Climate: the next great challenge

Climate: the next great challenge

Join our weekly 30-minute “COVID-19” webinar this Thursday at 13:00 BST. We’ll cover the latest health and economic impacts and our guest, Rick Lester, Deloitte Partner & COO Risk Advisory, will discuss what we have learnt as we address the challenges of reopening our offices. To register for this week’s webinar, on 9 July, please visit: https://event.on24.com/wcc/r/2430125/9C55183B04543424A1C3067F566ABEB6
 

• Visit our “COVID-19 Economics Monitor”, which is available here: https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html
   
• The monitor is updated weekly and features a changing set of charts and tables illustrating key economic themes from the COVID-19 crisis and our forecasts for UK GDP growth over this year and the next. The latest update includes charts on global GDP and trade, the acceleration of new COVID-19 cases in the US, the equity market rally in the second quarter and expected increases in public debt.
   
• The COVID-19 crisis has collapsed global economic activity, and with it, greenhouse gas emissions. The pandemic has brought cleaner air and skies across the world’s cities, but it also offers a glimpse of the scale of changes needed to mitigate the worst impacts of climate change.
   
• A study by the University of East Anglia and Stanford University has found that daily global CO₂ emissions in early April 2020 were 17% lower than average levels in 2019. The International Energy Agency (IEA) estimates that carbon emissions will fall by at a record rate, of almost 8% this year. 
   
• Lower levels of pollution have come at huge economic cost. The global economy is expected to suffer its worst year since the great depression of the 1930s. Yet the United Nations estimates that if the world is to meet the Paris Agreement of limiting global warming to 1.5℃, a similar reduction, of 7.6%, in emissions will be needed in every year to 2030. The world faces a huge challenge. 
   
• But in the short term, emissions will rise as the global economic recovers. More profound is the risk that the primacy of growth and jobs could undermine the drive to reduce carbon emissions. We, however, take the opposite view. Here are five reasons why the COVID-19 crisis is likely to accelerate the climate transition.
   
• Firstly, some of the behavioural shifts which have lowered emissions, such as increased in home working, video conferencing and less business-related travel, seem likely to stick. Oil majors Shell and BP have made substantial write downs on the value of their assets reflecting a view that the pandemic will dampen oil demand and prices and accelerate the move away from fossil fuels. 
   
• Second, the pandemic has vividly demonstrated society’s vulnerability to shocks and heightened awareness of the need to plan for future risks. A recent global poll by Ipsos MORI shows that 71% of those surveyed believe that climate change is as at least as serious a crisis as COVID-19. Last month a YouGov poll found that 56% of UK voters think government should either focus equally on the economy and climate or put climate first. Only 34% thought that the economy should come ahead of climate.
   
• Nor does the pandemic seem to have weakened investors’ concern about environmental and social issues. In April a group of eight major investors said that tackling climate change must continue to be a priority for public companies despite the health and economic crisis. At about the same time Royal Dutch Shell became the world’s largest energy group to announce that it planned to cut its carbon emissions to net zero by 2050. According to a survey carried out by the FT and Savanta, a market research company, nine in ten wealth managers polled believed that the pandemic would result in increased investor interest in ESG investing.
   
• The surge in Tesla’s share price testifies to the profit potential of electric vehicles. Last week Tesla became the world’s largest carmaker by market capitalisation eclipsing Toyota, a company which last year sold around 30 times as many cars. 
   
• Third. Renewables have made huge progress. Since 2010, the benchmark price for solar power has dropped by 84%, offshore and onshore wind by about half. It is a measure of the change that in mid-June the UK went for over two months without using electricity generated from burning coal. During this period 37% of Britain’s electricity came from renewable energy, up from 3% ten years ago. 
   
• Fourth. Greater government fiscal activism, made possible in part by very low borrowing costs, provides a golden opportunity to upgrade green infrastructure. In the initial stages of the crisis this was about supporting households and corporates; now the focus has moved to infrastructure investment. The returns appear to be attractive. An Oxford University study, carried out by economists including Nobel prize winner Joseph Stiglitz, found green projects create more jobs, deliver higher short-term returns per dollar spent and lead to increased long-term cost savings than traditional forms of fiscal stimulus. 
   
• Green projects are at the heart of the European Commission’s proposed €1.85tn recovery plan. Several European countries, including Germany, have announced fiscal packages that include support for climate-friendly industries including subsidising electric cars. (Twelve years ago, in the financial crisis, the German government provided extensive support for its overwhelmingly petrol and diesel auto sector. The absence of such general support in recent months is a sign of the times.) The French government added environmental conditions to the €15bn rescue plan for its aerospace industry, including higher levels of investment in electric and hydrogen planes.
   
• Finally, US politics have a significant impact on climate policy. Support for Joe Biden in the upcoming presidential election has risen sharply since early May. Last week betting markets put the Democratic candidate’s chances of winning the election at over 59%, 23 percentage points clear of Mr Trump, according to RealClear Politics. Mr Biden has pledged to set a target of net-zero emissions by 2050 in what would constitute an about-face from the current administration’s stance.  
   
• Fifth. The requirements on companies to report climate change exposures are growing. Identifying and pricing such risk is one of the most effective ways of reducing carbon emissions. After eight years as the governor of the Bank of England Mark Carney has become the UN’s special envoy for climate action and finance. As governor of the Bank of England Mr Carney established the Task Force on Climate-related Financial Disclosures to shed light on the financial risks posed by climate change. Many companies voluntarily report under these standards and Mr Carney has called for them to become mandatory. 
   
