Economy Mar 24

Pandemic hastens ESG flows but widens wealth gap 

Global inflows from climate-conscious investors into sustainable funds were up 88% in the fourth quarter of 2020 to $152.3 billion but this isn't the only global consequence of the Covid crisis – income groups are being pulled apart too 

by Ekta Handa and Ankur Tanwar
Pandemic hastens ESG flows but widens wealth gap
The pandemic triggered a wave of net-zero emissions pledges from companies and governments.   

(ATF) The devastating pandemic has sent national governments scrambling to build defences against a recurrence – with most efforts aimed at environmental protection and preventing biodiversity loss. These efforts will only increase in the coming years and the new normal will increase societal risks.

Global inflows into sustainable funds were up 88% in the fourth quarter of 2020 to $152.3 billion, while assets in sustainable funds hit a record high of USD 1,652 billion as of the end of December, up 29% from the previous quarter, according to Morningstar Research.

“Clearly the pandemic has had a structural shift on economies and society. There's been a lot of discussion on the roots of the pandemic, and how do we prevent the next one,” Mervyn Tang, Fitch Rating’s Global Head of ESG research sustainable finance told Asia Times Financial Television.

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He said that ongoing debates around whether deforestation, or loss of biodiversity, has led to an increased probability of a pandemic is leading, ultimately, to what is the policy response going to be to prevent the next one.

The rating agency said international policy commitments to limit climate change by cutting greenhouse gas emissions, a rapid decline in the cost of renewable energy and social change will lead to a marked decline in the demand for coal, oil and then gas over the coming decades.

“But one of the biggest things holding back the inclusion of biodiversity concerns for banks or ESG investors is the quality of data. We are going to see significant changes and initiatives in financial disclosures related to the environment, those sort of initiatives are really going to support things on the data side,” he added.

DATA QUALITY

Tang said the ongoing increase in ESG reporting requirements and steps taken towards harmonisation of reporting standards will improve the quality and quantity of ESG data over time. This will spur financial institutions to enhance ESG due diligence and exclusionary policies to cover a broader set of ESG issues and entities, further affecting financing conditions for issuers.

“Once we have the data, we're going to see financial institutions as well as policymakers be able to act better to tackle the biodiversity issues. We've seen that coal can have a financing impact for a lot of issues and our policymakers, when they start introducing things like carbon pricing, can have a policy and credit impact through just the regulatory cost that involves,” he said.

The pandemic has triggered a wave of net-zero emissions pledges from companies and governments.

The EU raised its 2030 greenhouse gas emissions reduction target to 55%, from 40%.

China has pledged to reduce its carbon dioxide emissions by “at least” 65% from 2005 levels by 2030, raising the target slightly from the country’s previous goal of “up to” 65 per cent.

China, the largest carbon dioxide emitter with about 30 per cent of world output, aims to reduce net carbon emissions to zero by 2060. It has a target for carbon emissions to peak before 2030.

PARIS AGREEMENT

The US target under the 2015 Paris Agreement aimed to reduce annual climate pollution 26-28% below 2005 levels by 2025. Its aim is to reduce emissions 80% below 2005 levels by mid-century.

At the corporate level – more than 200 of the world’s biggest companies, among them Shell, Chevron, Volkswagen and PepsiCo, have just committed to reach net-zero emissions no later than 2050.

“There was a wave of net-zero emissions pledges from companies and governments in 2020, but the policy paths that will be taken to achieve these pledges are unclear. We expect more details on these policy paths to be revealed in 2021,” Tang said.

ECONOMIC FAIRNESS

Earlier this year Fitch Ratings warned in a report that a more enduring impact of the pandemic may be on societal perceptions of economic fairness. It said poorer segments of society are less able to work remotely and respond to the hurdles posed by lockdown.

The IMF has estimated that the average Gini coefficient, a measure of income dispersion within an economy, for emerging market and developing economies will increase from 40.1 to 42.7 as a result of the pandemic, indicating a bigger gap between income groups.

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