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AXA-IM | COVID-19: Accelerating the energy transition and driving climate-friendly investment opportunities

Below four AXA IM ESG experts assess whether the crisis will help accelerate the energy transition, and outline what they think the investment implications could be. Access the full publication: AXA Investment Managers – Accelerating the energy transition – Oct 2020|

The decade of transition got off to a start nobody could have predicted – or wanted. Less than year into the 2020s, the world is reeling from the shock of COVID-19, a pandemic which has taken both lives and livelihoods and severely hit the global economy.

The impact of the coronavirus and subsequent global lockdown saw the US and the Eurozone economies endure their worst quarters on record between April through to the end of June – and the virus has far from run its course. However, as industry was put on pause and planes were grounded, the environment has enjoyed some renewed breathing space.

The United in Science report, a study from the United Nations (UN) and other global institutions, concluded that as large parts of the world became locked down during April, daily emission rates plummeted by a steep 17% compared with the same period in 2019. However, since the partial lifting of lockdowns, levels have increased once again and in June were just 5% below last year. For the whole of 2020, it is expected emissions will drop by between 4% and 7%.

But the analysis warned that 2016 to 2020 is expected to be the warmest five-year period on record as climate change continues to tighten its grip.

For the environment, the recent emissions retreat is certainly a positive. But as António Guterres, Secretary-General of the United Nations highlighted: “Never before has it been so clear that we need long-term, inclusive, clean transitions to tackle the climate crisis and achieve sustainable development. We must turn the recovery from the pandemic into a real opportunity to build a better future.”

To deliver on the 2015 Paris Agreement of limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C, we need to dramatically cut emissions and move the global energy sector away from fossil-based fuels, towards greener, renewable alternatives.

As a business AXA IM is a committed partner in this transition – we have already pledged to exit all coal investments in OECD countries by the end of this decade, and throughout the rest of the world by 2040. But we know more must be done.

Despite all the challenges the world is facing, we believe a ‘green recovery’ is possible. Policymaker action is helping this cause with numerous governments announcing climate-friendly rehabilitation initiatives – even China, the world’s biggest emitter of carbon dioxide, has pledged to become carbon neutral by 2060.

Looking at the current state of play, AXA IM’s CIO for Core Investments, Chris Iggo, believes the pandemic has very much sharpened the focus on climate change and environmental, social and governance (ESG) issues. Looking ahead, he expects investors are most likely toreward those companies that are meeting the challenge of making their businesses more sustainable.

He says: “It is quite astounding how rapidly the carbon transition is impacting business strategy through the need to disclose more data on carbon emissions, to sign up to targets that align with the Paris Agreement, and to use carbon pricing as a tool to properly reflect the economics of their business. Being able to demonstrate how COVID-19 has accelerated the carbon transition will be critical in the discussions between company managers and investors.

“Taxes may need to rise because of the COVID-19 recession – part of this could be a more active role for carbon taxes which would help shift demand away from carbon intensive activities to alternatives. However, achieving the Paris Agreement will require substantially more investment in alternatives, carbon capture and efficiency. Green bonds, ESG integration, impact and dedicated carbon reduction investment strategies will all be vital elements in investors’ contributions.”

Gilles Moec, AXA Group Chief Economist adds: “Public authorities – at least in Europe – have come to regard supporting the green transition as a way to spur economic growth, in contrast with a popular approach purporting an inconsistency between the two objectives. In many core countries of the European Union where public opinion is traditionally hostile to fiscal activism, environmental concerns are high on the agenda. “We think that reconciling economic growth and the green transition is better achieved when the policy instrument shifts to investment projects combined with carbon tax, rather than the usual combination of tax and production subsidy.”

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Compliments of AXA Investment Managers – a member of the EACCNY.