COVID-19: Climate friend or foe?

The COVID-19 pandemic has had a dramatic impact on carbon emissions - more than that of the financial crisis, World War II or the Spanish flu. But will it help or hurt the green agenda in the long run?

While the COVID-19 pandemic has inflicted severe human and economic costs worldwide, it has also had obvious benefits for the environment. With populations in lockdown and road and air travel significantly down, the global paralysis has brought an unprecedented reduction in carbon emissions.

Despite the immediate positive impact, there are concerns that the pandemic will hinder the green agenda, shifting attention away from the climate crisis and towards the economic one.

In response, calls are mounting to use the COVID-19 recovery as an opportunity to accelerate the transition to a greener economy. The United Nations, for example, has called on governments to “build back better,” while the EU expert group on sustainable finance is urging market participants to make use of its new tools for sustainable investments – the EU taxonomy, EU Green Bond Standard and Climate Benchmarks – in the recovery effort.

Risk of a green setback?

COVID-19 does pose some risks for the green transition, according to Marco Kisic, Senior ESG Analyst in Nordea Research. Oil and gas prices have plummeted amid the pandemic, which could make the switch to renewable energy less appealing, he says.

Marco Kisic. Head of ESG Research, Nordea Markets

Marco Kisic. Head of ESG Research, Nordea Markets

In addition, the sudden economic downturn and need for emergency stimulus could make climate issues seem less urgent. In Europe, auto manufacturers have asked the European Union to delay the implementation of its CO2 emissions rules due to the impact of coronavirus. Some EU member states are asking to suspend biofuel blending mandates for the transport sector to soften the economic blow. Coronavirus lockdowns have also delayed key international environmental meetings, including the UN’s 2020 Climate Change Conference, COP 26.

On the other hand, the European Commission has said that, despite the pandemic, it will stick to the ambitious goals laid out in the Green Deal, including net-zero carbon emissions by 2050. The Commission is moving forward with the details of the Green Deal as well as the EU taxonomy, its framework for classifying green investments.

“The level of political momentum and consensus regarding the green agenda is strong in Europe,” says Kisic. “It’s unlikely that once the emergency is over, these tools will be left unutilised.”

COVID-19: A climate wake-up call

Furthermore, parallels can be drawn between COVID-19 and climate change. Climate scientists have long warned about the risks of pandemics, as well as fires, floods, storms and droughts. The pandemic is a vivid example of how natural events once seen as unlikely can suddenly upend the status quo, Kisic says.

COVID-19 has also been a wake-up call on the size of the transformation needed to decarbonise our economies. Historical events, from the Spanish flu of 2018-2019 to the financial crisis of 2008-2009, have also triggered drops in emissions (see the chart below). Yet none of these rival COVID-19’s impact, which scientists (Le Quéré et al, 2020) expect to be around a 4-7% fall in CO2 emissions. That compares to a 7-8% decline in emissions needed every year between 2020 and 2030, according to IPCC, to reach a trajectory in line with the 1.5 degrees targeted by the Paris Agreement (presumably without the help of lockdowns and border closings).

Chart showing the impact of different crises on CO2 emissions

An opportunity to build back better

There is increasing focus on the role of ESG in investment practices post-COVID-19, according to Kisic.

In a recent survey of over 300 investment professionals by Responsible Investor, a majority said the coronavirus would be a tipping point for ESG investment, helping the case for long-termism.

Responsible Investor survey results on the role of ESG post-COVID-19

There is also growing public discussion around using the recovery effort as a chance to accelerate the transition towards climate neutrality.

Aila Aho, Executive Adviser, Sustainability, Nordea and TEG member

Aila Aho, Executive Adviser, Sustainability, Nordea and TEG member

In response to COVID-19, the EU’s expert group on sustainable finance has urged governments, public institutions and the private sector to make use of its proposed new framework for green investments when mobilising capital to fight the pandemic to ensure a “resilient, sustainable and fair” recovery.

Nordea’s Aila Aho, a member of the TEG, says the financial community has embarked on a mission to learn how to incorporate environmental and social aspects into financial decision-making, with the help of tools such as the taxonomy and Green Bond Standard. While it will be a lifelong journey, now may be a period when we accelerate the pace, she says.

“I hope that this is one of those times when all parties really do their homework and issue green, or at least make sure they are not issuing anything that is harmful,” she says, adding “We can’t afford to miss this opportunity for major climate-positive investments that need to happen.”

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