ESG in the Time of COVID-19

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The strategic threat posed by the spread of infectious diseases is by no means a new risk, but the COVID-19 pandemic has made this risk a reality. It has already illustrated how one microscopic virus can rapidly spread around the world and bring the global economy to a grinding halt, leaving significant and lasting disruption in its wake. While the pandemic has displayed the immediate and striking social consequences to business and society alike, as described in the accompanying commentary, "The ESG Lens On COVID-19, Part 1," published April 20, 2020, this catastrophe also may give us some insight as to how the companies S&P Global evaluates prepare for disruption amid a rapidly evolving risk landscape. Indeed, disruption rarely occurs in isolation. Today, companies around the world are confronting this unprecedented health threat, while reeling from the dual shock posed by the breakdown in OPEC negotiations and accompanying collapse in global oil prices, along with the looming systemic threats posed by climate change. The growing complexity posed by these emerging and intersecting risks and megatrends are conspiring in ways that require deftness, adaptability, and resilience for entities to remain relevant, both now and for the long run.

The coronavirus pandemic has rapidly spread across the globe, creating a once-in-a-generation public health catastrophe. It has upended the global economy, plunging even the most prosperous countries into recession. It's exposing vulnerabilities in value chains, revealing the depth of corporate values, and prompting coordination and collaboration not seen since war-times. Financial markets have been roiled as investors seek to identify the companies that are best positioned to weather a crisis of this magnitude and as governments develop strategies to rescue beleaguered sectors. With a long recovery ahead, it's clear that few sectors and companies will be spared the consequences. The impacts are both direct and indirect, and most certainly enduring.

As governments around the world continue to tackle the coronavirus pandemic, many of us are adjusting to a new normal characterized by social distancing and other measures to slow the rate of contagion. With Earth Day upon us, we take a moment to consider how the unfolding pandemic could affect the way we tackle other global systemic risks, such as climate change.

The COVID-19 pandemic has hit Europe hard, and the economic challenges ahead are significant. From a macroeconomic perspective, however, Europe's policy response appears encouraging, with its incentives for sustainable growth, solidarity, and economic stability.

European governments have committed to taking unprecedented fiscal measures in response to COVID-19. Importantly, the markets seem to have accepted these measures as appropriate. Recent sovereign debt offerings by Portugal and Italy priced at very low rates and were largely oversubscribed. Across Europe, sovereign bond yields are similar to those at year-end 2019. Although spreads and CDS pricings on certain European government debt have widened, they are nowhere near the levels observed in previous shocks, particularly during the 2008 financial crisis.

As the Covid-19 pandemic continues its spread through countries and affects their economies, the private sector is discovering positive ways to support overwhelmed health and social care systems. Fashion houses are replenishing hospital clothing supplies; cosmetic companies are contributing disinfectants; aerospace, sporting and academic institutions are manufacturing medical equipment; staffing agencies are adapting their benefits policies; and several corporations are pledging financial donations to support the response. Evidence is also emerging that investors are signaling a preference for products that favor companies with a positive societal impact. ESG funds are continuing to gain assets[i], even during one of the most significant disruption to markets, and as of April 6, the S&P 500 ESG Index was outperforming the S&P 500 by 2.47%.

But how will the financial system regenerate post-coronavirus? Will the private sector return to ‘business as usual’ or could there be a reframing of financial markets to align with global sustainability goals?

A decade after the financial crisis crashed Europe's cap-and-trade emissions prices, experts say the reforms made will hold up against the current coronavirus crisis.

Set up in 2005, the EU Emissions Trading System, or ETS, is the world's largest carbon market and Europe's flagship tool to force companies to cut their emissions efficiently. It covers around 45% of the bloc's total emissions, produced by more than 11,000 installations, including power stations and heavy industrial plants, as well as flights between EU countries. Companies receive a certain amount of allowances for free and buy the rest in regular auctions, or from each other, to cover their needs for any given year.

French and German environment ministers have joined calls for the EU to raise its 2030 target to cut CO2 by the end of this year and avoid pro-fossil fuel post-lockdown measures to boost the economy.

There are now 13 EU environment ministers warning against short-term economic recovery solutions "that risk locking the EU in a fossil fuel economy for decades to come," they said in a joint statement published April 10.

The ministers come from Austria, Denmark, Finland, France, Germany, Greece, Italy, Latvia, Luxembourg, the Netherlands, Portugal, Spain and Sweden.

As the extent of the impact of the coronavirus outbreak on economic activity and power demand emerges, newbuild activity in global power faces old and new sets of challenges.

The short-term focus has been shifting due to coronavirus-related disruption of manufacturing activity and logistics, but delays will most likely be short-lived.

The global power capacity mix has already been shifting toward renewables. S&P Global Platts Analytics estimates that solar photovoltaic, wind and hydro made up almost 67% of total power capacity additions over the past year. The question is whether renewables investments will accelerate, but so far we do not see major signs that this could happen soon.

As the head of the renewable energy division at the European Investment Bank, Alessandro Boschi is overseeing operations at one of the largest lenders to clean energy projects in Europe. Following a broader industry shift, the bank, or EIB, has started financing unsubsidized wind and solar projects under Boschi's leadership. And as it now prepares to greatly increase its climate financing, Boschi explained in an interview why he thinks renewables still need state backing and how the coronavirus might hasten a shift towards that realization. The following is an edited transcript of the conversation.

S&P Global Ratings has reviewed its portfolio of six public Environmental, Social, And Governance (ESG) Evaluations in light of the COVID-19 pandemic and has left all scores unchanged for now. We will continue to monitor the portfolio.

ESG Evaluations are our view of an entity's capacity to operate successfully in the future and may be affected by the risks and disruptions caused by COVID-19. The ESG Evaluation comprises two assessments: the ESG profile considers near-term and observable risks and opportunities, and an entity's preparedness considers its ability to manage emerging, disruptive, and strategic risks. We consider this pandemic to be a social risk that could affect our view of the ESG profile of an entity--particularly the social profile--and a disruption that could affect our view of an entity's preparedness. We may revise our opinion of an entity's ESG profile and preparedness, and adjust our ESG Evaluation score appropriately. These adjustments could be either negative or positive, and would take into account the management team's efforts to mitigate the risks posed by COVID-19.

As the oil price rout continues, the case for investors and governments to shift more capital to the clean energy sector grows stronger, the International Renewable Energy Agency said in an April 20 report.

The International Renewable Energy Agency, or IRENA, issued the report the same day that futures prices for West Texas Intermediate crude plummeted into negative territory for the first time ever as markets sapped of demand by the coronavirus pandemic remain awash in oil.

The renewables sector has not been spared from the pandemic's economic fallout, but John Morton, a senior fellow at the Atlantic Council Global Energy Center, said it appears to be in a relatively solid position.

Declining US coal-fired power demand, hit further by the coronavirus pandemic pressuring electricity demand, has pushed major coal basins into oversupply and utility stockpiles to multi-year highs, requiring producers to consider permanent cutbacks, B Riley FBR analysts said April 17.

"While YTD US coal production is at its lowest level in decades, demand declines have been even sharper," B Riley analysts Lucas Pipes, Daniel Day and Matthew Key said in a report. The combined impact of elevated coal stockpiles and subdued US electricity demand from the economic shutdown "has led to little-to-no activity in the spot market" and led some producers to expect to sell less than their contracted 2020 volumes, they said.