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The ESG Lens on COVID-19, Part 2

How Companies Deal With Disruption

The strategic threat posed by the spread of infectious diseases is by no means a new risk, but the COVID-19 pandemic has made this risk a reality. It has already illustrated how one microscopic virus can rapidly spread around the world and bring the global economy to a grinding halt, leaving significant and lasting disruption in its wake. While the pandemic has displayed the immediate and striking social consequences to business and society alike, as described in the accompanying commentary, "The ESG Lens On COVID-19, Part 1," published April 20, 2020, this catastrophe also may give us some insight as to how the companies S&P Global evaluates prepare for disruption amid a rapidly evolving risk landscape. Indeed, disruption rarely occurs in isolation. Today, companies around the world are confronting this unprecedented health threat, while reeling from the dual shock posed by the breakdown in OPEC negotiations and accompanying collapse in global oil prices, along with the looming systemic threats posed by climate change. The growing complexity posed by these emerging and intersecting risks and megatrends are conspiring in ways that require deftness, adaptability, and resilience for entities to remain relevant, both now and for the long run.

Key Takeaways

  • In recent weeks, management teams have had to regroup to respond to the most severe public health and economic situation many of them have ever faced.

  • Immediate consequences aside, this pandemic calls into question how companies prepare for black swan risks, which are harder to predict, measure, and prioritize.

  • In addition to ensuring they can buoy themselves in the near term and upskill leadership teams on rapidly evolving epidemiological matters, senior management must weigh the needs of a variety of stakeholders in their response plans and effectively execute enterprise risk management amid the crisis.

  • Furthermore, we'll monitor how the economic recovery takes shape in coming months, to understand how ESG and sustainability initiatives and attempts at fostering an effective, unified culture are influenced by the events stemming from this pandemic.

Pandemic Pandemonium

The ESG lens on COVID-19, Part 1

The coronavirus pandemic has rapidly spread across the globe, creating a once-in-a-generation public health catastrophe. It has upended the global economy, plunging even the most prosperous countries into recession. It's exposing vulnerabilities in value chains, revealing the depth of corporate values, and prompting coordination and collaboration not seen since war-times. Financial markets have been roiled as investors seek to identify the companies that are best positioned to weather a crisis of this magnitude and as governments develop strategies to rescue beleaguered sectors. With a long recovery ahead, it's clear that few sectors and companies will be spared the consequences. The impacts are both direct and indirect, and most certainly enduring.

Renewable supply chains holding up against coronavirus impacts for now

The coronavirus continues to threaten a disruption of supply chains for power generation assets, with a lag potentially coming with implications for renewable projects utilizing tax credits. The real delay, however, may be stalling projects in early-stage development.

"Clearly, disruptions in global supply chains are giving investors and lenders concern," said Ram Sunkara, a partner at Eversheds Sutherland LLP who leads the firm's natural gas liquids, petrochemical and distributed generation and renewable corporate procurement teams. "For renewable projects specifically, a COVID-19 related delay to expected timelines for wind turbines or solar modules could potentially impact tax equity financings as the tax regulations require projects to be under continuous construction within a four-year period."

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Climate

Stepping Up To A Sustainable Future, Post COVID-19

As governments around the world continue to tackle the coronavirus pandemic, many of us are adjusting to a new normal characterized by social distancing and other measures to slow the rate of contagion. With Earth Day upon us, we take a moment to consider how the unfolding pandemic could affect the way we tackle other global systemic risks, such as climate change.

COVID-19: A Test of the Stakeholder Approach

The coronavirus pandemic is highlighting why stakeholders matter, less than a year after moves by business and industry to shift from a focus on shareholders.

Amid the pandemic, insufficient consideration paid to all stakeholders in decision-making is backfiring on a number of companies. In contrast, other companies are stepping up.

While most of our rating actions since the beginning of the pandemic have been driven by the impact of the lockdown on revenue and cash flow, we expect that stakeholder management will become a factor in the future.

Corporations that better embed stakeholder considerations in their decision-making and strategy will limit unintended consequences and be more resilient over time.

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Economic Research

EU Response To COVID-19 Can Chart A Path To Sustainable Growth

The COVID-19 pandemic has hit Europe hard, and the economic challenges ahead are significant. From a macroeconomic perspective, however, Europe's policy response appears encouraging, with its incentives for sustainable growth, solidarity, and economic stability.

European governments have committed to taking unprecedented fiscal measures in response to COVID-19. Importantly, the markets seem to have accepted these measures as appropriate. Recent sovereign debt offerings by Portugal and Italy priced at very low rates and were largely oversubscribed. Across Europe, sovereign bond yields are similar to those at year-end 2019. Although spreads and CDS pricings on certain European government debt have widened, they are nowhere near the levels observed in previous shocks, particularly during the 2008 financial crisis.

The EU's Drive For Carbon Neutrality By 2050 Is Undeterred By COVID-19

The EU's long-term goal to tackle climate change remains unchanged. But the COVID-19 pandemic will likely delay specific laws needed to reach carbon neutrality as governments and firms mobilize their finances to deal with the economic fallout.

