The coronavirus pandemic is a “once in a generation shock event”, which has not only triggered a historic economic crisis but has positively impacted the trajectory of environmental, social and governance (ESG) trends, according to RobecoSAM’s Rainer Baumann.
“The lockdown of economies around the globe forced companies to suspend their business due to supply chain disruptions or to protect their own workforce. The pandemic illustrated the risks of fragile systems, fat-tail events and their extension to the real economy,” Baumann – the firm’s head of investments – said.
“Moreover, society had to adapt to a new way of living and to change traditional habits in kind of a ‘shock therapy’, forcing people into a ‘new normal’.”
As a result of all this, Baumann said that four “powerful” ESG trends have surfaced from the pandemic and will be part of shaping the world’s recovery.
Fiscal stimulus and regulation tilted toward ESG
Looking back to when the number of coronavirus cases began to escalate rapidly outside of China, markets reacted by going into one of the worst crashes in history, which was followed by trillions’ worth of monetary and fiscal stimulus to ease the economic impact of the virus.
“The programmes will cause government to play a more prominent role in economic and social affairs, leading to more regulation of both corporate and social behaviour,” Baumann said.
“This means the increasing socialisation of certain sectors of the economy.”
But the positive side to this is that regulation will now involve a stronger ESG consideration, he added.
The best example of this is the European Union’s (EU) €750bn Coronavirus Recovery Fund - officially called ‘Next Generation EU’ – which will be channelled through the EU’s pre-established European Green Deal. It stipulates that 30 per cent of the Recovery Fund must be spent purely on climate change solutions, making it clear that ESG is a big part of Europe’s coronavirus recovery.
Placing this Next Generation EU stimulus into a market perspective, Baumann said: “It foresees the substantial funding of sustainable businesses to accelerate growth.”
One of the aims of the European Green Deal is to make the EU carbon neutral by 2050, and in order to reach this goal the EU will promote several sustainable initiatives, including new projects for renewable energies – mainly wind and solar - financing one million electric vehicles charging points, sustainable transport infrastructure and a strategy to coordinate and accelerate clean hydrogen production.
A consumer shift towards clean transport
Following on from the EU’s environmentally focused recovery, Baumann said regulators are investing more and more in electric vehicles (EV) infrastructure as a cleaner energy alternative to traditional fuel options.
Part of this, he said, is subsidising the cost of electric vehicles and modernising rail infrastructure.
“With these incentives, we expect consumer spending on these sustainable technologies to increase rapidly – despite budgetary constraints due to the economic downturn,” Baumann said.
Global EV sales have grown rapidly in recent years, from 450,000 in 2015 to 2.1 million in 2019, according to data from Bloomberg New Energy Finance and its Electric Vehicle Outlook.
“With many carmakers now offering newly designed EVs, customers are confronted with more choice across size, range, design and price. This should attract ‘mainstream’ car buyers as previous concerns – like the lack of charging infrastructure – diminish,” he said.
“Rising acceptance of the new technology in combination with people’s awareness of their own contribution to climate change should help the EV market to grow exponentially and therefore to generate a higher market share.”
Reshoring of production
One of the main issues companies were faced with during the coronavirus crisis was the disruption to supply lines, which meant many companies couldn’t operate normally.
“Many firms with international operations recently experienced the challenge of severe supply shortages,” Baumann said.
“The closure of production sites and the inability to transport goods prevented them from continuing operations. The globalisation of supply chains and just-in-time manufacturing lowered production costs substantially for decades, but then showed their downside all of a sudden.
“The vulnerabilities of the system, as well as the interdependencies between firms located across several continents, were a shocking eye-opener that will make many corporations reconsider their portfolio of suppliers and their production sites.”
With securing supply chains now top of company agendas, Baumann said they’d be looking to do this by diversifying their subcontractors and make production more domestic, or ‘reshoring’.
This reshoring will require companies to make bigger investments in automation and robotics.
“Technologies such as 3D printing, artificial intelligence, connectivity of devices (IoT) and robots that work hand-in-hand with humans (Industry 4.0) can unlock new savings as they reduce reliance on low-skilled manufacturing,” he said.
“In addition, this has implications for the global production landscape, as larger parts of it move closer to key end consumer markets. Automation allows for more flexibility in adjusting to changing demand, thus mitigating risks to companies in the event of an external shock.”
Healthy living
A final ESG trend is a move towards better health practices, both socially and domestically.
One thing the coronavirus made clear was how vulnerable society’s health was as a whole.
With mandatory face masks and public hand sanitiser stations now commonplace, the pandemic will shift people’s views around health in the future, Baumann said. He added that demands for hygiene improvements will catalyse technologies and services to allow faster testing, diagnosis and efficient treatments, boosting the life sciences sector.
And with the news that the coronavirus may have originated from a Chinese wet market, the health risks with meat-based diets have been highlighted and Baumann therefore expects more people to turn to plant-based diets.
“The food industry has begun to develop meat alternatives, with the biggest food chains now including these dietary options in their menus. Veganism is the new lifestyle for many people,” Baumann said.
And it’s not just what people eat that might change, but how they access their food.
With nationwide lockdowns shutting people indoors for months, the growth in online food shopping and restaurant delivery is expected to accelerate, according to Baumann.
“We expect food delivery to move into the segment of higher-quality eating,” he said.
“Restaurants that previously focused on providing customers with a fine dining-in experience will now venture into the new delivery business. Beyond food, the shift from physical retail to e-commerce will continue as more people realize the benefits of shopping online.”