There is no doubt that the COVID-19 outbreak requires, above all, a health response to detect and contain infections, provide emergency care, and maintain public health systems. However, the management of this health and social crisis has created a situation of extreme complexity manifested in infinite nuances. This serious situation is characterized by high uncertainty, ranging from high volatility in financial markets to a certain sense of social fear caused by a lack of confidence, the urgency to solve present problems, and the paralysis of many personal and business decisions. This situation will likely lead many countries into a recession of uncertain duration and magnitude. This complex, volatile environment has altered the order of priorities on the public agenda of governments, which have focused on meeting the most immediate social needs and designing an economic viability plan, to focus later on how to rebuild the levels of growth, employment, and well-being that existed before the coronavirus crisis.
In this sense, the coronavirus crisis has forced the British Government and the UN climate body to postpone the next Climate Summit (COP26), initially scheduled for November 9 to 18 in Glasgow, to a date yet to be determined in 2021. The announcement, while responding to the material impossibility of carrying out bilateral efforts before the Summit, highlights that this postponement could mean a loss of the momentum recorded in recent months and the indefinite delay of the commitments acquired in the Paris Agreement.
On the other hand, the slowdown of economies is leading to a temporary reduction in greenhouse gas emissions and air pollution, just as it is causing a reduction in the price of CO2 emission rights in the EU, which could lead to a lower incentive to fight the harmful effects of climate change.
However, none of this should obscure the fact that the long-term structural challenges of climate change persist. On the contrary, far from being an obstacle, economic efforts to relaunch the economy after the crisis caused by the coronavirus and, in particular, the European Green Deal (European Green Deal) proposed by the new European Commission, should be compatible with addressing the climate challenge and, in doing so, boost employment growth and activity in various sectors of the economy. In other words, economic reconstruction should go hand in hand with sustainability.
Additionally, the management of COVID-19 has shown the importance of addressing global issues with greater global coordination and a higher degree of consensus between countries, which could lead to a new phase of globalization: more humane, more sensitive to social issues, and more attentive to potential global risks in order to provide an early and coordinated response. This could pave the way for a new phase of globalization 2.0: sustainable globalization.
However, for this desire to overcome the economic crisis to be compatible with resilient recovery and transition plans that consider climate, biodiversity, development, and social justice in an integrated manner, it is necessary to reaffirm some concepts that were already consolidating before the pandemic. Firstly, it is to be expected that the coronavirus will not change citizens’ attitudes toward climate change and that, therefore, a majority of the European and Spanish population will continue to believe that sustainability and ecological values remain non-negotiable pillars of our future.
Secondly, to increase the sensitivity of individuals and politicians to climate change, it might be advisable to rethink the time horizon and begin to give more importance to commitments focused on 2030 instead of proposing achievements for 2050 or 2100. In this sense, it seems fundamental for the European Commission to approve the commitments defined in the Green Deal so that implementation can begin, above all by highlighting those proposals aimed at incentivizing productive transformation processes, such as the confirmation of greater climate ambition, the mobilization of capital, and the implementation of a taxonomy that serves to facilitate investment decisions in Europe, as well as beginning to fiscally penalize the use of fossil fuels.
Thirdly, it is essential to have a stable regulatory framework and adapt to clear and well-defined supervisory expectations so that financial institutions can multiply the impact required for the necessary transformation of the productive fabric toward an environmentally friendly economy. In this regard, it is worth highlighting the effort that many institutions are making to clarify concepts and define a simple and predictable regulatory framework. Specifically, the European Banking Authority (EBA) published its Action Plan at the end of last year, which outlines the path over the next five years that should serve as a guide to consolidate sustainable finance.
Likewise, the involvement of central banks through the Network of Central Banks and Supervisors for Greening the Financial System will result in the publication this year of a “Manual on environmental and climate change risk management,” in which greater clarification is expected regarding the use of methodologies for measuring risk derived from climate change, as well as the parameters on which the stress tests planned by the Bank of England for next year and the EBA in 2022 should be leveraged. In Spain, the Ministry for the Ecological Transition and the Demographic Challenge submitted the updated draft of the National Integrated Energy and Climate Plan 2021-2030 (PNIEC) for public consultation. And the Bank of Spain, aligned with the EBA and the international network of central banks, has announced that it is already working on methodologies that include different transition scenarios and their effects on stress tests.
Finally, to ensure that the crisis caused by the coronavirus does not overshadow other longer-term risks, such as those derived from climate change, it is necessary for financial institutions, after applying all the measures being promoted to mitigate the effect of this health crisis, to take a firm step forward and show a high degree of conviction. This conviction, which had been evident before COVID-19 in multiple initiatives, includes the adherence to the Equator Principles in 2004, committing to manage environmental and social risk in the financing of productive projects; the signing of the United Nations Principles for Responsible Banking in 2019; the Spanish Banking Agreement on Climate Action, which more than 95% of Spanish banks signed at the end of last year within the framework of COP25 with potentially very significant implications for the readjustment of the portfolios of the signatory banks over the next ten years; and the establishment of the Center for Sustainable and Responsible Finance (FinResp) at the beginning of 2020. All of these are laudable initiatives that demonstrate the degree of commitment that exists in the financial sector and highlight the industry’s sensitivity to climate change.
However, for this degree of conviction to be effective, it is advisable to integrate the risks and opportunities derived from climate change into business models and the strategic plans of banks. To do this, it is necessary, among other requirements, to increase the prominence and responsibilities of the Board of Directors, which in turn requires having the appropriate knowledge and correct information. Likewise, it is necessary to extend the time horizon of the strategic plans of financial institutions, which are also obliged to identify, measure, and monitor climate change risk with appropriate indicators and methodologies. Finally, it is necessary to generate transparency and be willing to disclose analyses with a certain degree of granularity through prudential reports and for statistical purposes. In this sense, non-financial information and the value of intangible capital must gain as much weight and credibility as the financial information on which investment decisions are currently based.
As the European Commission states, a more sustainable financial system should also contribute to mitigating not only the risks inherent to climate change but also improving the prevention of future pandemics. Therefore, despite the challenges outlined above, the coronavirus experience can be understood as a precursor to the type of impact that climate change could have on the global economy; thus, the way we address the solution to this pandemic as a society will ultimately determine how we face the risks of climate change. In other words, articulating the economic stimuli defined to overcome the economic impact of this pandemic within the framework defined by the European Green Deal generates special value because it establishes a common perimeter that facilitates the transition and makes financing and investment transparent.
In short, COVID-19 has represented a crisis of enormous proportions, affecting both human health and the economy. The health crisis cannot be a shield to keep alive sectors that should tend to disappear in the future, but neither can all jobs generated be forced to be linked to sustainable projects and sectors; therefore, an appropriate balance guided by a sense of prudence must be sought. In this sense, fiscal and monetary stimulus packages should maximize the mobilization of private sector investment in climate solutions, offering a unique opportunity to overcome a short- and medium-term recession, as well as to create significant, long-term change that will benefit all citizens in a stable, healthy, and environmentally friendly future.
Juan Carlos Delrieu, Director of Strategy and Sustainability