• The COVID-19 demonstrates the urgency of preparing for external shocks and is likely to sharpen the urgency of efforts to reduce climate change. As Mark Carney said recently: “We can't self-isolate from climate change.” Public investment in green infrastructure is on the rise. Understanding and pricing of climate risk has grown over time. Renewables are increasingly commercially viable. 
   
• There is a view that it is only by shrinking economic activity, as has happened this year, that we can be sure of stopping climate change. Having emerged from a massive downturn the human consequences are becoming clear. In fact the experience of recent years shows that the economy and the environment need not be in opposition. The energy intensity of UK GDP fell by 38% between 2000 to 2015 even as the economy expanded by nearly one-third. The pace of the climate transition needs to quicken. But green growth is possible. Now, in the wake of COVID-19, could be its moment. 
   
• PS: We have been struck by the divergence between weakening corporate revenues and the modest widening in corporate bond spreads, a measure of default risk. Corporate bond spreads widened sharply at the start of lockdowns in March. Central bank interventions quickly improved financial conditions and spreads subsequently narrowed. In the UK insolvencies have not increased, partly because of the lockdown disrupting court operations and insolvency practitioner activity. In April and May, insolvencies were actually below pre-lockdown levels. Unfortunately, it may only be a matter of time before insolvencies increase. A report by TheCityUK estimates that about £100bn in business lending could prove unsustainable by the first quarter of 2021. In the US insolvencies have already risen to levels last seen in 2009. 

OUR REVIEW OF LAST WEEK’S NEWS

The UK FTSE 100 equity index ended the week broadly flat at 6,157.
 

COVID-19

Globally, the spread of the pandemic continued to accelerate with a record number of new daily cases recorded
In the US, daily new cases exceeded 50,000 for the first time, driven by rapid increases in Florida, Georgia, Idaho, Montana and Nevada 
Some states are halting or rolling back plans to ease their lockdowns, while companies like Apple and McDonald’s are closing stores or delaying re-openings
The US, Brazil and India together account for the majority of new cases now
In Italy the number of hospitalised COVID-19 patients fell below 1,000 for the first time since March
In the UK, the seven-day moving average of new cases fell to 560 on 2 July, down from 1,073 on 26 June, and a peak of 5,519 on 14 April
The UK relaxed lockdown restrictions from 4 July, reopening cinemas, hairdressers, hotels, restaurants and pubs
The English city of Leicester reimposed a lockdown in response to a spike in new COVID-19 cases
The UK will no longer require the 14-day self-isolation of arrivals from over 70 countries deemed low-risk for exposure to COVID-19

Economic developments

The US added 4.8m jobs in June, above expectations, lowering the unemployment rate to 11.1% from 13.3% in May. The US has now recovered 7.5m of the 22m jobs lost since March 
The June jobs figures were collected in the second week of the month, before new daily COVID-19 decisively accelerated
The EU unemployment rate rose to just 6.7% in May, from a 12-year low of 6.4% in March, with a larger increase limited by short-time working schemes covering 40m workers
Manufacturing activity continued to contract in most countries in June, but less sharply than in May. Brazil, China and the UK registered modest growth
Chinese service sector activity in June expanded at the quickest pace in over a decade 
The Office for National Statistics revised its estimate for UK March GDP downwards to -6.9% (from -5.8% previously)
St. Louis Federal Reserve president James Bullard said that a wave of corporate bankruptcies could trigger a financial crisis
The United States-Mexico-Canada Agreement entered force, replacing the North American Free Trade Agreement (NAFTA)
The share of UK online retail spending reached a record 33.4% in May, up from 19% in January
The yield on 30-year UK government bonds fell below that on 30-year Japanese bonds for the first time on record, despite the recent expansion in British bond issuance

Policy response

UK prime minister Boris Johnson announced a “new deal” of infrastructure projects to boost the economy, committing an additional £5bn in spending
Bank of England chief economist Andy Haldane said that UK activity had rebounded faster than expected, justifying his vote to maintain, rather than loosen, the Bank’s policy stance in June
The US treasury department announced a $700m bailout of trucking company YRC, taking a 29.6% stake in the company, considered an essential provider of military transportation
Spain is likely to extend its furlough scheme until the end of this year and possibly into 2021 for the hardest-hit sectors
The UK government is expected to announce plans to phase out Huawei from its 5G network 
 
Business news

Electric carmaker Tesla overtook Toyota to become the world’s most valuable carmaker, with a market capitalisation of $224bn as of 2 July
Airplane manufacturer Airbus announced 15,000 job cuts and airline Qantas 6,000 job cuts
EasyJet, Royal Mail and several UK retailers announced thousands of job cuts ahead of the unwinding of the government’s furlough scheme
US department store chain Macy’s will cut 3,900 administrative and management jobs
Royal Dutch Shell will write down $22bn from the value of its assets on expectations that COVID-19 will permanently lower energy demand
Microsoft permanently closed all its 83 stores

Politics

An average of polls compiled by RealClearPolitics give former vice president Joe Biden a 59% chance of winning the 2020 US presidential election against 37% for president Donald Trump
Mr Biden leads Mr Trump by five points in Florida, a key battleground state 
Mr Biden’s platform includes a reversal of Mr Trump’s 2018 tax cuts, a $15 minimum wage, an expansion of Medicare and a 2050 net-zero emissions target
Mr Johnson condemned China’s new security law for Hong Kong and announced a path to UK citizenship for Hong Kong residents 
Russian voters approved constitutional changes including a provision that would allow president Vladimir Putin to serve two more terms
 

And finally… US periodical Scientific American republished an article from 1959 noting that baby bottles were the most effective way to drink in space, given that “under weightless conditions even a slowly lifted glass of water was apt to project an amoeba-like mass of fluid onto the face” – small sips for humankind