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Investing for Ignorance

Ignorance is among the most reliable side effects of a one-in-100-year event. Whether hurricane, market crash, or pandemic, the valuable information most investors cannot know will dwarf what they can know—let alone what they actually do know.

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Social - The "S" in ESG

The Positive Impact Scorecard

As the Covid-19 pandemic continues its spread through countries and affects their economies, the private sector is discovering positive ways to support overwhelmed health and social care systems. Fashion houses are replenishing hospital clothing supplies; cosmetic companies are contributing disinfectants; aerospace, sporting and academic institutions are manufacturing medical equipment; staffing agencies are adapting their benefits policies; and several corporations are pledging financial donations to support the response. Evidence is also emerging that investors are signaling a preference for products that favor companies with a positive societal impact. ESG funds are continuing to gain assets[i], even during one of the most significant disruption to markets, and as of April 6, the S&P 500 ESG Index was outperforming the S&P 500 by 2.47%.

But how will the financial system regenerate post-coronavirus? Will the private sector return to ‘business as usual’ or could there be a reframing of financial markets to align with global sustainability goals?

Coronavirus crisis to test banks' gender balance efforts, could halt progress

Financial institutions with gender-diverse boards and management will be better placed to navigate the coronavirus crisis, according to experts. But they warn that, unless banks put gender balance front and center of their crisis management strategy, the pandemic could be detrimental to the progress made by the sector. "The real risk in the short term is that diversity and inclusion initiatives are seen as 'nice to have' and fall off everyone's radar," said Jessica Clempner, a principal at Oliver Wyman and lead author of the company's "Women in Financial Services 2020" report, which was released in November 2019.

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Why voluntary CEO pay cuts, while largely symbolic, matter in ESG context

CEOs and management teams at dozens of companies around the world are taking voluntary pay cuts as their companies lay off workers to cope with the revenue hit from the coronavirus pandemic. Experts say cutting executive pay, while largely a symbolic gesture, could help companies manage reputational damage and enhance their ability to attract and retain workers in the long term.

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Carbon Impacts

Why the next recession will not break the world's largest carbon market

A decade after the financial crisis crashed Europe's cap-and-trade emissions prices, experts say the reforms made will hold up against the current coronavirus crisis.

Set up in 2005, the EU Emissions Trading System, or ETS, is the world's largest carbon market and Europe's flagship tool to force companies to cut their emissions efficiently. It covers around 45% of the bloc's total emissions, produced by more than 11,000 installations, including power stations and heavy industrial plants, as well as flights between EU countries. Companies receive a certain amount of allowances for free and buy the rest in regular auctions, or from each other, to cover their needs for any given year.

The recent extraordinary movements in key economic and financial variables include:

  • Experts on the carbon market say the latest economic shock will not impact the ETS as it did a decade ago, even though the IMF now expects the coronavirus recession to be far worse than in 2009.

  • That is because of both concrete measures taken to avoid a repeat of the ETS price crash, as well as the EU's long-term climate ambitions.

  • More long-term, market observers also take solace from the EU's push for net-zero emissions, which could have a more significant structural effect than any short-term disruption, even on the scale of the coronavirus. That should also attract speculators back into the market.

Environmental Goals for EU

France, Germany join call to raise EU's 2030 CO2 goal by end-year

French and German environment ministers have joined calls for the EU to raise its 2030 target to cut CO2 by the end of this year and avoid pro-fossil fuel post-lockdown measures to boost the economy.

There are now 13 EU environment ministers warning against short-term economic recovery solutions "that risk locking the EU in a fossil fuel economy for decades to come," they said in a joint statement published April 10.

The ministers come from Austria, Denmark, Finland, France, Germany, Greece, Italy, Latvia, Luxembourg, the Netherlands, Portugal, Spain and Sweden.

Coronavirus crisis gives Germany early glimpse of a future without coal

With Germany's exit from coal power on the horizon, the coronavirus crisis has already shown Europe's largest economy what its electricity mix could look like without the fossil fuel and might even speed up the phaseout process. As industrial power demand plummets, driven by countrywide lockdowns, many of the nation's large fossil fuel generators have been powered down to minimal output or even shut completely.

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Demand Issues

Tracking global energy transition in turbulent times: solar stutters, coal keeps growing

As the extent of the impact of the coronavirus outbreak on economic activity and power demand emerges, newbuild activity in global power faces old and new sets of challenges.

The short-term focus has been shifting due to coronavirus-related disruption of manufacturing activity and logistics, but delays will most likely be short-lived.

The global power capacity mix has already been shifting toward renewables. S&P Global Platts Analytics estimates that solar photovoltaic, wind and hydro made up almost 67% of total power capacity additions over the past year. The question is whether renewables investments will accelerate, but so far we do not see major signs that this could happen soon.

