Critical Resource recently met with its Senior Advisory Panel, made up of eminent industry figures and opinion formers, to discuss risks and trends to watch as the COVID-19 crisis unfolds in 2020 and beyond. Key themes include how the lack of international cooperation is failing us so far, the possibility for resource nationalism to rear its head and why Africa could suffer the most.
This is an anonymised summary of key points from the discussion. Please note this is an abridged version of a longer note sent to Critical Resource’s clients.
The COVID-19 crisis is the biggest test of international cooperation the world has faced – and so far we appear to be failing.
- It remains to be seen whether the crisis undermines or enhances international cooperation more generally. We simply do not have a robust set of actors at the G20 in the way that we did in the financial crisis of 2008. However, it is also possible that the crisis might galvanise a coordinated international response – many countries will be feeling a mutual sense of helplessness. The impact of any fiscal response is going to be crucial, and a G20 attempt to ‘save the world’ should not be ruled out.
- The China-US relationship is a crucial element of the current crisis. We may see a war of words on the where the virus came from and which country is exacerbating its spread., as well as restrictions on travel and trade. All of this is likely to further ratchet up tensions. The outcome of the US presidential election will determine the trajectory of the relationship with China – a victory for someone other than Trump may lead to a softening of rhetoric and attitudes.
Cash-starved governments and resource nationalism
Governments are likely to come hunting for cash from the extractives sector – resource nationalism may rear its head when the time comes to pay back their debts.
- Governments are feeling pressured to respond to this crisis with aggressive fiscal packages to try and counter the shock. The politics have shifted from attempts to play down the crisis to a situation where no government will be criticised for doing too much. World leaders are likely, if anything, to be punished for inadequate responses.
- Governments may be able to borrow at 0% interest rates to fund this, but eventually it will have to be repaid – and we might see the tentacles of resource nationalism appear on the horizon as a result. Natural resource assets are easy targets for cash-starved governments, and it is possible we may see windfall taxes around the world.
- A key factor here will be pricing. With disruptions to the supply chain, we might see price increases in certain commodities, leading to a perception that certain industries, particularly in the mining sector, are doing comparatively well. Expect these industries to be targeted.
Accelerating green ‘New Deals’ and the energy transition
The door is open to major interventions in the economy by governments, who will feel pressured to promote a green agenda in their fiscal packages. A crisis in the private sector could also see key players seek to catalyse a green transition.
- There is a concern among some groups that we will see government bailouts focusing on protecting the ‘old economy’ and failing to address what needs to change in terms of combatting climate change.
- Governments rushing to intervene in their economies will face pressure from civil society and other actors to take this opportunity to embed green elements into their fiscal packages. However, implementing a coherent green transition on a broad scale would require an ambitious level of international cooperation we simply do not have at the moment, and building consensus will be difficult. We may therefore see a more piecemeal effort at introducing green ‘New Deals’ across the globe.
- Some companies will also see this as an opportunity to accelerate their energy transition programmes. There are lessons to be learned from the diesel scandal within the automotive industry, which prompted an accelerated move into electronic vehicles. With fundamental restructuring of businesses now on the cards, many of the emitters could see an opportunity to transition towards cleaner products.
The effect on Africa
A fall in commodity prices and a slowdown in tourism will have a devastating impact on African economies, where the ‘S’ – i.e. tax revenues and employment income – is the most important element of ESG.
- It may be the economic repercussions, rather than the spread of the virus itself, that ultimately have the largest impact on Africa. The current crisis is already a major economic shock to the continent, coming primarily from the oil exporters, but it will be exacerbated further through a drop in other commodity prices.
- A potential danger for Africa is that further investment in the extractive industries will exclusively focus on the ‘E’ (how much carbon a company emits) or the ‘G’ (how corrupt a jurisdiction is). The continent will be in real trouble if Africa is blacklisted solely for these reasons. In Africa it is the ‘S’ that really matters, and in particular the generation of tax revenues and employment income.
Prospects for ESG
The ESG megatrend may take a hit while extractive companies, as well as the financial sector, enter survival mode. However, ESG is here to stay in the long run.
- The ESG trend may face a temporary setback as a result of COVID-19, but we are in a situation where the environmental crisis has reached a tipping point. The virus might slow things down but it is unlikely to send the trend into reverse.
- It is important that we not lose sight of livelihoods as we think about decarbonisation. There is a disconnect between investors and businesses in this sense. Some assets that are large emitters of greenhouse gases are also large employers and sometimes the sole employers in their local areas. Simply shutting them down would cut thousands of jobs, as well as having a knock-on effect on the supply chain and the facilities that companies provide in local areas. We need to think hard about what counts as a just transition in complex multi-stakeholder situations.