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Is Covid-19 a barrier or a boost to sustainability?

Sustainability was already increasing in importance before Covid-19. But the nature of the pandemic has elevated its prominence further. While the origins of the virus remain unclear, human encroachment on the natural environment seems to have been a contributory cause.

Meanwhile, lockdowns in many countries have prompted many people to appreciate nature in a new way and note the benefits of reduced road and industrial pollution. As a result, many of us have pledged to live more sustainable lives. But will it last?

As Marieke Blom, chief economist at ING in the Netherlands, explains it is not certain that people will “reset” their personal choices. “It’s important to remember that the sustainability advances that we saw during lockdown came at a high price,” she says. “People had to sacrifice travel, for instance. Such a change is unlikely to be durable. Also, the pandemic created considerable financial stress, which usually makes people focus on their self-interest.” Fortunately, while most economies shuddered to a halt as a result of Covid-19, decisive government interventions in the US, China and Europe mean that they are largely on track to return to their original growth trajectories. Perhaps because the economic impact of the pandemic was less than feared, people’s eagerness to embrace sustainability – thus far – is undiminished. A survey of 4000 people in 13 countries conducted for ING shows that more than half are now more focused on the environmental impact of products they buy than before Covid-19, while a significant majority of people “want governments to build back better by shifting to a low carbon economy”, says Blom. While efforts vary by region, most governments have made significant commitments to sustainability over the past year. For instance, over a third of the EU’s recovery fund is focused on green projects while a new law requires the region to cut carbon emissions by at least 55% by 2030, compared with 1990 levels. The election of President Biden has resulted in the US rejoining the Paris Agreement on Climate Change, with a vast share of its jobs plan is directed to “greening the economy”, notes Blom. China has committed to net-zero carbon emissions by 2060 and has become a leader in green infrastructure.

What does this mean for companies?

While government commitments are important, much of the hard work of creating a more sustainable post-Covid-19 world will have to be done by companies. Here too, there has been increased impetus. “The pandemic has accelerated the urgency of sustainability,” says Leonie Schreve, global head of sustainable finance at ING. “In the past year we have seen the topic gain strategic importance among our clients: 60% of ING’s corporate clients now say it is a priority. There is a growing realisation that sustainable business is better business.”

Paul Polman, co-founder of IMAGINE, a social venture which mobilises business leaders around tackling climate change and global inequality, and a former CEO of Unilever, says that despite the challenging business environment, 90% of company executives want to do business differently in the next five years. “Companies are stepping up,” he says. “Around 25% of companies have made net-zero commitments, with big names such as Nestlé and IKEA announcing multimillion dollar deals to green their value chain. Covid-19 has shown that the cost of inaction is higher than action. Business would be wise to seize the opportunity that is available.”

For Anheuser-Busch InBev, the world’s largest brewer, Covid-19 has not impacted its sustainability efforts. “But that’s because sustainability has been high on our agenda for 30 years,” says Fernando Tennenbaum, CFO. “Our products are made of natural ingredients and we serve local communities. So if we don’t have a sustainable business, we don’t have a business. The pandemic simply validated our case for sustainability: we’ve been here for 600 years; if we want to be here for another 600, we need to double down on sustainability.”

“60% of ING’s corporate clients now say sustainability is a priority. There is a growing realisation that sustainable business is better business.”

- Leonie Schreve, global head of sustainable finance at ING

Why short-term targets are important

Someone on a swing in a mountainous area

While carbon emission reduction targets by the EU, the US, China and many companies are welcome, they invariably have deadlines many decades in the future. “Corporate commitments focused on 2050 are not enough anymore,” says Polman. “To avoid catastrophe, we need to reduce our carbon emissions by 50% every 10 years. To do that, companies need to work to 2030 targets: 25% of companies have done so; 75% still need to do so. Governments also need to do more: only around 30% of the EU’s recovery plan is focused on sustainability, for instance.”

Yvon Slingenberg, director at the European Commission's Directorate-General for Climate Action, agrees that short-term targets are important. “Europe has been focused on these issues for decades, but in recent years we have paid more attention to the science of what is needed to keep the planet liveable,” she says. “On that basis, we have accelerated our plans: as a result, Europe expects to be the first climate neutral region in the world.” The EU’s pathway to get to that target includes lower carbon emissions by 2030 – agreed in April in a legally-binding climate law. The EU is also pinning down obligations and compliance for different actors on a year-by-year basis using mechanisms such as the emissions trading system, which puts a price on carbon for manufacturing industries and the power sector, according to Slingenberg.

