Ireland is at a crossroads in more ways than one. As we begin to emerge from the crisis caused by COVID-19, it is clear the economy will need help to get back to a normal footing. The question is, do we use the crisis as an opportunity for a reset of our environmental targets, or do we take the approach that growth must come at any price? An improving climate and macro-economy are not mutually exclusive, and we can look to Spain’s recent excellent example to lead the way. Spain was one of the European countries that was hardest hit by the COVID pandemic. Despite this, the country last month announced the setting out of a draft climate law to end their contribution to global warming in the next 30 years, thereby setting the direction of economic recovery from the coronavirus pandemic.
The timing is opportune for Ireland with a new government with a strong CO2 reduction target likely to be a key component of its manifesto. We shouldn’t underestimate the challenge of the mooted 7% CO2 reduction target – it will not be an easy one to attain. This year, the Irish economy all but shut down for several weeks, and yet the reduction in Irish carbon emissions is still likely to be only between 8-12%. Furthermore, the danger is that as the economy recovers we lose the opportunity to maintain or improve on our carbon emissions levels. In the recession following the global financial crisis in 2008, Ireland’s emissions fell from peak of 67.3 million tonnes of CO2 equivalent in 2008 by over 15% to just 57 million tonnes in 2011. However, from that level emissions have been gradually creeping back up again as the economy has expanded.
It is important to remember however, that rebuilding the country in a ‘green’ way is not necessarily poor for economies or indeed companies. On the contrary, the Spanish government has claimed that carbon-cutting measures will boost the country’s economic growth by 2030 compared with business as usual. Indeed Irena, the International Renewable Energy Agency, has done a study that shows that from a socio-economic perspective, the energy transition is actually marginally positive for GDP, employment and welfare globally. From a company perspective, opportunities abound, whether that be via so called ‘green’ lending, or changes in transport, how we power or construct the country, or the way we eat.
Of course, Ireland will need to embrace change. Recent Environmental Protection Agency data suggests that agriculture accounts for over 1/3 of all greenhouse gas emission in Ireland, and transport over 20%, so these sectors seem a likely place to begin. However, in crisis comes opportunity, and Irish companies can show their resilience and adaptability now, and be at the forefront of the climate change movement. Arguably many companies started down this path some time ago, and the quality and adaptability of management teams in Ireland is commendable. If we had asked companies at the beginning of March if their workforce could all work remotely, most (including my own) would have believed not. Roll forward just a few short weeks and we are all doing exactly that. Thus, COVID-19 has forced us to think of scenarios that we never imagined possible.
From a listed company perspective, Ireland has a decent head start in embracing changes brought on by climate change. Whilst only 50% of Irish listed companies currently report their emissions to the CDP (Carbon Disclosure Project) the results are very encouraging – 68% of Irish companies score an A/B rating compared to the global average of just 49%. And there is a vested interest in listed companies looking at climate change, as it is a key component of ‘E’ (environment) in ‘ESG’ (Environmental Social and Governance) investing, which has been gaining in popularity for some time. Nowadays, many pension funds and others have begun to use screening processes to eliminate the possibility of investing in companies with a low ESG rating. In addition, for the companies themselves returns generally improve and costs go down as ESG scores improve.
For investors, the overall trend towards ESG investing seems undiminished by COVID-19, although it has been interesting to track the change in investor sentiment during recent months. At the beginning of the year, the move towards ESG investing, which had been growing in popularity for some time, seemed seminal. The arrival of COVID, however, initially changed investor focus towards the stability of balance sheets, cashflow and dividends, as survival was key. However, strong balance sheets are not mutually exclusive with high ESG ratings, and what has been notable during the stock market volatility brought about by COVID is that highly rated ESG companies have consistently outperformed the market in share price terms than their lower rated peers. In many regards, this shouldn’t come as a surprise – companies that seriously assess environmental, social and governance risk are inherently prepared for risks of any form, and look for opportunities to be sustainable over a longer term period.
From a company perspective, focus on the various components of ESG has also been changing during the crisis. When the extent of the COVID crisis became clear, the ‘S’ or social responsibility side of ESG came to the fore, as companies wanted to demonstrate that they were looking after not just their employees, but also those in need. Many Irish companies gave striking examples in this regard, with donations of everything from the use of apartments for key healthcare staff to donations of PPE (personal protective equipment) or money to research labs tackling the COVID-19 pandemic. However, in the last couple of weeks the rhetoric seems to have moved on a bit, and increasingly we are hearing more from companies about the opportunities within climate change again.
These opportunities could come from several sources and sectors. From a listed perspective, the Irish market is dominated by a few key sectors, with construction/housing and food related companies making up over 50% of the index. Instinctively, these are among the sectors that need to be the most agile in a changing covid-19/climate change world. When it comes to food, the trend towards healthier, fresher food and away from meat for example has been dominating for some time and the trend appears to have been expedited by COVID-19 , but is also largely in keeping with climate targets.
Turning to housing and construction, it seems likely that the day of workers being 100% in the office is well and truly over. This means that when it comes to looking at housing solutions in Ireland, innovation will be key, and for example we may see more home or shared office facilities incorporated into the planning process for new builds in the future. This will have the benefit of cutting down on emissions from commuting, which is again positive for the climate. However, another angle that we need to examine is retrofitting existing buildings for energy efficiency. This could bring employment to Ireland, and we have fantastic examples in Ireland of leading companies in the energy efficiency space. For lenders, the opportunity could be an increase in green lending and finance.
Overall, it appears the opportunity, ability, and willingness to adapt from the current pandemic towards climate change is here within the Irish market. What remains to be seen is whether companies decide to seize this opportunity and indeed if the government helps to support that opportunity to create long term change for the greater good.
Author: Marie Gillespie, Senior Equity Analyst, Davy Private Clients. To find out more go to https://www.davy.ie/
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