Comment: The parallels between covid-19 and climate change

Comment: The parallels between covid-19 and climate change

Climate change is a priority for governments, corporations and citizens globally as well as the world's largest investors. This moment marks a once-in-a-lifetime opportunity to mitigate the climate crisis, argues Michael Baldinger.

Investors who are becoming increasingly reluctant to allocate already scarce capital towards businesses which are not taking climate considerations into account.  

But since January, our world has been rocked by a different crisis: a global pandemic. Lives and business models have been transformed overnight.

If anything, the pandemic has reinforced beliefs that climate change is more important than ever."

So, you may ask, will investors think of climate change as a less urgent challenge in light of covid-19?

No, if anything, the pandemic has reinforced beliefs that climate change is more important than ever. Covid-19 has dramatically highlighted what happens when countries and businesses do not prepare for long-term resilience, prioritising instead short-term considerations.

It has also shown with terrifying clarity that the fall-out cost can far exceed the upfront, protective investment.

The clear signs
In my view, clear parallels exist between climate change and coronavirus:

1. Covid-19 is a catastrophic, unprecedented event - one that the markets did not price in. If we ever wanted to see what a disorderly climate transition might look like, the current situation could give us a pretty good insight. 

2. Just like climate change, the pandemic is a systemic tidal wave. It has ripped through countries at speed, leaving behind profound socio-economic destruction. Its systemic nature means the effects are swiftly magnified, highlighting how interconnected our world has become, and how easily complex global supply chains can collapse. The impact both in health and economic terms is disproportionate, with the Covid-19 pandemic hitting hard in poorer, densely populated urban areas. 

3. The pandemic is an immediate, short-term risk, whereas climate change is a slow burn threat which will continue to play out over the long-term. But left unchecked, such as Covid-19, climate change will reach a tipping point - maybe sooner than we think - which will produce its own uncontrollable consequences. 

We knew a global pandemic was long overdue - the World Economic Forum's annual risk reports regularly flag infectious disease as a high impact and high probability risk. But when this crisis hit, we found governments around the world woefully underprepared. The lack of readiness reinforces the value of reporting standards like the TCFD, that give investors and corporates greater transparency and better frameworks  to improve long-term resilience.

But learning from the pandemic and applying those lessons to our fight against climate change could bring us long-term benefits. 

Adapting to changes
One of the more positive outcomes of this crisis has been the ability of some companies to adapt their business models at speed. At a time when capital will be scarce, companies demonstrating ‘adaptability' may be better positioned to attract capital.

Take transport as an example. In Europe and China, covid-19 could lead to a shift away from air travel towards rail. Given it will be hard to maintain social distancing on aircraft, demand for short-haul air travel could drop, with high speed trains taking up the slack.

This would also support the ambitions of regions like Europe to achieve net zero carbon emissions by 2050. I would argue that industrialised countries are already experiencing the health benefits of cleaner air due to less air traffic, while also learning to manage without non-essential travel. 

Globally, trillions of dollars will likely be directed to recovery spending in response to the pandemic. Some of those dollars may well be directed toward healthcare systems, but could spending also target low-carbon, low-pollution and future-proofed infrastructure?

And what about corporates? Can they adopt resilient, climate-smart, 21st century business models - already an important investment criteria for some of the world's biggest investors?

We have to understand how companies are adapting, not just to this crisis but also to the threat of climate change. Company engagement will be a critical tool and I urge investors to tackle ESG issues in their dialogues with companies.

And as economies rebuild in the wake of the pandemic, I hope governments, business and investors can use the opportunity to help shape a lower-carbon future.

If and when another crisis hits the world, it's my wish that we'll be better prepared. 

If changes to the way we work, travel and do business change permanently as a consequence of the pandemic then the transition towards a lower-carbon future could actually be accelerated. 

Can we turn this once in a lifetime disaster into a once-in-a-lifetime opportunity to mitigate the climate crisis?

Michael Baldinger is head of sustainable and impact investing at UBS Asset Management