19 May 2020
In the first of this two-part series, Hervé Duteil draws on three sustainability foresights offered by the Covid-19 pandemic crisis. This article explores the future we want, the future we fear, and the future we create
We financiers do not really create anything directly; yet, we do earn a return. We do so because we are selling something; and that something is time – whilst inheriting risks that future time holds. Pricing the future in the present is what we call Finance.
Undoubtedly, the Covid-19 crisis has taught us something about time, especially as it gave us glimpses into what the future might hold and how unsustainable it may be. As financiers, we can price that unsustainable future in the present and, in turn, help shape the sustainable future we want. Pricing future unsustainability in the present is what we call Sustainable Finance.
In this first part, we draw on three sustainability foresights offered by the Covid-19 pandemic crisis to help us envision the future we want. In a second part, we explore three enabling mindsets that we must adopt to create that future we want and where Sustainable Finance has an important role to play.
1. Sustainability foresight into the future we want: we are one, facing a common long-term goal
As the current system has failed to deliver wellbeing and prosperity for all, approximately four billion of us have remained united in lockdown to preserve the capacity of a functioning healthcare system for those who may need it the most.
In choosing to shut down our global economies, we have acknowledged through global solidarity that life,1 above all, matters most, along with the protection of the weakest; in practice, that a healthy future is worth a taxing present, in absence of any better alternative.
This unique moment in history has united us in a common lived experience to focus on a shared goal: to fight the common invisible enemy. In doing so, it created a bond between us rarely experienced in the 21st century. In short, we have expressed that we are one, facing a common long-term goal: the desire to live a happy future.
As such, the current health crisis has refocused us on what truly matters, and its associated socio-economic turmoil has underscored the need for long-term perspectives.
As we emerge from this crisis, we will collectively face the opportunity to embrace the courageous decisions that are necessary to transform our society into one that is fair and sustainable – in short, achieving net-zero carbon emissions by 2050 while achieving the UN Sustainable Development Goals.
2. Sustainability foresight into a future we fear: we live in a fragile world, where we must listen to science – but it can't replace bold decision making
The Covid-19 pandemic shares similarities with a fully-fledged climate or biodiversity crisis: it is systemic, with knock-on effects that propagate around the world. It also illustrates the "tragedy of the commons", a situation in which individual actions can run counter to the common good if they are not coordinated globally to preserve a shared resource – be it a virus-free environment, a diverse biosphere, or a life-friendly climate.
The Covid-19 crisis has also shed light on the linkages between pandemics and climate change or biodiversity loss.2 More importantly, society has by now experienced first-hand what pandemics mean for the vast majority of us: beyond fear of illness or death, pandemics are about deep economic recessions, filled with bankruptcies, sky-rocketing unemployment, and loss of individual freedoms. This is not even considering the subsequent waves of silent illnesses or unreported deaths created by economic insecurity.
In countries with effective responses, public administration and civil society have learned to listen to science, especially as it tells us that our way of life has become increasingly vulnerable to shocks from the natural world. Unfortunately, as medical discourse kept evolving, this crisis also revealed that science is rarely a perfect truth but rather a path to access it.
As a result, government leaders still need to take responsibility for bold decision making when we cannot afford to wait for a perfectly predictable future. This is not without similarities with the courageous actions that still need to be taken to fight climate change and biodiversity erosion.
3. Sustainability foresight into the future we create: we will eventually reduce global carbon emissions, but will it be by design?
The Covid-19 pandemic crisis has also let us experience first-hand what an abrupt decarbonisation pathway might mean for the world.
As this pandemic has wiped out almost a third of global oil demand through lockdowns and travel bans, oil and gas prices have plummeted, with the US oil benchmark trading as low as minus $40.32 a barrel. In turn, oil and gas stock prices have slumped while treasury liquidity is under stress, and access to credit more expensive. Beyond the fossil fuel sector, numerous industries (ranging from travel to entertainment) are navigating through dire economic and financial shocks.
"Today's crisis is another wake-up call that the fossil fuel industry faces structurally higher costs of capital going forward, unlike the energy transition sectors"
One significant fact this crisis has highlighted is that disorderly decarbonisation pathways can really happen. In particular, it is not unconceivable to imagine the need to abruptly slam on the brakes sometime in the future as we realise that we are transitioning too slowly towards a low-carbon economy. Governments could suddenly levy burdensome carbon taxes while consumers could unexpectedly shift their preferences, such as curtailing travel or working from home.
