BNP AM

The official blog of BNP Paribas Asset Management

Will COVID-19 lead to sustainable change?

The COVID-19 pandemic has led the world into the largest social distancing experiment in history.  A USD 2 trillion US government stimulus programme and US Treasury yields below 1% are all the result of the crisis. In addition, oil prices have fallen to below USD 20 a barrel as demand destruction has exacerbated the effects of a collapse in OPEC’s pricing policy. Will the world go back to ‘status quo’ when we exit this dislocation? Probably not. We believe the learnings from the ‘go-remote’ experiment are here to stay. The implications for the future of energy, real estate, work, education, health care delivery and so forth are vast.

In our Global Sustainability Strategy, published a year ago, we introduced the ‘3Es’ – the key sustainability challenges of our time:

  • Energy transition
  • Environmental sustainability
  • Equality and inclusive growth.

Below, we explore each to determine the insights into the opportunities and risk mitigation strategies.

Energy transition

The coronavirus-induced social distancing has triggered a drop by over 20% in global oil consumption. This is leading to unthinkable scenarios such as negative regional oil pricing. As the table below shows, the energy sector had already vastly underperformed the broader equity and high yield market indices in the period from the low during the Global Financial Crisis through February 2020.

  Total return (31/03/2009-28/02/2020) Annualised return
US equity market    
S&P 500 (SPX) 364.5% 15.1%
S&P 500 Energy index (S5ENRS) 35.4% 2.8%
US High Yield bond market    
ICE BOfA US High Yield index (H0A0) 204.2% 10.7%
ICE BOfA US High Yield Energy index (H0EN) 86.6% 5.9%

Source: Bloomberg; April 2020

Our analysis[1] points to a scenario of lower priced oil playing out over the long run. The convergence of multiple trends such as lower plastics usage, electrification of transport, and climate mitigation policies looks set to add up and dampen oil demand into the next cycle.

Work pattern changes will curb commuting, travel

This trend of lower oil demand is further reinforced by the potential for permanently reduced business commuting and travel, resulting from the containment-related changes in work patterns. Let’s not forget that the Stone Age did not end because we ran out of stones. Perhaps on realising this transition, major oil producers such as Saudi Arabia and Russia have started a war for market share gains, causing oil prices to tailspin.

The risk of oil exploration and production assets ending up stranded remains a key concern in the energy complex. In light of this, our process to integrate ESG selection criteria into investment strategies uses portfolio-level carbon foot-printing as a strategy to mitigate investment risk.

The opportunities

We believe the energy transition will bring opportunities to companies in areas such as renewable energy, energy conservation and energy storage. Our ESG integration methodology aims to differentiate the winners from the losers in this transition.

Environmental sustainability

Understanding the transmission path of the coronavirus, responsible for the SARS (severe acute respiratory syndrome), MERS (Middle East respiratory syndrome) and now COVID-19 illnesses, has brought to light issues around human-to-animal interactions associated with the destruction of natural habitats and the global wildlife trade.

The impact of globalisation on health

From an infectious disease perspective, globalisation, which has enabled seamless mobility, has significantly empowered the weakest link in the human health-chain to affect all of humanity. The US Centers for Disease Control and Prevention estimates that three-quarters of new or emerging diseases that infect humans originate in animals.

Our ESG scoring and engagement methodology emphasises that companies play their part in increasing social resilience in communities at risk. Developing skills-based training and improving healthcare access are examples.

The opportunities

Supply chain dislocations highlight how a circular economy can reduce dependence on raw material for manufacturing. Such an economy, which emphasises reuse, has the potential to bring in cost benefits and new revenue opportunities to companies.

Consumer electronics companies with ecosystems that reuse, refurbish and resell used devices are noteworthy in this regard. In 2019, BNP Paribas Asset Management launched a strategy focused on companies that include circular economy practices in their business models.

Equality and inclusive growth

The divide between urban and rural communities when it comes to opportunities, the lack of access to the digital economy, misinformation overload, and access to affordable healthcare are key inequality issues confronting the world.

The COVID-19 pandemic and subsequent forced isolation have accelerated the world’s transition to the future of ‘remote’ where we remain physically separate, but digitally connected. Provided we ensure equitable digital access, this online transition can be positive from an access standpoint – as it pertains to the urban versus rural and the socioeconomic divide.

Opportunities in remote services…

Remote services, which include remote health examinations, remotely done work, educational training, exercise classes and cloud kitchens, highlight the importance of robust and scalable digital service delivery models.

Companies that enable online collaboration, workspaces, remote services and associated cybersecurity should continue to benefit as we come out of this crisis. Specific examples of industries that play to these themes are networking, cybersecurity and enterprise software.

… and remote healthcare

The fragility of our global healthcare ecosystem is a key issue that the current pandemic has exposed. Unsustainable trends in healthcare cost inflation combined with demographic trends have contributed to the move of healthcare delivery towards a more distributed future and one of value-based care – where the use of technology, ambient data and telemedicine enable lower healthcare system costs.

Companies that engage with health systems proactively to accelerate the shift towards lower cost and digitally connected models should benefit over time. Specific industries that play into this transition are healthcare equipment, healthcare delivery systems and IT services.

Summary

The COVID-19 pandemic has fundamentally reshaped our lives by hurling us into a digitised future. Of all industries, this likely will reshape healthcare the most. Will a new global order emerge after the crisis and what questions must we consider around the theme of globalisation?

Viewing such transformative market shifts through the lens of our 3E framework will enable us to add an incremental layer of risk assessment to protect investment portfolios from long-tail risk events. We seek to identify companies that are proactive in finding solutions to societal issues that can support sustainable returns in the long run.


[1] On the basis of the energy return on capital invested (EROCI) from our “Wells, Wires and Wheels” paper

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.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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