In addition to being a global public health emergency, the COVID-19 pandemic presents a major economic challenge for countries across the world. In response to this latter difficulty policymakers are responding with measures designed to reconnect a global economy that has been hit hard by lockdowns, travel restrictions, and uncertainty about the future.

    The current policy response was the subject of a panel discussion that was part of HSBC’s recent Credit Conference, where a panel of expert speakers explored not only the scale of action taken by government and lenders across the world, but also the relevance that the handling of the pandemic will have on the longer term challenge of climate change.

    Phase 1 – lockdown and loan forbearance

    A wide range of policies have been introduced in response to the pandemic – including credit guarantees, loan forbearance, as well as measures addressing employment insurance and tax relief. These initial actions form the first phase of the response, said Edward Wells, Head of Group Policy, Sustainable Finance and Investment at HSBC Holdings, and the length of this first phase will depend on the ability of governments to borrow and how they use the money.

    Government borrowing could go on for quite some time, as low interest rates makes the cost of money very low, he said. There is also a shift in emphasis towards the GDP part of the debt to GDP ratio, as countries are more interested in the size and the growth rate for their economy. And this relates to investment, because allocating funds to ensure people retain productive activity during the crisis has the potential for repayment. Paying people to stay at home and not work could be harder to recoup.

    “Governments perhaps feel more free to borrow because everyone else is doing it. There is now no great stigma to having a high debt to GDP ratio,” said Mr. Wells. “There is perhaps an irony that this capacity has been used when there is an immediate danger. Perhaps we have seen less willingness to act when we have an obvious but long-term issue such as climate change.”

    In Asia, the Asian Development Bank has been at the forefront the region’s financial response. The policy bank is deploying a USD20 billion assistance package for medical treatment and economic stimulus for countries in Asia and the Pacific – this means personal protective equipment and testing kits, as well as trade and supply chain finance1.

    A representative of the ADB speaking on the panel said that the region was well prepared for the pandemic as it had not only weathered the Global Financial Crisis in 2008, but also the Asian Financial Crisis in 1997.

    Keeping climate change on the agenda

    Despite the immediate concerns related to tackling COVID-19, climate change has not been forgotten, said Mr. Wells, as many parts of the policy response will help address sustainability issues. There will likely be a focus on making economies more resilient to shocks by strengthening supply chains.

    That said, he said that growth in the social part of ESG will be accelerated by the current crisis. He expects large sums of money to be invested in dealing with the social implications of COVID-19, with the capital to be raised via social bonds.

    “There will be a rethinking of sustainability,” he said. “But I don’t think we will see a loss of focus on the overall transition towards a low-carbon economy.” He cites the European Union’s new sustainable finance strategy, published in April at the time much of the continent was going into lockdown, which asks how we can have a financial sector that is geared to towards funding the necessary transition towards reduced dependency on carbon.

    He also predicts greater stress testing on the macroprudential tools that could help address crises going forward – for both climate related risks and economic resilience that is relevant to the immediate environment.

    “There will be different types of stress test, and each will have a different level of priority, but I don’t see any sign from policy makers that they will relegate sustainability to a second-order priority,” he said. “There is an argument that the current crisis could support those who would like to see transformative sustainability agendas going forward.”

    Phase 2 – thinking beyond COVID-19

    The second phase of the policy response is already taking place in many countries in Asia and Europe, with lockdowns and other restrictions gradually being eased. Different countries are at different stages, and restrictions could be reintroduced if there is an increase in cases of COVID-19.

    While the first phase was characterised by policy responses that were coordinated on a national level, the second phase could be guided by cooperation between countries, said Mr. Wells. He suggests Europe as an example of a shift from individual to collective action, noting that countries working together to fight the virus could be integrated into a longer term green new deal that addresses climate change.

    “COVID-19 has made policy makers change their behaviour in response to the fragility of human society to pandemics. And if they recognise that climate change is an even bigger threat, we might ultimately expect to see stronger policy, particularly from the EU, being implemented.” said Jonathan Drew, Managing Director, Sustainable Finance, Real Assets and Structured Finance Group at HSBC.


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