The reverberations of the Covid-19 pandemic can be imagined through the lens of Edward Lorenz’s 'butterfly effect,' visual imagery that the MIT meteorology professor used to suggest that the flap of a butterfly’s wings might indirectly cause a tornado, which represents how small change can have large consequences.
The current crisis is said to have started in a provincial market in China, before spreading rapidly round the world through travel routes and supply chains.
There is also clear scientific evidence that the spread of diseases can be exacerbated by rising temperatures, deforestation, loss of biodiversity, and poor sanitation - all of which are prominent, interconnected sustainability issues.
The idiosyncratic, nonlinear nature of systemic risk from events like a pandemic makes it challenging to predict where, when, and to what extent the effects will be felt, but we are closely monitoring the near- and longer-term consequences on sustainable investing, especially with respect to bond markets, financial valuations and dialogue between companies and their backers.
Investors can watch for these six implications that the Covid-19 environment may have on sustainable investing:
Covid-19 has intensified sustainability challenges, requiring significant bond financing
The most obvious impacts of the pandemic have been its social and economic costs - loss of life, rising unemployment, food insecurity and related health outcomes.
According to the United Nations, the pandemic has negatively impacted 13 of the 17 Sustainable Development Goals, with effects that include inadequate access to clean water and loss of income, leading vulnerable segments of society to fall below the poverty line.
In an effort to drive capital to address these problems, the International Capital Markets Association has published guidance for the issuance of social bonds to finance the Covid-19 response.
We had already seen a steady rise in social- and sustainability-bond issuance ahead of the pandemic, as investors increasingly focused on social as well as environmental issues; however, this trend has now sharply accelerated, with themed bond issuance in response to coronavirus.
In April, the World Bank raised $8bn for a five-year sustainable development bond that will support Covid-19 response efforts, the largest ever dollar-denominated bond issued by a supranational entity. Supranationals comprise 53% of year-to-date issuance, while public agencies account for 29% and corporates 17%.
Sustainable investing will play a defining role in shaping the recovery
The Covid-19 pandemic has temporarily arrested economic activity. However, the massive fiscal response globally will drive the recovery.
What will that recovery look like? One effect of recent stay-home measures has been the temporary reduction in greenhouse gas emissions.
But a big question is whether the urgency of stimulating economic recovery could delay progress on global climate change initiatives and policies.
Encouragingly, there are early positive signals coming from some regions integrating sustainability goals into their recovery measures.
For example, the European Commission has highlighted green and inclusive growth as a core pillar of its €750bn European Recovery Fund.
In Germany, about a third of the recent €130bn recovery budget is dedicated to green initiatives.
And in Canada, the government has made access to its Large Employer Emergency Financing Facility contingent on support for environmental sustainability and national climate goals.
The investment community will play a pivotal role in supporting these initiatives by allocating capital toward constructing a stable and sustainability-focused recovery.
Investors will increasingly focus on integrating sustainability into valuations
The pandemic has resulted in increased scrutiny on companies and governments, with investors examining how sustainability factors may impact valuations, and how successfully issuers emerge from this crisis.
We believe the organisations that will fare the best are the ones that have gone the extra mile, for example, ensuring labour standards are not compromised along stressed supply chains; responding to employees' uncertainty around job stability; and maintaining continuity of their operations.
Companies that have invested in social inclusion and in expanding access to essential goods and services, such as health care and digital telecommunications, may benefit from both a more stable consumer base and a better brand reputation.