The implications of COVID-19 for the natural world

A drop in emissions may be giving a false sense of security about the state of the environment. Temporarily clearer skies shouldn’t provide a reprieve to companies about the urgency to manage environmental considerations.

At the moment, long-term environmental issues are somewhat out of the spotlight, as companies grapple with the immediate health, societal and economic issues triggered by the COVID-19 pandemic. In order to balance the interests of shareholders and other stakeholders, corporate responses in the short-term must focus on ensuring the societal and economic damage from the pandemic is temporary rather than permanent- to mitigate volatility without jeopardising their own survival.

Still, as stewards of our clients’ capital, we must also remain firmly focused on the long-term, structural trends which impact sustainability and value. In our view, this shock strengthens the case for a robust approach to ESG analysis in evaluating long-term company sustainability.

We believe long-term, systemic issues related to the environment remain critically important and will inevitably resurface once this crisis has passed. Indeed, major dislocations like the present provide us with an unparalleled opportunity to achieve rapid and more sustainable change.

Climate change
From an emissions standpoint, the huge drop in travel and industrial activity has temporarily reduced global carbon emissions and yielded cleaner skies¹²³⁴. While from a climate perspective this provides some short-term relief, achieving it at the expense of such sudden and violent economic and social disruption is neither desirable nor sustainable.

The medium to long-term outlook at this stage is less clear and the emissions respite may be short-lived5. This crisis may lead to permanent changes in the way certain things are done, such as business travel, or the sourcing of goods⁶. Other emissions drivers, such as industrial activity and ground transport, may quickly return to business-as-usual.

Managing the COVID-19 pandemic is the clear priority at present. However, climate change remains a long-term systemic risk that will return to the forefront once the crisis has stabilised and/ or we inevitably experience another extreme weather event. Focus may have been shifted away from the climate crisis temporarily, but it is, in fact, inextricably linked to the pandemic. Indeed, the destruction of habitats and ecosystems through deforestation, degradation and climate change have been linked to the virus outbreak⁷⁸. Pandemics have always been flagged as a potential outcome from climate change and will continue to be a material risk long after COVID-19 has subsided.

We expect there will be policy delays and some limiting of climate ambition in the short term, but we do not anticipate the efforts to date will be permanently thwarted. The postponement of COP26 at such a critical time for the Paris agreement is disappointing but also essential to ensure the appropriate effort and attention is applied when it does occur, given the inadequate outcomes from the COP25 event. We also expect potential delays in the rollout of some green projects such as renewable energy, but the long-term growth prospects for renewables should remain intact as their technologies and economic competitiveness continue to improve.

Questions remain around political next steps and whether stimulus/ recovery plans will be “green” or simply aiming for growth at any environmental cost. Policymakers have an unprecedented opportunity to provide economic stimulus plans that also facilitate sustainable social and environmental development - such as the numerous measures proposed in the Green Stimulus Plan¹⁰. This could provide a strong investment opportunity for “green” stocks such as infrastructure or energy.

At this juncture it is necessary to be somewhat pragmatic around resource-intensive corporate climate change commitments in the immediate term. However, the urgency of the climate crisis has not changed, and one thing that we believe to be clear is that COVID-19 has strengthened the case for companies to undertake rigorous TCFD (Task Force on Climate-related Financial Disclosures) aligned disclosures, stress testing and scenario analysis around their operations. In due course there will be a need to refocus on establishing appropriate measures to mitigate the material risks this work uncovers in order to ensure long-term business resilience, which will be front-of-mind for investors in the aftermath of the pandemic.

Waste
Massive amounts of waste from a shift back to disposables out of hygiene concerns, increased online shopping and associated packaging, food waste from stockpiling and supply chain mismatches, plus an increase in medical waste, may all serve to delay the transition to a circular economy¹¹¹²¹³. A renewed focus on product lifecycle stewardship once the COVID-19 dust settles will be imperative for long term ecological and biodiversity protection. To some extent this will also tie into considerations of supply chain adaptation as discussed in the follow up pieces to this series.

In summary

The implications of COVID-19 for the natural environment at this stage are somewhat mixed- there have been both positive and negative outcomes, which may or may not be short-lived. Longer-term issues may necessarily be taking a temporary backseat as the immediate social implications of the crisis are managed, however the pandemic cannot be used as an excuse for companies to shelve these considerations permanently.

¹https://www.eea.europa.eu/highlights/air-pollution-goes-down-as
²https://www.theguardian.com/world/2020/apr/09/climate-crisis-amid-coronavirus-lockdown-nature-bounces-back-but-for-how-long?CMP=Share_iOSApp_Other
³https://www.ft.com/content/c736cd3c-1457-440b-af07-4061afb35bc9?desktop=true&segmentId=7c8f09b9-9b61-4fbb-9430-9208a9e233c8#myft:notification:daily-email:content
⁴https://www.theguardian.com/environment/2020/apr/12/global-carbon-emisions-could-fall-by-record-25bn-tonnes-in-2020?CMP=Share_iOSApp_Other#maincontent
⁵https://www.ft.com/content/052923d2-78c2-11ea-af44-daa3def9ae03
⁶https://www.mckinsey.com/business-functions/sustainability/our-insights/addressing-climate-change-in-a-post-pandemic-world?cid=other-eml-alt-mip-mck&hlkid=af5586b7c4394a7481d3b15833d91449&hctky=9947174&hdpid=50056e1f-1960-4ae3-b9a3-ff33b5ea692e
⁷https://ensia.com/features/COVID-19-coronavirus-biodiversity-planetary-health-zoonoses/
⁸https://www.theguardian.com/environment/2020/mar/18/tip-of-the-iceberg-is-our-destruction-of-nature-responsible-for-COVID-19-aoe
⁹https://carbontracker.org/COVID-19-and-the-energy-transition/?mc_cid=b364c7d329&mc_eid=66302b4e7f
¹⁰https://docs.google.com/forms/d/e/1FAIpQLSfMzRDRJQWsgp2QW4er8ags2VMPiibFm51X4TnZbDmLg1lqYQ/viewform
¹¹https://www.bloomberg.com/news/articles/2020-03-30/the-unexpected-environmental-consequences-of-COVID-19
¹²https://news.bloomberglaw.com/environment-and-energy/chinas-war-on-garbage-faces-a-major-coronavirus-setback
¹³https://www.theguardian.com/world/2020/apr/09/us-coronavirus-outbreak-agriculture-food-supply-waste?CMP=Share_iOSApp_Other