With Covid-19 being a common factor affecting the economy across industries, we also take a look at its impact on capital markets and what that means for sustainable finance.
It is worth noting that the pandemic has taken away from sustainable finance, however this is only temporary. There’s a strong argument that Covid-19 has drawn more attention to the planet’s fragility, the importance of bio-diversity, and on good social considerations within businesses. Against Covid-19, the pace of change in ESG matters continues heavily. We have seen demonstration of outperformance in Q1 this year for ESG products, and more ESG funds being made available.
With significant focus, financial commitments are currently unaffected by Covid-19. The European Green Deal, Europe’s response to the climate crisis, is expected to have global reach. The Green Deal covers 47 policy themes including: climate law, which commits the EU to become carbon neutral by 2050; it includes measures on sustainable finance for capital markets. The Green Deal also comprises a range of industrial and agricultural policy changes, and a number of carbon measures including carbon borders, with an intended impact on global trade.
At Davos 2020 in the beginning of the year, we saw a culmination of the many changes that happened in the second half of 2019. The Business Roundtable, a US-based organization consisting of big corporates such as J.P. Morgan and Apple, has amended its declaration which puts shareholders first to one whose ownership is an ecosystem which includes all stakeholders This leads us to believe that the Milton Friedman model stating that “the social responsibility of business is to increase its profit”, is becoming obsolete. At Nomura, we are well placed to comment on the merits of stakeholder capitalism which dominated management theories in 1970s Japan. The late Ronald Dore, a famous British academic, published a book called “British factory: Japanese factory” in 1973. That concluded that the Japan “community model” nearly 50 years ago had its merits. We think the stakeholder model is being reinvigorated.
One of the initiatives embraced by ESG-compliant companies is the taskforce on climate-related financial disclosures support, of which Japanese companies have emerged as most adept at adopting. This is a good example to show that being in Asia, we are quite advanced, in some respects, in adhering to these ESG initiatives.
If we look at Korea, it is similar to Japan, where both countries adopted a development-state model in post-war periods. In this model, governments channeled capital into strategic industries such as automotive shipping and electronics. Korea is following Japan in its ESG compliance in a number of ways.
The Stewardship Code, which was originated in the UK in 2012 was soon adopted in Japan and Korea shortly thereafter. In Korea, we are beginning to see local investors taking the initiative to implement ESG-compliant behavior. This is evidenced in the behavior of leading investors such as NPS in the way it is engaging with company management teams.
We have seen Thermal Coal as a hot topic in ESG investing over the last few months. One of the particular challenges of this area is that thermal coal forms a large component of the electricity generation backbone in Asia, and that many countries in the region do not have a quick alternative, even if they wanted to quickly transition to other sources of energy. Conventional thermal, which is made up of oil and coal, represents a large component of current power capacity generation in the region. In the short run, it seems challenging to transition away from conventional thermal to other, more sustainable forms of energy such as nuclear, hydro or solar power. Therefore, a lot of the focus in Asia has been to find cleaner ways to use thermal coal either through carbon capture or other low-emission profiles.
Another trend to look at in this context is what is happening in the oil markets. Oil storage difficulties and a significant drop in travel has had implications on how we see the role of carbon profiles play into investor preferences and the ability to finance oil assets. At the beginning of Covid-19, there was a perception we were in a short-term V-shaped situation. However, it has become more evident that there is a long-term, and potentially permanent change in many markets.
Looking at healthcare, it has been a sector that has performed extremely well during this cycle. The hospital and clinic side of the industry has suffered due to its consumption-based nature. The delay in non-critical surgery and medical care has contributed to this burden. Thus, in the initial period of the pandemic, we saw sovereign-level issuance of debts.
Finally, ESG bonds have broadly performed better than their benchmarks during this period. Unfortunately, this is correlated to the fact that transportation and energy segments are generally excluded from ESG. This is a critical piece of the next stage of development, particularly for Asia, since it has the least depth of an ESG product market due to environmental and sustainable finance risks. Since there is a large demand to invest in emerging markets of Asia, potentially more than other parts of the world, the demand for ESG products in this region will continue to be a major theme.
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Wholesale Governance Officer
Joint Head of APAC Equity Research
Co-Head of Investment Banking, Asia ex-Japan
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