COVID and climate change

Change in ESG investing

Döttling and Kim use a set of 2,720 US retail equity funds and 2,421 US equity institutional funds and categorize them according to their Morningstar sustainability ratings. They then study how these funds fared over the period from the week ending January 4, 2020 to the week ending April 25, 2020. They find that:

• High ESG retail funds with five-globe Morningstar sustainability ratings experienced a sharper as well as lasting decline in flows compared to low ESG funds during the crisis;
• On the contrary, flows into high ESG institutional funds experienced only a temporary drop during the same period.

The authors conclude that this difference between retail and institutional funds flows underscores a shift in retail investors’ preferences away from sustainable investments:

Given that retail investors comprise a significant fraction of the mutual fund investor base and the client base for institutional investors as well, our study underscores the implications of potential externalities from retail fund flows on the long-run prospects of ESG investing overall.

Sustainability Preferences Under Stress: Evidence from Mutual Fund Flows During COVID-19
Authors: Robin Döttling, Sehoon Kim
From: Erasmus University Rotterdam, University of Florida

Will covid induced changes in consumer preferences be compatible with a low carbon economy?

A key implication of Covid-19 for climate change is how economies will be organized as a result of the pandemic. If Covid-19 forces us towards a “low-contact economy” then consumer preferences will change: instead of preferring activities with no emissions, people will prefer activities with no contagions. Fuentes and al. use the example of packaging: Prior to Covid-19 crisis, the emphasis was on reducing waste by using recyclable materials. During Covid-19 the concern is for packaging surfaces to be easily cleaned. Will this involve recyclable materials? Only if the transition to a low carbon economy is compatible with contagion mitigation, we will have a low contact-and-low carbon economy.

COVID-19 and Climate Change: A Tale of Two Global Problems
Authors: Rolando Fuentes, Marzio Galeotti, Alessandro Lanza, Baltasar Manzano
From: EGADE Business School, University of Milan, Luiss University Rome, University of Vigo

Financial risk, the pandemic and climate change

Understanding the compound risk in the pandemic, climate, finance nexus requires a new approach to both policy and research. There are several possible reasons for the limited understanding of the nexus. The most important is that a fundamental barrier to assess compound risk stands in the inadequacy of the current economic risk assessment framework to deal with the complexity and uncertainty of risk in decision making and society. Most economic and financial risk assessment approaches are sector-specific or hazard-specific. In contrast, compound risk emerges from the interaction among different events that are not studied within the same field of research (such as in the case of climate change and finance).
Thus, a truly interdisciplinary risk assessment framework aimed to understand and anticipate compound risks is therefore urgently needed in order to assess countries’ exposure to compound risk and in order to build resilience against such adverse scenarios.

The importance of compound risk in the nexus of COVID-19, climate change and finance
Authors: Irene Monasterolo, Monica Billio, Stefano Battiston
From: Vienna University of Economics and Business, Ca’ Foscari University of Venice, University of Zurich