation. As more economies reopen, more people may opt for the eco-friendly and safer option of walking or biking to work, weather permitting. But if they can’t do either, it’s highly questionable that public transportation, with its crowded buses and trains, will be a preferred option. This means more may choose to drive, possibly pushing car usage that plunged during lockdowns to rise above pre-virus levels, particularly if gasoline prices remain cheap. Gas under two bucks a gallon in the U.S.—it’s $1.98 this week, AAA says—historically has served as a big incentive. Or consider plastics. For reasons of workplace and customer safety, reusable cups and plastic bags may well be reinstated in many offices and locales to help prevent Covid’s spread. Between economic cost and environmental aspiration, this all works to tip the balance.

From a geographic perspective, policymakers from different regions are responding to the pandemic in very different ways. Europe generally is more aspirational, Asia more pragmatic and the U.S. more skeptical. For example, Europe is doubling down on its effort to go green. After launching the “European Green Deal” in March, it has proposed further “green” policy prescriptions as part of the European Union (EU) post-Covid recovery package. These include robust initiatives on e-mobility, hydrogen, building renovation, renewable energy and rail. The stimulus-climate incentives are aimed at keeping the EU on target for member countries to become “climate neutral” by 2050, meaning emissions can yield no net impact on the climate. An interim target is a 50% reduction in emissions by 2030.

Will green initiatives clash with post-Covid commerce?

But the proposed stimulus package, while ambitious, is potentially costly and certain to be fiercely debated within the bloc. Bailouts for Air France and Lufthansa came with toughened fuel standards that may be hard for the profit-challenged industry to swallow. In Germany, incentives are being pushed for “clean’’ car purchases only, much to the chagrin of regions that are home to major automakers that employ 800,000 and represent 20% of Germany’s GDP. So, it isn’t cut and dry, and a lot of data and polls in Europe reflect this dichotomy. Many Europeans say they believe in climate change and support policies to combat it. But in the year of Covid, the economy is almost certain to be the larger issue amid soaring unemployment and a recession the EU says may be of “historic proportions.’’

Pursuing stimulus as a vehicle to also promote more “green’’ policies may be visionary thinking, but will it work? The airline industry will be an interesting case study. Its business model rests on making money from every inch of space on a plane. But tougher environmental compliance costs on top of what are sure to be stringent social distancing standards are going to make it even harder to turn a profit, let alone survive. With many European airlines facing a 3-year deadline for repayment of their aid packages, their options likely will require much higher fares and heavier subsidies for an industry that already receives substantial government assistance. Many countries actually hold ownership stakes in their flag carriers, such as France’s Air France and Britain’s British Airways.

'E' may go on pause but it's not going away

Long-term, the key drivers behind sustainability are firmly in place. In fact, the aftereffects of the coronavirus may serve as a catalyst for greater adoption of ESG. Nearer term, however, it may well be the environment takes a back seat to the other two key tenets of responsible investing, the S and the G. That doesn’t mean the E won’t catch up, it may just be on pause. Consider that even amid this pandemic and the collapse in oil prices, supermajors including British Petroleum are still stepping up investments in solar, wind and biofuels as they pivot from their legacy fossil fuel businesses. Science will almost always win out; when is another matter. Covid is buying time on climate change. The question is whether the world will make use of it.

Tags Coronavirus . Responsible Investing . International/Global . Equity .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.

There is no guarantee that considering ESG risks will be a successful investment approach.

Federated Global Investment Management Corp.

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