Equally importantly, this pandemic crisis has brought to the fore the long-predicted decline of a fossil fuel-based economy. The precipitous decline in prices reminds us that oil markets were under increasing long-term structural pressure long before the Covid-19 crisis hit 3. According to Mark Lewis 4, oil needs a long-term breakeven price of $10 to $20 per barrel in order to remain competitive with emerging electric smart mobility.
More astonishingly, this global shutdown may have very well accelerated the demand trajectory for 'peak oil' while we continue to shift to renewable energy. As this pandemic has already caused the biggest drop in oil demand the world has ever seen, some of this precipitated demand destruction is likely to stick. First, the virus has revealed fragilities in our economic system that could likely lead to a retreat from globalisation.
In turn, repatriation of supply chains into the developed world will reduce oil demand as shipping distances decrease. Further, many of us have learned to work remotely while halting all travel. Some of these behavioural responses will likely become permanent.5
To be sure, a number of investors had already turned their back on the oil and gas sector, well before the pandemic struck. Whether motivated by increased environmental, social, and governance (ESG) scrutiny or fears of slowing demand growth, today's crisis is another wake-up call that the fossil fuel industry faces structurally higher costs of capital going forward, unlike the energy transition sectors.
As a result, investors will continue to become increasingly selective regarding carbon-intensive players, while redirecting their capital towards the green agenda or growth sectors. Incidentally, it should not elude us that ExxonMobil's market capitalization was briefly overshadowed by Netflix last April while its share price is back to where it was twenty years ago.
Epilogue: the vision of a dream, or of a nightmare?
As the Covid-19 pandemic crisis has, in part, brought a nightmare into the present, it has also offered us the vision of a dream: a world where we are one, facing a common long-term goal to live a happy future; a world where politicians heed scientific advice today on how to make a better tomorrow; and a world where the unsustainable present can transition in an economic and orderly manner into a sustainable future.
Without globally-coordinated, systemic action, this dream could become a nightmare; and sadly, this pandemic has exposed a deficit in global cooperation indeed. Also, as we learn to better manage (and price) collectively too-long-ignored threats, there is still one risk we each need to fully re-embrace individually: the vulnerability that comes with in-person social interactions.
If we take home the lessons these three foresights offer, we may stand a chance to create the future we want.
Hervé Duteil is Chief Sustainability Officer for BNP Paribas in the Americas. In that role, he leads the bank's regional strategy for sustainable finance, corporate social responsibility, and company engagement. He serves as a member on Commodity Futures Trading Commission's Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee, Canada Standards Association's Technical Committee for the Development of a National Standard for "Transition & Sustainable Finance", and the Yale Initiative on Sustainable Finance Advisory Board.
2 Indeed, global warming intensifies a variety of climate-sensitive infectious, mosquito-borne diseases (such as malaria and dengue fever). It also alters their geographic range, seasonality, and transmission intensity. At the same time, deforestation and disappearing habitats are forcing various animal species to migrate, opening the way for pathogens to break through species boundaries and ultimately transmit to humans.
3. We could cite here (i) intensifying climate policies in many countries around the world; (ii) the long-running struggle of the U.S. Shale oil and gas industry's to turn a profit in what is proving to be a significantly capital-intensive business (despite the fact that it has been providing around half of all new supply globally in the past decade); (iii) the increasing competitiveness of renewable energy regardless of subsidies (not mentioning that the sector is a much larger source of job creation than conventional energy); (iv) the continued significant technological improvements in energy efficiency; (v) the far superior efficiency of electric vehicles compared to conventional cars; or (vi) concerns over unsustainable air pollution in the developing world.
4. Wells, Wires, and Wheels – EROCI and the Tough Road Ahead for Oil, Mark Lewis, Global Head of Sustainability Research, BNP Paribas Asset Management
5. Whether because academic studies conclude that working from home leads to productivity gains; or because organisations decide to exploit a saving opportunity; or because individuals are left with a psychological scar that prompts them to refrain from unnecessary social interactions in fear of getting sick.