There have been over 30 million confirmed cases of COVID-19 globally, and the number of active cases has continued to rise. As part of the economic relief effort, governments have spent trillions of dollars to support households and businesses impacted directly or indirectly by the spread of the coronavirus. Although global active cases continue to increase, the combination of encouraging results from vaccine trials and the end of most government-imposed lockdowns have helped shift investor attention from relief to recovery.
The global recovery from the economic cost of the pandemic will require further trillions of dollars of stimulus, it presents us with a unique opportunity. The improving economics of renewable power generation and the rise of electric vehicles and green hydrogen mean that more and more, it is possible to decouple economic growth and carbon emissions.
In Asia Pacific, this can provide the opportunity to deploy stimulus to both deliver economic growth and turbocharge progress on meeting the climate goals. Two important questions are:
- Can a green recovery be realised?
- How will stimulus for the recovery be funded?
A green recovery?
The responses from governments towards driving an economic recovery have been varied. While some countries or regions have made announcements focused on green investment and climate ambition (including Singapore, Taiwan and South Korea), others have announced plans for stimulus to support carbon-intensive business activities that risk locking in high emissions for years to come. Such plans are at odds with limiting global warming to well below 2 degrees Celsius.
A notable global example of commitment to a green recovery comes from the European Union. In July 2020, the EU approved a EUR 500 billion green stimulus package with 30% of funds earmarked for climate action.
Funding the recovery
As the numbers mentioned above suggest, the magnitude of the stimulus that will be deployed globally for relief and recovery from COVID-19 is game-changing. To provide some context, based on data from Fitch Ratings, by June 2020, global direct fiscal stimulus in 2020 was already two times larger as a percentage of GDP than the fiscal stimulus deployed in the wake of the global financial crisis in 2008. This is even before including the EUR 500 billion EU package.
Clearly, such extensive plans will need to be paid for. Although central banks can play a role in providing the required capital, we see a significant opportunity for green and social bonds to help fund the recovery. This was highlighted by news from the EU in September that EUR 225 billion of its stimulus package will be funded by issuing green bonds.
To put this in context, EUR 225 billion exceeds the entire global issuance of green bonds in 2019.
Implications for investors
A green recovery has the potential to turbocharge not only the chances of meeting the region's climate goals, but also the financial instruments and industries that will be instrumental in delivering these objectives. This can create exciting new investment opportunities. However, we caution investors to be diligent when assessing:
1. Issuer or instrument characteristics
There are many definitions globally of what constitutes a ‘green’ investment. For example, the standards set under the EU taxonomy have material differences to national or regional green investment guidelines in Asia Pacific. Therefore it is important to undertake appropriate due diligence to determine that the characteristics of an investment are aligned with the investment objectives.
However, we note that there is an ambition in Asia Pacific to converge standards. For example, China has made significant progress with its update to the green bond catalogue in 2020. In our stewardship activities, BNPP AM has been actively participating in initiatives in Asia to promote or establish standards aligned with the principles and metrics underpinning the EU taxonomy that are appropriate for the region.
2. Thematic opportunities
A rapidly growing profit pool can present an attractive investment opportunity. However, as highlighted by the solar panel sector in the early 2000s, rapid expansion may not always translate into rapid growth of sector profits.
As a result, it is important to be diligent in evaluating business and sector fundamentals. Although the human and economic cost of the pandemic cannot be underestimated, the recovery presents the world with a unique opportunity to deliver both economic security and to speed up towards meeting our climate ambition.
This will have material implications for the instruments and sectors aligned with the green recovery. With this in mind and as the economics of low or no carbon technologies become increasingly undeniable, it is worth considering a health check for your portfolio.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
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