Competitiveness and sustainability are not a binary choice

One commonly voiced concern is that that the imposition of carbon emission reduction targets or higher environmental standards in the EU could put companies operating in the region at a disadvantage. But Slingenberg rejects this argument. “Companies have a legitimate concern about competitiveness and this is reflected in our rules and regulations,” she says. “So-called carbon leakage, where companies move locations to escape the costs associated with emissions targets, is a real risk. However, the Paris Agreement – and more recent announcements by the US and China – reflects a major change. All countries are now engaged in the transition, which should address concerns about the EU going it alone and reducing the competitiveness of companies based in the region.”

“Sustainability initiatives are value accretive, not value destructive.”

- Fernando Tennenbaum, CFO AB InBev

The EU’s carbon border adjustment mechanism, which is set to be formally proposed in July and implemented in 2023, will create a level playing field and ensure that the EU’s carbon emission reduction ambitions are not thwarted by companies moving to other regions. The mechanism should counteract this risk by putting a carbon price on imports of certain goods from outside the EU.

More generally, Anheuser-Busch InBev’s Tennenbaum says that the idea that sustainability results in higher costs and makes companies less competitive is mistaken. “We feel that a sustainable company is much more likely to prosper in the long run as it has reduced risk, a lower cost of capital and the potential for greater profitability,” he says. “Sustainability initiatives are value accretive, not value destructive.” Polman says that the same logic applies at country level: “The countries that are greening their economies fastest are the most competitive.”

What more needs to be done?

A key driver of the transition to a low carbon economy is the availability of finance to companies pursuing sustainable objectives. The good news is that the financial sector is changing fast. “Getting access to capital increasingly demands making sustainability a strategic priority,” says ING’s Schreve. “We embedded sustainability into our commercial strategy years ago, and have helped to shape the sustainable finance market by launching many innovative transactions that reward companies for improving their sustainability.”

Polman points to the launch in April of the Glasgow Financial Alliance Investors, chaired by Mark Carney, UN Special Envoy on Climate Action and Finance, which brings together over 160 firms (together responsible for assets of more than $70 trillion) from across the financial system, to accelerate the transition to net zero emissions by 2050 at the latest. “At a macro level, finance has woken up,” he says. “Funds focused on Environmental, Social and Governance issues have dominated inflows since the onset of the Covid-19 crisis, for example.”

While the financial sector has been innovative in the development of green bonds, blended finance and other initiatives, robust regulatory frameworks that provide incentives are critical, according to Slingenberg at the DG for Climate Action. “The price we put on carbon, the EU taxonomy – which defines activities that are in line with the Paris Agreement – and our ‘do no significant harm’ principle, which informs our Green Deal, are important. We are practising what we preach: for example, there is no funding for fossil fuels in our budget, which covers the next seven years. Similarly, our recovery plan – NextGenerationEU – will be borrowing €750 billion, 37% of which will be directed towards climate-relevant investments.”

 “Funds focused on Environmental, Social and Governance issues have dominated inflows since the onset of the Covid-19 crisis…”

- Paul Polman, co-founder of IMAGINE

Tennenbaum says that momentum for sustainability is building throughout the corporate sector as the appeal of sustainability-linked finance grows. “Green and sustainable finance offers significant advantages for both companies and investors,” he says. “Ultimately, investors want a higher return for lower risk. The moment you acknowledge that sustainable companies are lower risk and have a greater likelihood of delivering on their plans, it becomes inevitable that capital will migrate towards more sustainable companies. This, in itself, will result in higher returns. Some people believe that sustainability-linked loans, of the type we have just completed, offer a discount to borrowers. But we are not getting it for free: we are earning it because we are a lower risk company and therefore deserve a lower cost of capital. Investors increasingly understand this: sustainability is top of mind for everyone.”

While the devastating experience of Covid-19 has few silver linings, the increased importance of sustainability – to individuals, companies and governments – could prove a valuable legacy that improves everyone’s lives and reduces the risk of catastrophic climate change.

This article is based on our Orange Live webinar:

Sustainable Finance beyond the green. You can find the replay link here.

Our latest sustainable finance survey of corporate and investment leaders found that companies have accelerated their green transformation plans, while investors are demanding tougher environmental targets. You can find it here.