The response to the COVID-19 crisis is demanding a prodigious effort from both the public and private sectors. As long as the focus is on the pandemic, brief delays to getting new sustainable investment off the ground will be inevitable.
But some argue that the economic emergency justifies relaxing long-term sustainability objectives themselves. This should not be the case. There is an opportunity to channel the significant resources needed to get the economy back on track in a way that is consistent with the transition to a low-carbon future. In this task, the financial sector has a major role to play.
Don’t jettison climate change goals
The scale of the impact of the COVID-19 pandemic on the world economy has no obvious precedent. Both the public and private sectors are striving mightily to contain the virus. Once that goal has been accomplished, they will have to sustain their efforts over the medium term to ensure the recovery of the economy. This prospect raises the question whether maintaining climate change-related commitments will remain a priority for governments and boards alike.
The Paris Agreement obligations - which are quite stretching - still hold, and there is no suggestion they should be loosened. Pushing back COP26 is a recognition that the required diplomatic and related efforts are not possible now, but that the threats that existed before Covid have not gone away. This has been recognised by EU climate chief Frans Timmermans: “As for the European Commission, we will not slow down our work domestically or internationally to prepare for an ambitious COP26, when it takes place,” he said in a statement. It is also consistent with a recent joint letter by 13 EU climate and environmental ministers on the subject.
The financial sector has a significant role to play in the reconstruction of the post-COVID economy. Given the reliance of European business on bank loans – in contrast to market financing - it makes sense that a lot of the government money earmarked to support the productive fabric is channelled through lenders. In the pre-COVID world, environmental sustainability was becoming an increasingly critical part of doing business for mainstream banks across the globe. Financial institutions had committed to adhering to the UN Global Compact Principles and to achieving the objectives established in the Paris Agreement (COP21) and the UN Sustainable Development Goals (SDGs).
At COP25, 33 financial entities with over $13trn in assets signed the Collective Commitment to Climate Action. This sets out concrete, time-bound measures that banks pledge to take to meet the objectives of the Paris Agreement, notably by aligning their lending with the obligations of the pact. These commitments were seen as a lever to promote more environmentally sustainable behaviour among the banks’ customers.
Banks may be approaching a crossroads. During this first phase of the coronavirus crisis, firefighting and putting in place the operational changes required to meet clients’ needs have been the main concern for many companies, including financial institutions. Banks must act swiftly to ensure their customers have sufficient liquidity and, at the same time, thoroughly evaluate their credit risk in what is a very unstable environment. They need to adjust their risk models to incorporate not only an economic crisis that is currently unfathomable but also the unknown impacts of the lockdown. The models should also build in the investments needed to comply with the Climate Change agenda.
Keeping an eye on sustainability objectives while channelling needed funds to the economy is a difficult but important task that will help attain climate goals while reducing overall risk in banks’ loan portfolios. Public support mechanisms coherent with this long-term objective could make it easier to accomplish the task. Prioritising industries and companies aligned with the transition to a low-carbon economy can be challenging but also necessary if we want to build a better and more sustainable world.