Climate Risk and Energy Transition

As governments around the world continue to tackle the coronavirus pandemic, many of us are adjusting to a new normal characterised 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. Particularly as the healthcare industry zeroes in on precision medicine, therapies tailored to patients' genetic makeup, a better understanding of different populations' biological differences is vital in drug testing.

The coronavirus pandemic may accelerate a shift from fossil fuel spending to investments in renewable energy, but the pace of that transition depends heavily on how governments direct economic recovery spending, and whether the consumer behavior changes induced by the outbreak become permanent.

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Energy transition refers to the global energy sector’s shift from fossil-based systems of energy production and consumption — including oil, natural gas and coal — to renewable energy sources like wind and solar, as well as lithium-ion batteries.

The future financial and social consequences of climate change are becoming increasingly apparent to companies, investors and policy makers. Strong action to reduce emissions and limit climate change may avoid the worst physical impacts of climate change but presents significant market, technology and regulatory transition risks for market participants. Conversely, failure to adequately reduce greenhouse gas emissions may limit transition risks but will result in increasing climate change and associated physical risks.

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, 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%.

Greenhouse gas emissions are expected to dip this year due to fallout from the pandemic that has plunged economies the world over into recession. S&P Global Platts Analytics estimates global GHG emissions will drop 5.5% this year.

That would be the largest drop since 1.4% in 2008 during the global financial crisis, according to the Global Carbon Project.

That's significant but would still fall short of the 7.6% each year in reductions that the UN Environment Program says the planet needs to keep global warming below 1.5 degrees Celsius under the Paris Agreement.

Global energy investment is expected to plunge by 20%, or almost $400 billion, in 2020 as the COVID-19 crisis risks slowing the world's transition to cleaner and sustainable energy systems, said the International Energy Agency on May 27.

Continuous methane emission sensors could help the oil and gas industry more effectively limit unintended leaks, and the University of Texas at Austin is spearheading a project to evaluate the technology's viability and durability.

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