Risk modelers are looking at the global response to Covid-19 as a test case for how climate shocks could roil markets and push governments to respond to existential threats.
The 2° Investing Initiative, a European think tank that works with large financial firms and regulators to plan for climate risks, tried its hand at mapping out Coronavirus scenarios this week. “There are some similarities to climate risk in terms of the speed and scale with which the crisis is materializing and because this is also an exogenous risk that’s not part of the normal business cycle,” said Jakob Thomä, a managing director in Berlin.
The virus is a completely different economic scenario, however: while long-term climate risks are felt by an entire region in terms of unemployment and economic activity, Covid-19 has a bigger impact on older age groups. Swift national shutdowns and the expectation that the virus has an end date will also have a dissimilar impact on the economy. But the current crisis highlights something risk modelers do want to spend more time on: the social consequences of climate change. “We may have made a mistake in ESG to think about climate risk as a narrow type of risk, rather than pandemics and an overall framework for existential risk supervision,” Thomä said. “We’re paying the price for that right now because everyone is scrambling.”The outbreak could compound other environmental crises, too, should floods, wildfires or hurricanes hit in the coming months. Meanwhile, the United Nations (and just about everyone else) switched its top priority from climate change to the coronavirus.
Social issues often have a bigger impact on markets than long-term environmental risks. They are connected to and compounded by broader issues: Inequality, for example, is exacerbated by disease as well as climate change. “This is teaching all of us lessons about what it really means to stress test and model extreme scenarios,” said Emilie Mazzacurati, founder of Moody’s unit Four Twenty Seven Inc., a physical climate risk data firm. “We need to be able to think and stretch our imagination beyond what we have seen historically—in this case things that were unthinkable a few weeks ago, such as airlines shutting down and not driving, are now in place.”
Sustainable Finance In Brief
- Low carbon funds that bet on a broad group of companies with lower emissions did better as the market crashed (see chart above) than clean energy indexes betting on wind and solar companies.
- Clean energy faces operational risks from the pandemic as solar workforces could be cut in half by social distancing. Door-to-door sales of solar roofs are likely to struggle.
- Private equity firm KKR & Co. agreed to a $5 billion deal for Pennon Group Plc’s waste-management and recycling arm.
- Hiromichi Mizuno, an ESG-advocate and chief investment officer of Japan’s $1.52 billion GPIF, will depart this month.
Emily Chasan writes the Good Business newsletter about climate-conscious investors and the frontiers of sustainability.
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