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Coronavirus: impact on ESG

Net zero just got a whole lot tougher. Time for finance to step up.

It is no exaggeration to say that, in the space of just a few short months, the coronavirus crisis has changed the face of the world. It is a once-in-a-generation challenge to our way of life and with around a quarter of the world’s population currently on lockdown, the true human, social and economic consequences will not be determined for quite some time. 

The change in political priorities from the end of 2019 to the start of 2020 is stark. In the UK, Boris Johnson’s catchy rhetoric of ‘getting Brexit done’ and ‘levelling-up’ the economy has been shattered by the unprecedented curtailment in civil liberties announced last week, and the rapid preparations underway for the biggest crisis the NHS has ever faced. 

In a mark of how quickly everything has changed, it was only last month that political momentum on the climate was building after the Australian bushfires and policymakers from both the UK and the EU announced their first plans to achieve net-zero emissions by 2050.

Action on the climate

In attempting to transition an entire continent’s economy to net-zero emissions without sacrificing any economic or social development, the European Union launched the ‘European Green Deal’, which aims to transform the bloc’s economy to reach carbon neutrality by 2050. The EU recently announced its first iteration of the Deal, the new industrial strategy, which promises to support key industries towards climate neutrality, launch a new ‘European Clean Hydrogen Alliance’ and build a more circular economy, in which resources are continuously used to extract the maximum value. 

On the other side of the Channel, Rishi Sunak’s first Budget was the perfect opportunity for the government to start its own journey to net zero. It included some new measures to tinker round the edges of environmental policy, including a plastic packaging tax, a commitment to plant more trees, and a green levy to help fund the development of greener fuels, but lacked the bold ambition of the EU and fell well short of the Conservative party’s manifesto promise to “prioritise” the environment.

Action on Coronavirus

But that was then, and this is now. Action on the climate has been displaced by action on the coronavirus. Governments have been forced to act fast and act big. 

With the government’s priorities elsewhere, there is, however, a perfect opportunity for the financial sector to step up to the plate and have a bigger role to play in holding companies to account for their records on the climate and financing the economic transition required to reach net zero.

Regulatory policy is moving in the right direction and is set to increase the financial sector’s role. The FCA has recently consulted on proposals to require all listed companies to make climate related disclosures consistent with the Taskforce on Climate-related Financial Disclosures (TCFDs), or to explain to shareholders why they have not done so.

More can be done, however, including a clarification of the fiduciary duties of pension scheme trustees to prevent trustees from prioritising short-term financial returns over long-term climate considerations and the introduction of new green government bonds issued by HM Treasury to channel capital into ‘green’ infrastructure projects. France has already raised €20bn issuing similar bonds, with the Netherlands, Sweden and Germany close behind.

Once more, the response to the coronavirus and the focus on the climate are not mutually exclusive. As the UK and the EU start to move along the ‘curve’ and ease strict lockdown measures, it is likely that fiscal stimulus measures will be necessary to get both economies back on their feet. This will present an ideal opportunity to focus the investment on shaping a new green economy while stoking aggregate demand. 

With political momentum on the climate subdued, and governments across western Europe fighting to control the biggest crisis seen since the war, it is time for the financial sector to step up and assist the UK and EU in reaching carbon neutrality by 2050. Help is needed now, more than ever.