Climate in the COVID era
Coronavirus has sharpened investors’ focus on sustainability, according to the latest proprietary analysis from HSBC Global Research published just ahead of Climate Week in New York City in September.
Stocks of large companies with stronger environmental, social and governance (ESG) ratings have outperformed the global average by 4.7 per cent since mid-December 2019. For climate-related stocks the gap is even bigger, with performance 13 per cent better than the global average over the same period.
These findings underline that sustainable investing strategies are mainstream today – and that it is more important than ever to understand how climate and other ESG issues are reshaping industries worldwide.
Despite – or because of – the pandemic, 2020 has seen a number of climate-rated developments that could have an impact over years to come. Here, we highlight six to watch:
1. European Green Deal
In December 2019 the European Commission released its overall plan for the ‘European Green Deal’, a multi-year project with the aim of becoming the first climate-neutral continent by 2050. New policies to encourage a circular economy, ensure more sustainable industries, and cut pollution were announced in 2020. More are set to follow, and will affect every part of the economy.
While COVID-19 shifted policymakers’ priorities to some extent, the European Green Deal puts sustainability at the heart of Europe’s plan for economic recovery.
2. Oil and climate
The oil and gas industry faced significant disruption from COVID-19 in 2020, but also took a step forward in its climate ambitions – particularly among large European producers. Six European companies now aim to make their own operations ‘net zero’ by 2050, coupled with long-term strategies that seek to reduce the intensity of carbon dioxide emissions from other sources. Some are ramping up their spending on developing renewables.
These plans are set to fundamentally change the shape of significant industry players within 10 years, in our view. Some institutional investors, however, want to see meaningful emissions reductions in the next five.
HSBC sets out net zero ambition
Find out how we plan to help build a thriving low-carbon economy.
3. Middle East ambitions
In the Middle East, North Africa and Turkey fossil fuels play a major role in many economies. The region is also vulnerable to the physical effects of climate change, from heatwaves to floods. These challenges are significant. But we view evidence of growing investment in clean technology as positive signals.
Every country in the region has a renewable-energy target: in some cases, these are ambitious. Sustainable cities are being built in Abu Dhabi and Saudi Arabia. The launch of an ESG index in Dubai in June 2020 was the latest sign of an emergent sustainable finance sector.
4. Sustainable consumers
Before the pandemic, a growing number of consumers were motivated by ESG concerns. Coronavirus has raised new challenges. Plastic pollution has grown. Some consumers may now need to prioritise affordability over sustainability.
But the radical reshaping of shopping trends amid global lockdowns could boost sustainable consumption in other respects. The trend to online has accelerated, opening up new ways of marketing sustainable products. Local sourcing has risen in popularity for some, reducing the emissions footprints from transportation from some products. And altered travel and work plans mean accelerated development of cleaner urban transport, including bicycles and e-bikes.
COVID-19 has also underlined that communities and economies worldwide are vulnerable to changes in the environment. As the global population grows further, the planet is losing its biodiversity rapidly. In economic terms, WWF estimates the cost of inaction on ecosystem decline at USD9.87 trillion over 2011-50.
Biodiversity in the balance
With 1 million species under threat, investors have a key role to play in protecting the planet.
There is a risk that biodiversity gets pushed to the background as policymakers and companies focus on tackling the pandemic. But if anything, the pandemic should accelerate the focus on sustainable investing. While governments focus on the immediate response to COVID-19, we think private investors can step up and play a pivotal role in directing capital to protect the planet’s ecosystems.
This year has also seen a rise in interest in hydrogen technology. The colourless, odourless gas can be burned for heat energy or converted into electricity with only clean water emitted – and could play a key role in the low-carbon transition.
The trouble is that the vast majority of hydrogen produced today comes from carbon-intensive processes. But we think that in the future wind and solar power could be used to produce the gas more sustainably and propel a ‘green’ hydrogen economy. The industry is on the cusp of being able to mass-manufacture electrolysers, with standardisation and scale set to drive rapid cost declines. The journey to green hydrogen, in our view, is already underway.
Read more from HSBC Global Research about how renewables can make energy green.
New York Climate Week
Wai-Shin Chan, Co-Head of ESG Research, HSBC, is among the speakers taking part in Climate Week NYC (21-27 September). The online event brings together leaders from government, business and communities around the world to discuss action to protect the planet.
HSBC is hosting free online seminars on three key topics:
Innovations in sustainable finance in the COVID-19 era
Investing in nature-based and technological climate solutions
Financing a just transition for cities
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Ashim Paun.
Equities: Stock ratings and basis for financial analysis
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For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
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As of 17 September 2020, the distribution of all independent ratings published by HSBC is as follows:
Buy 55% ( 33% of these provided with Investment Banking Services )
Hold 36% ( 32% of these provided with Investment Banking Services )
Sell 9% ( 24% of these provided with Investment Banking Services )
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