Can Europe deliver a green revolution to spur recovery?
Ambitious new European Commission proposals for a €750bn EU coronavirus recovery package could hold some profound environmental, social and governance (ESG) implications for European companies, governments and fixed income investors, says Newton portfolio manager Scott Freedman.
The European Commission has put down a major new marker for sustainability with the launch of plans to create a €750bn EU recovery package with a ‘European Green Deal’ at its heart.
As Europe battles with the economic and social impacts of the ongoing Covid-19 coronavirus pandemic the Commission is determined to push forward with its plans – known as Next Generation EU – which are designed to boost regional economic recovery, while safeguarding the environment and promoting sustainable business practices.
Announcing the proposals in May, European Commission president Ursula von der Leyen said: “This recovery plan turns the immense challenge we face into an opportunity, not only by supporting the recovery but also by investing in our future: The European Green Deal and digitisation will boost jobs and growth, the resilience of our societies and the health of our environment.¹ ”
Unlike the aftermath of the global financial crisis when cheap borrowing arguably led to a compounding of challenges, the Commission’s approach is designed with sustainability at its core. Central to the proposals is a stimulus package focused on renovation, clean mobility, hydrogen and renewable energy – with measures aimed at helping create a million new ‘green’ jobs.
These include plans to provide €91bn a year for home energy efficiency and green heating, €20bn for clean cars over two years, up to €60bn investment in zero emission trains and €25bn in renewable energy and the production of one million tonnes of clean hydrogen.²
For Newton portfolio manager Scott Freedman, the proposals, if implemented, could provide a major new boost to sustainable investment drives, delivering positive change throughout Europe and creating major new implications for companies, governments and those who invest in them.
“The Covid-19 pandemic has driven EU policymakers to accelerate investment in areas that directly benefit the environment and health – we believe this has profound implications for companies and governments and the responsibility each must demonstrate to their stakeholders. Ultimately, the EU Green Deal has delivered on what was expected – a proposal that incorporates clean mobility, building renovation, acceleration of renewables and hydrogen, and the circular economy at its heart,” he says.
“If the proposed plan is agreed and taken forward then investors should be prepared to see the emergence of winners – such as beneficiaries of the recovery plan projects and losers among those in sectors not touched or indeed where any subsidies could be cut to support funding elsewhere. Further details on how the plans will be financed and agreed by member states will be eagerly anticipated by markets.”
According to Freedman, the proposed projects will likely further boost growth in issuance of green and sustainable bonds – in both corporate and sovereign markets – building greater scale and diversification of these markets.
Commenting on the role bond issuance and fixed income investment could play against the ongoing backdrop of the Covid-19 coronavirus pandemic, he adds:
“The debt capital markets have been an especially important source of funding for many companies to replenish their cash reserves through the crisis this year and the pendulum of influence has swung back in favour of debt investors due to the enhanced focus on the balance sheet by all stakeholders.
“This will likely remain for some time in a post-coronavirus world, where the value of sustainability has also received a significant boost. Issuers will be under scrutiny not only on their approach to dealing with the pandemic, but beyond and whether they can sustain appropriate performance in a prolonged recovery, and one which supports a broad range of stakeholders, including their employees, customers, supply chain and wider society.”
More broadly, Freedman thinks the widespread impacts of Covid-19 could force a major rethink on how we manage our environment and the global economy, raising wider awareness of environmental, social and governance (ESG) factors in investing.
“The pandemic crisis has made social and economic concerns more pressing and it is likely to kick-start the opportunity to invest in the reshaping of economies globally. Going forward we expect increasing focus on ESG factors from investors. For fixed income investors, engagement will be an important driver of change, holding management teams to account.
“The social element within ESG should also command more attention than it has done in the past, as this crisis has become a societal issue, and as governments and companies are asked to build a fairer economy.”
While the European Commission presses ahead with its Next Generation plans some individual European states and cities are also taking their own initiative in embracing green projects and planning models.
In the Netherlands, capital city Amsterdam is officially embracing the sustainable development framework created by the Oxford economist, Kate Raworth, that has become known as ‘doughnut economics’. It is aiming to emerge from the crisis by balancing the needs of people without harming the environment or placing too much emphasis on purely economic growth.³
¹European Commission. Europe’s moment: repair and prepare for the next generation.27 May 2020.
²Guardian. EU green recovery package sets a marker for the world.
³Guardian. Amsterdam to embrace ‘doughnut’ model to mend post coronavirus economy. 08 April 2020.