Head of sustainable investing at Newton Investment Management and editorial panellist for ESG Clarity Andrew Parry discusses how lessons learned from the pandemic will change how companies plan forever
Despite some early hope that victory in the battle against the virus may be within sight, the consequences of the peace once the disease is vanquished are still far from clear.
What we are witnessing is no ordinary economic recession. At its heart, it is a very real human experience that will leave deep scars on society that will linger for a generation or more. For many, it may signal that real change is afoot and that a new environmental and social order is about to be ushered in. If we can do this for a virus, surely we can use the experience to tackle the bigger challenges that the planet and humanity faces?
While history does not repeat itself, it often rhymes, and we need to be vigilant that one potential outcome of the current crisis is that existing and entrenched interests are reinforced, not reversed. This pessimistic view is not made lightly, nor is it a certainty, as while the future is an unknown place, it is still within our hands to shape. The use of quantitative easing to rescue the economy in the 2008-09 global financial crisis had the long term impact of artificially inflating asset prices, creating an environment where large companies are given unearned competitive advantage and exacerbating inequality. We need to ensure these mistakes are not made again.
To create the world that we deserve, naive idealism will be of little defence: we need to be alive to perverse incentives in the system that can encourage bad outcomes and challenge these at every level. We are currently seeing the best of people and companies in the battle against the disease, but with trillions of US dollars flooding the global system, the potential for misappropriation of the peace by vested self-interests is high.
Companies should now be true to their word and be held accountable for their actions by shareholders and broader society. All companies are by definition social enterprises and have an implicit social contract with their workers, the communities they serve and the environment in which they operate.
Never before has good governance been so essential, not only in the world of business, but also in the administration of public money to tackle the social crisis that confronts us. It demands that conditionalities be placed on government rescue packages, and vigilance will be needed for the oversight of the allocation stimulus funds. Equally, strong anti-trust enforcement is essential to avoid the rise of de facto monopolies.
Now is the time to rebalance expectations and replace the public policy vacuum with strategies that recognise the benefits of sustainable, regenerative economic development. The city of Amsterdam has shown the way by officially embracing a sustainable development model as a way of emerging from the covid-19 crisis with purpose to balance the needs of people without harming the environment.
In a recent report, the World Health Organisation disclosed that globally, seven million people a year die prematurely from air pollution, mostly in the developing world. Global collaboration should be enhanced, not rolled back even further if the next crisis is not to overwhelm us. To achieve this goal, we need to need to find a way to place incentives in the system that foster cooperation to find solutions and eliminate the incentives that encourage the free-riding that has characterised the climate debate over the last few decades. A globally-agreed carbon price, backed by a tariff based penalty system for nonparticipants, would be a way of incentivising participation and improving the effectiveness of the ambition to reduce global carbon emissions.
In the US, the Securities Exchange Commission (SEC) has now officially asked companies to release “robust, forward-looking disclosures” about the impact of the covid-19 crisis on their businesses. This is a landmark moment, which may well mark a watershed in the disclosure of broader sustainability information, and the better dissemination of material information on the medium to long-term risks to which companies are exposed.
On climate change, in particular, the SEC’s announcement should allow US companies to provide scenario-planning information recommended by the Task Force on Climate-related Financial Disclosures, (TCFD) which many felt were prohibited prior to now.
Climate change, environmental degradation, and inequality of opportunity, alongside health issues, are all issues that demand our urgent attention, and we demand the leadership to tackle these threats.