PwC | Österreich
  • Share
  • PwC Österreich
  • Deals
  • Dealmaker
  • Deals
19.04.2020

The COVID-19 Diaries – Week 4 – ESG Investing & Climate change

Climate change should hire Corona’s PR manager

There is zero doubt that the economy is experiencing a flu, but the extent of damages cannot be reliably estimated. However, throughout the past couple of years Coronavirus was not the only externality that the markets experienced.

There is no single externality on the planet larger than carbon emissions.

To put it into perspective

El Niño

El Niño is a period with rising temperature and less rain in the Caribbean. Historically, it lasted for a year on average. In 2019 it closed its 6th consecutive year. Commodities are gone in the region, leaving over 2 million people on the edge.

Rumble in the (Jungle) Desert

Climate change leads to a doubled likelihood of drought in the Horn of Africa region. Severe droughts in 2011, 2017 and 2019 wiped out commodities. Circa 15 million people are short of food and water. The lifeline project is 35% funded.

Ring of Fire

The wildfires in Australia do not need much of an introduction but statistics wise, it burned through close to 20 million hectares. That is Austria and Slovenia combined. Twice.

Externalities and hedging

The financial sector is fairly capable of dealing with high-frequency, low-impact disruptions, but never passed the exam at managing a low-frequency, high-impact dilemma.

Externality by definition is a cost or benefit that is not reflected in market pricing of a given security. Fair to say if it is not priced, it is also ignored in financial decision making. However, banks cannot afford to ignore externalities much longer. It is an opportunity to take financial resilience seriously before climate change blows up the system.

“The digital advances of the past decade have expanded our confidence that everything can be app-ified: efficiently and easily distributed, quickly and at a low cost. The equivalent in finance is the conviction that every risk can be securitized and transferred to whomever is most prepared to bear it.”

But in this context, who is most prepared and willing to bear the risk? Catastrophe bonds are currently the closest alternatives which can be used as hedging instruments for unforeseen events.

Catastrophe bonds are on average BB rated with maturities less than 3 years. If no catastrophe occurred, the issuer would pay a coupon to the investors. If a catastrophe did occur, then the principal would be forgiven, leaving the issuer with additional liquidity.

From a common-sense perspective, catastrophe bonds are zero-sum-games. Whereas to achieve a sustainable and resilient financial sector, win-win scenarios have to be established. Instead of hedging or treating the risk, it could be more beneficial for all parties to eliminate or prevent the root cause of the problem. ESG investing and products may offer a longer-term solution.

ESG on the rise

Definition

“As the world recovers from coronavirus, it will be looking with fresh eyes at its resilience in the face of global threats—and asking anew whether we’re investing to avert future catastrophes.” (Bloomberg)

The term ESG appeared in high finance in the middle of the past decade. And since then it has been used sometimes vaguely. The abbreviation stands for environment, social and governance. In essence, it captures factors such as climate change, water scarcity, energy sufficiency and air pollution from an environmental point of view.  On a social scale, it includes customer satisfaction, gender diversity and human rights. And from a governance perspective, ESG focuses on board composition, political contributions and executive compensation.

ESG investing is a practice that considers not only the traditional value drivers when allocating capital to a product or company but also includes ESG factors to its pricing.

Proposition

“Climate change has become an investment consideration impossible to ignore, as related disasters and economic losses grow1 and regulators increasingly recognize it as a systemic financial risk.” (Bloomberg)

The European Council proposed that each transaction and financial product – debt offering, refinancing, M&A will receive ESG rating in the future. As an example, the better the ESG rating, the cheaper the debt therefore more value is funneled to collective stakeholders. From a bank’s perspective, a better ESG rated loan could receive lower capital requirements thus positively impacting the RWA of the institution.

“Moreover, among institutional and individual investors, demand to integrate climate change as a factor in portfolios is high. More than 40% of institutions are actively considering or seeking to address climate change as a sustainability issue and over 75% of individuals are interested in it as an investment theme.” (Morgan Stanley)

On the one hand it is great that attention is drawn to ESG investing and climate change. On the other hand, it is fairly disappointing that it only happened when there is a clear monetary compensation to succeed in the field. Nevertheless, it provides a new wave of opportunities to be discovered for both sell-side and buy-side participants.

