We must build a sustainable economy. Here’s what that means for investors

The economic and social toll wrought by COVID-19 over the past year is without question. Government lockdowns to control its spread have caused one of the deepest and most abrupt global recessions in modern history.

But the disease’s long-term impact on society and financial markets may end up being even greater as it relates to its influence on how we deal with other systemic problems such as climate change. The pandemic has shone a brighter light on the magnitude and urgency of our environmental and social ills, and has reinforced the need for government, investors and corporate leaders to direct capital more effectively at enterprises that offer solutions to these complex issues.

Of course, in doing so, it has become that much harder to envision an investment landscape that does not end up being markedly different than it is today. Accelerating the transition of capital towards activities and business models that embrace sustainability and resilience will likely dictate market returns in the years ahead.

The past year has demonstrated that in order to have any reasonable chance of meeting the Paris Climate Accord 2050 objective of net-zero emissions, the scale of emissions reduction is almost unfathomable. For example, the COVID-induced lockdowns resulted in only a four to five per cent reduction in global carbon emissions nearing the end of last year, according to UBS Research. This level of reduction would be an annual requirement moving forward in order to meet the 2050 net-zero emissions goal.

Although this seems improbable in practice, its daunting magnitude demonstrates the urgent need for increased regulatory action. Governments around the world have begun targeting stimulus, first at “green” activities such as renewable energy, electric vehicles and building efficiency, but then also increasingly at so-called “transition” activities. These involve industries that are so integral to our day-to-day life they cannot simply be shut down and must instead be transitioned towards lower emissions, requiring a re-engineering of entire supply chains and production processes.

As investors, issuers and lenders begin to appreciate the scope of the change required, the opportunities have become just as important as the risks. Capital incentivized by governments will begin to flow towards more sustainable activities and away from those with large environmental footprints. These flows will accelerate due to the fear of unmitigated climate change, but also in a relative race for technology leadership in the fields of renewables, batteries, electric vehicles, building efficiency, hydrogen and biomaterials.

These are areas of transition that one might expect an “expert” in sustainable finance to highlight. After all, they are specifically environmental in nature and perhaps predictable. However, COVID-19 also lays bare other social arenas in full transition.

The shift in balance of power from shareholder to governments was underway prior to the pandemic, but according to the International Monetary Fund, close to US$20 trillion of global stimulus has made obvious the inability of markets to direct capital in a fashion that would provide resiliency in the face of a major natural disaster or similar health crisis.

Certainly, little of the funding to date addresses the root causes of the pandemic, which in turn provides ample runway for investments that do — as well as those that help build resiliency to deal with the consequences. The interaction between food insecurity, environmental degradation and pandemic spread is a ground well-trodden by scientists and addressed directly by the UN Sustainable Development Goals (SDGs), which are providing a longer-term road map for governments and investors.

In fact, between 2014 and 2018, the population experiencing some form of food insecurity increased from 23.2 per cent to 26.4 per cent, according to the World Health Organization. That’s a surprising statistic, given the SDGs were launched in 2015, but highlights how the pandemic exposed the fallacy that protectionism can truly isolate citizens from the responsibility of acting and investing with a global mindset.

Clearly, then, our transition to a more sustainable economy is no simple task and, in all its forms, will require new thinking, fresh capital, more risk-taking and increased urgency if it’s to be successful. Perhaps it took the tragedy of a global pandemic to teach us that and bring truth to the phrase “let no crisis go to waste.”

I will be sharing more of my thoughts at today's United for Climate Action event hosted by Impact United, a community of individuals, family offices and foundations committed to investing their capital for social and environmental returns alongside financial returns. Investors can register here.

Martin Grosskopf is vice-president and portfolio manager at AGF Investments Inc.

The views expressed are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. References to specific securities should not be considered as investment advice or recommendations.