#SRI — 29.12.2021

From Covid-19 to COP26 – and Everything in Between

Arnaud Tellier, CEO APAC, BNP Paribas Wealth Management

Long-term themes returned to the top of the agenda in 2021 as the rollout of Covid-19 vaccines allowed investors to look beyond the pandemic. As the year draws to a close, low yields and sustainability are driving decisions, but near-term challenges have not gone away.


As we approach the end of 2021, it is perhaps time to reflect on just how much has changed over the past 12 months. When we began this year, the first Covid-19 vaccines had only just been approved, and there was still considerable uncertainty over the pace of their roll-out and the efficacy of the new shots. Thankfully, the science proved its value, allowing many countries to reopen and economies to rebound.

This vaccine reflation trade was in line with our first investment theme for 2021. While the virus remained an ever-present threat throughout the year, the strength of the economic recovery allowed investors to turn their attention to longer-term trends – especially around sustainability. Investors needed to be on guard for policy surprises against a backdrop of lower-for-longer rates and ongoing economic stimulus programmes, but recovery and sustainability proved to be the two consistent underlying themes.

Vaccine recovery

Our vaccine-driven optimism was quickly backed up by the macro picture. China – first in and first out of Covid lockdowns – grew 7.9% year-on-year in the second quarter and 4.9% in the third.[1]  US GDP increased at an annual rate of 6.7% in the second quarter, moderating to 2.0% in the third [2]; in the EU, second-quarter growth was close to 14% – the highest ever – and in Q3 surpassed pre-pandemic output levels.[3]

In this environment, investors focused on equities as markets responded strongly to rebounding growth, high liquidity and ongoing low rates. In the first half of the year, these conditions drove record-breaking fund inflows: $580 billion in the first half, according to Emerging Portfolio Fund Research (EPFR).[4]

ESG investments set the pace as markets reflected the global awakening to the urgency of responding to global warming. The MSCI World ESG Leaders index continued to climb through the third quarter, pushing up nearly 44% on a 12-month basis – compared to 41% for the MSCI World index [5]. Similarly, the S&P 500 ESG Index rose 26.46% this year as of the end of October [6],  compared to 16.95% for the S&P Global BMI in the same period [7].

According to Morningstar, global sustainable fund assets almost doubled in Q2 and Q3 to reach USD 3.9 trillion at the end of September. Global sustainable funds continue to outpace the broader market: although global sustainable inflows slowed by 11% in Q3, this compares to a 20% fall for the overall global fund universe [8].

Demand for commodities associated with decarbonisation continued to soar: by mid-November, the price of lithium – essential for battery manufacturing – was up 324% from January 1[9], while the price of nickel reached a decade-high USD 21,000 per tonne in October [10]. We see this ‘green supercycle’ as a structural trend in the long term – and it will buoy the shares of companies that are able to engage with the growing number of investors looking for sustainable assets.

Capital markets issuers have continued to tap into this trend: total sustainable bond issuance reached USD779.2 billion in the first nine months of 2021, with USD130.6 billion issued in September alone – the biggest month on record [11].

The green supercycle

The UN Climate Change Conference (COP26) in November 2021 added to this focus on sustainability.

Negotiators at COP26 secured global agreements to reduce coal usage, limit deforestation and cut methane emissions, among other commitments. However, the global talks also made it clear that the decarbonisation process will be a long process, and one that we expect will continue to shape markets for many years to come.

“We have kept 1.5 degrees within reach, but its pulse is weak," said COP26 President Alok Sharma. "It will only survive if we keep our promises."

Indeed, the role of finance in enabling the transition to a sustainable economy was a pervasive topic at the conference, with developed economies facing pressure to recommit to provide USD 100 billion a year for their developing counterparts to fund resilience and adaptation measures.

The financial sector has a critical part to play in mobilising the funds needed for decarbonisation. That is why BNP Paribas is proud to be a founding member of the Glasgow Financial Alliance for Net Zero (GFANZ), which calls on financial institutions to set a clear plan to reach net zero across their lending and investment portfolios by 2050 [12]. The alliance has now gathered commitments from 450 firms managing total assets of more than USD 130 trillion – enough to fund the investments required for global decarbonisation, if all institutions can keep their promises [13].  

Read more: Our 2022 Investment Themes

Near-term challenges

While sustainability is now enshrined as an unstoppable, long-term trend, investors have plenty of other uncertainties to deal with as 2021 draws to a close.

At the time of writing, the Omicron strain of Covid-19 has initiated a fresh wave of concern about the virus, driving sell-offs across global markets.

In China, a long-feared correction in the overleveraged property development sector, combined with ongoing supply-chain disruptions and fuel shortages, cut optimism – and growth.

The inflation debate has also returned to the bond markets after data showed rapid price rises across the world, with consumer prices in September up 3.6% year-on-year in the European Union and 6.2% in the US [14]. Should prices continue to race higher, central banks could be forced to raise rates at the same time as economic stimulus measures are withdrawn, threatening the growth outlook.

We expect much of the price pressures will be transitory, but inflation indicators will need to be closely watched. As GDP growth moderates, BNP Paribas foresees ongoing supply chain bottlenecks and inflated energy prices driving more hawkish stances at central banks –causing consumer sentiment to peak [15].

Monetary tightening could derail risk assets, especially if the pace is quicker than investors expect. Even in that scenario, however, we expect sustainability-aligned investments to outperform as investors seek opportunities in the green supercycle.

In decades to come, we will come to regard 2021 as a watershed year when the climate crisis finally topped the world’s priorities. If we can manage the risks we face in the near term, this long-term trend should continue to drive positive returns for investors.

[1] https://www.bea.gov/data/gdp/gross-domestic-product

[2] https://www.bea.gov/news/2021/gross-domestic-product-3rd-quarter-2021-advance-estimate

[3] https://ec.europa.eu/commission/presscorner/detail/en/ip_21_5883

[4] https://www.ft.com/content/85b06040-1993-4752-bf4f-7964fed3fe26

[5] https://www.msci.com/documents/10199/db88cb95-3bf3-424c-b776-bfdcca67d460

[6] https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview

[7] https://www.spglobal.com/spdji/en/indices/equity/sp-global-bmi/#overview

[8] https://www.morningstar.co.uk/uk/news/216474/sustainable-assets-are-teetering-on-the-%244-trillion-mark.aspx

[9] https://tradingeconomics.com/commodity/lithium

[10] https://tradingeconomics.com/commodity/nickel

[11] https://www.climatebonds.net/resources/reports/sustainable-debt-summary-q3-2021

[12] https://group.bnpparibas/en/press-release/bnp-paribas-joins-net-zero-banking-alliance-launched-unep

[13] https://www.gfanzero.com/press/amount-of-finance-committed-to-achieving-1-5c-now-at-scale-needed-to-deliver-the-transition/

[14] https://www.weforum.org/agenda/2021/10/inflation-plague-developed-nations-harmonised-consumer-price-index/

[15] https://economic-research.bnpparibas.com/Views/DisplayPublication.aspx?type=document&IdPdf=44562