Thermal coal demand declining globally, driving fewer imports, production: analysts

Thermal coal demand is declining globally and forcing cutbacks of imports and production, driven by lower power-sector coal demand resulting from the coronavirus pandemic, analysts said April 14.

After some delays compared with other commodities, the steam coal market seems to finally grasp the magnitude of the impact of the Covid-19 on the international demand.

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Clean Energy

Coronavirus will prove renewables need support, says EU bank's clean energy head

As the head of the renewable energy division at the European Investment Bank, Alessandro Boschi is overseeing operations at one of the largest lenders to clean energy projects in Europe. Following a broader industry shift, the bank, or EIB, has started financing unsubsidized wind and solar projects under Boschi's leadership. And as it now prepares to greatly increase its climate financing, Boschi explained in an interview why he thinks renewables still need state backing and how the coronavirus might hasten a shift towards that realization. The following is an edited transcript of the conversation.

Pandemic response could include significant clean energy investment, experts say

While the recent $2.2 trillion stimulus package passed by the U.S. Congress did not include many energy, let alone renewable energy, provisions, industry observers are predicting that may not be true in future response packages, especially bills focused on infrastructure investments.

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S&P Global Ratings

ESG Evaluations Remain Unchanged For Now In Light Of COVID-19

S&P Global Ratings has reviewed its portfolio of six public Environmental, Social, And Governance (ESG) Evaluations in light of the COVID-19 pandemic and has left all scores unchanged for now. We will continue to monitor the portfolio.

ESG Evaluations are our view of an entity's capacity to operate successfully in the future and may be affected by the risks and disruptions caused by COVID-19. The ESG Evaluation comprises two assessments: the ESG profile considers near-term and observable risks and opportunities, and an entity's preparedness considers its ability to manage emerging, disruptive, and strategic risks. We consider this pandemic to be a social risk that could affect our view of the ESG profile of an entity--particularly the social profile--and a disruption that could affect our view of an entity's preparedness. We may revise our opinion of an entity's ESG profile and preparedness, and adjust our ESG Evaluation score appropriately. These adjustments could be either negative or positive, and would take into account the management team's efforts to mitigate the risks posed by COVID-19.

S&P Global Ratings ESG Evaluation

S&P Global Ratings ESG Evaluation is a one of a kind assessment of a company’s ESG strategy and ability to prepare for potential future risks and opportunities. The ESG Evaluation is the ideal tool for investors in that it provides a forward looking, long term opinion of readiness for disruptive ESG risks and opportunities. The methodology is founded on our analysts’ sector and company expertise, relying upon in-depth engagement with company management to assess material ESG impacts on the company, past, present and future.

Learn more about ESG Evaluations

Renewable Energy

Oil rout shifts focus to renewables

As the oil price rout continues, the case for investors and governments to shift more capital to the clean energy sector grows stronger, the International Renewable Energy Agency said in an April 20 report.

The International Renewable Energy Agency, or IRENA, issued the report the same day that futures prices for West Texas Intermediate crude plummeted into negative territory for the first time ever as markets sapped of demand by the coronavirus pandemic remain awash in oil.

The renewables sector has not been spared from the pandemic's economic fallout, but John Morton, a senior fellow at the Atlantic Council Global Energy Center, said it appears to be in a relatively solid position.

NextEra's renewables, storage dealmaking undeterred by COVID-19 crisis

As the novel coronavirus pandemic pushed the global economy into a tailspin in the first quarter, employees of NextEra Energy Resources LLC, one of the world's largest developers of renewable energy and battery storage projects, hunkered down and got deals done.

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As recession looms, rooftop solar sector faces 'tough couple of years'

Developers of residential and commercial rooftop solar photovoltaic, or PV, systems in Europe are grappling with the effects of the coronavirus pandemic, as countrywide lockdowns and tighter household finances slow the rate of new sales.

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Commodities

Coronavirus pandemic accelerating need for coal production cutbacks amid declining demand

Declining US coal-fired power demand, hit further by the coronavirus pandemic pressuring electricity demand, has pushed major coal basins into oversupply and utility stockpiles to multi-year highs, requiring producers to consider permanent cutbacks, B Riley FBR analysts said April 17.

"While YTD US coal production is at its lowest level in decades, demand declines have been even sharper," B Riley analysts Lucas Pipes, Daniel Day and Matthew Key said in a report. The combined impact of elevated coal stockpiles and subdued US electricity demand from the economic shutdown "has led to little-to-no activity in the spot market" and led some producers to expect to sell less than their contracted 2020 volumes, they said.

Cross currents: Big oil and the energy transition

Well before the oil price rout caused by the coronavirus pandemic, commentators and shareholders were calling on Big Oil to make step-out energy transition acquisitions.

Now, with economies in lockdown and corporates fighting to survive, the oil sector’s incremental move into new energy looks over-cautious.

As the value of their fossil fuel assets tumbles, the coronavirus lays bare these companies’ exposure to a world of massively smaller oil and gas demand, offering a glimpse of the EV revolution to come.

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