Earth Day 2020: coronavirus will not derail climate and environment megatrend

This year marks the 50th anniversary of the first Earth Day, which was designed to drive transformative change for people and the planet. This year’s Earth Day is arguably the most important, as calls continue to intensify for a green economic revolution in the post-coronavirus world.

Below, a number of investment professionals discuss the innovative solutions needed to address the global environmental challenge.

Focus on resource efficiency solutions

Thomas Sørensen, portfolio manager of Nordea’s Global Climate and Environment strategy

The coronavirus pandemic will absolutely not jeopardise the climate and environment megatrend. The pandemic is the world’s primary focus right now, as it should be, but normal life will eventually resume. Cars and planes will still be needed, and manufacturers will continue to improve energy efficiency.

We also do not believe the low oil price will damage the shift into alternative energy. We saw sharp oil price falls in 2015, but the alternative energy sector continued to grow. The indiscriminate sell-off we have seen has created opportunities to position our strategy in strong, market-leading businesses for when we come out the other side.

We currently see significant opportunities for companies focusing on solutions within resource efficiency and environment protection. Saving electricity, using less resources or deploying more efficient products translates directly into a better value proposition for clients. In addition, we believe medium-sized growth companies are often better positioned to capitalise on climate and environment solutions. Many of these innovators have strong industry positioning and offer specialised services to clients.

We need to learn from the crisis

Therese Kieve, stewardship analyst at Sarasin & Partners

With industrial and commercial activity on pause due to coronavirus, a striking set of images have emerged: Venice, with crystal clear canals; a map of Hubei showing vastly reduced air pollution levels. The world’s first priority at this time must be to control the spread of the virus. However, these images help us visualise what less damaging patterns of consumption might mean for the environment.

It is right for companies and governments to devote their time and resources to tackling the immediate crisis, but we must not lose sight of the bigger picture. One thing the pandemic has shown us is the extraordinary ability of governments to mobilise for action. We have an opportunity to learn from this crisis. Concerted action from companies and governments will give us the best chance of a sustainable future.

One of the key challenges to a lower-waste world is fast fashion. Fast fashion is not only damaging from an environmental perspective, but also raises social concerns. Cheap clothes are often produced in poorer countries, where workers receive very low pay and few rights. A societal move towards repairing, re-wearing or renting clothes could help encourage more sustainable behaviour. We need governments and companies to do more to deliver this change.

Spectacular growth of green bonds

Quentin Fitzsimmons, portfolio manager of the T. Rowe Price Global Aggregate Bond Fund

Since the issuance of the first green bond just over a decade ago, the market has gone from strength to strength. A record $255bn of bonds were sold for the purpose of financing environmentally friendly projects and activities in 2019, an increase of more than 45% from the previous year and more than three times the amount issued in 2016.

Despite spectacular growth, the green bond market remains small in comparison with the overall size of the bond market, although its share is growing. One of the factors holding it back has been a lack of liquidity, but there are signs of improvement on this front – with the boom in green bond issuance helping to increase liquidity.

In a further positive sign, liquidity in the secondary market has picked up in the past year thanks to jumbo deals from France and the establishment of liquid ‘green’ benchmarks in countries like Ireland. Against this backdrop, we believe it may be the right time to possibly start integrating a layer of green bonds into fixed income portfolios. As such, in the event we can identify a green bond with the same valuation characteristics as a similar equivalent conventional bond, it is likely to be considered as a preferred selection in some of our portfolios.

Opportunity in energy storage

Ben Guest, managing director of the Gresham House New Energy division

Energy generation in the UK is undergoing fundamental change. Older coal-fired stations are being decommissioned and renewable energy is increasing its share of the energy mix. The intermittency of renewables puts pressure on the network to match supply and demand in real-time. We believe energy storage is an optimal solution to this problem.

Investing in operational storage offers investors an alternative and complementary route to renewables in supporting and facilitating the migration to a low-carbon economy – while aiming to deliver a higher yield than other more established opportunities.

This technology is designed to sit ‘hand-in-glove’ with growing renewable generation capacity, at a time when conventional generation is in decline.

Bright prospects of US solar

Liam Thomas, CIO of the US Solar Fund plc

During the rise of renewables, solar energy in the UK has – unsurprisingly for such a cloudy country – often taken a backseat to wind power generation. However, solar has come to the fore in recent years, with total UK solar production capacity now about 6 gigawatts.

Despite this, the closure of the Renewables Obligation subsidy regime to all new constructions in 2017 raised investor concerns around all types of renewables in the UK. Only one utility-scale installation has been deployed in Britain since October 2017, increasing utility-scale capacity by just 0.1%.

If investors are apprehensive about renewables in the UK, the solar market in the US is booming, with total installed utility scale capacity of 39 gigawatts at Q2 2019. It is not just the impact of subsidies that drives US solar investment, but much higher levels of sunshine. California alone receives three times as much sun as the UK. Moreover, the large land area of the US allows investors to take advantage of cheap cost of land and location diversification. This diversification provides better risk mitigation in the event of localised natural disaster.

These comments also appeared in ESG Clarity.