 

Stay connected and informed on the latest deal market developments.
Join the Dealmaker Community!
dealmaker.pwc.at

 

The views, information, or opinions expressed in this blog series are solely those of the individuals involved and do not necessarily represent those of PwC Austria and its employees. PwC Austria does not give any representation or warranty of any kind (whether expressed or implied) as to the accuracy or completeness of the information contained in this blog series. It has been prepared solely for general informational purposes. Nothing in this document should be construed as advice to proceed or not to proceed with transactions or any other type of decisions.

Koppany Kovacs
Koppany Kovacs
FB twitter Linkedin GooglePlus
Foto von Koppany Kovacs
Koppany Kovacs koppany.kovacs@pwc.com

Topics

Archiv

Latest news

  • The COVID-19 Diaries – Week 12 – ‚A random walk down COVID-19‘
  • The COVID-19 Diaries – Week 10 – ‚Deflation– the “ogre” in the world economy‘
  • The COVID-19 Diaries – Week 8 – ‚Dear IMF, thank you for your encouragement‘
  • The COVID-19 Diaries – Week 7 – EBA bought a ticket for the ESG bandwagon
  • The COVID-19 Diaries – Week 4 – ESG Investing & Climate change

Register to the Dealmaker Community

Register
  • Presse
  • Kontakt
© 2018 — 2021 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.
  • Impressum
  • Privacy Policy
  • Datenschutzerklärung
  • Cookies
Wir verwenden auf unserer Website Cookies, um die Nutzung bestimmter Funktionen der Website zu ermöglichen, das PwC Serviceangebot kontinuierlich zu verbessern und Ihnen ein besseres Nutzererlebnis zu bieten.


Bei der Verwendung bestimmter Cookies von US-Anbietern kann es zur Übermittlung Ihrer personenbezogener Daten an diese Anbieter in die USA kommen. Wir möchten Sie darüber informieren, dass laut Urteil des Europäischen Gerichtshofs (C-311/18, Schrems II) in den USA kein angemessenes Datenschutzniveau herrscht und zudem keine geeigneten Garantien zum Schutz Ihrer Daten vorhanden sind. Die Übermittlung Ihrer Daten in die USA und die Verwendung von Cookies, bei denen eine solche Übermittlung stattfindet, erfolgt darum ausschließlich auf Grundlage Ihrer Einwilligung.

Bei Übermittlung Ihrer Daten in die USA, besteht insbesondere das Risiko, dass Ihre Daten dem Zugriff durch US-Behörden zu Kontroll- und Überwachungszwecken unterliegen und dagegen keine wirksamen Rechtsbehelfe zur Verfügung stehen. Ebensowenig kann die Durchsetzung von Betroffenenrechten gewährleistet werden. Insgesamt sind die Zugriffe und Verwendung von Daten durch US Behörden, laut dem Gerichtshof der Europäischen Union, nicht auf das zwingend erforderliche Maß beschränkt und daher unverhältnismäßig.


Eine Einwilligung in die Datenübermittlung in die USA wird erteilt, indem Sie alle Cookies akzeptieren und kann jederzeit über Ihre Browser-Einstellungen mit Wirkung für die Zukunft widerrufen werden.

Nähere Informationen finden Sie in unserer Datenschutzerklärung und Cookie-Information.
Alle Cookies (inklusive US-Datentransfers) akzeptieren Nur notwendige Cookies akzeptieren Cookie Einstellungen
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
immer aktiv
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDauerBeschreibung
cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
CookieLawInfoConsent1 yearRecords the default button state of the corresponding category & the status of CCPA. It works only in coordination with the primary cookie.
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
CookieDauerBeschreibung
_ga2 JahreThe _ga cookie, installed by Google Analytics, calculates visitor, session and campaign data and also keeps track of site usage for the site's analytics report. The cookie stores information anonymously and assigns a randomly generated number to recognize unique visitors.
_ga_0WB8EF20YE2 JahreThis cookie is installed by Google Analytics.
SPEICHERN & AKZEPTIEREN
Unterstützt von CookieYes Logo