The decade ahead: unthinkable (but not impossible) forecasts: ESG & Sustainability

June 22 2020

Caroline HaasManaging Director and Head of Sustainable Finance, Financial Institutions and SSAs

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Caroline Haas Q&A

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If the coronavirus crisis taught us anything, it would be that the future of the world can turn on a dime and anything is possible. Caroline Haas gives us her takeaways from recent months and in her wildest imagination, what might lie ahead for the next decade. 

What’s been key to the industry’s ability to adapt so quickly and effectively to the coronavirus crisis?

Our human-ness. Humans are uniquely able to turn on a dime and creatively overcome adversity — the crisis has demonstrated that. Survival would not have been possible with 100% automation; humans have held their own during this crisis and shown the important role they play. Automation has been a concern over the past decade: will robots overtake humans? Interestingly, this crisis showed that the human brain can quickly assimilate information and restructure to continue with a new operating model in very short timeframes. The resilience, creativity and people’s ability to roll up their sleeves to keep the markets open and ensure that funds continue to flow has been impressive. Funds have gone to supranationals, governments, corporations and financial institutions to support efforts concerning healthcare related responses, as well as socio-economic measures to mitigate job losses and ensure liquidity in the lockdown environment. Frankly, all this has been critical to not just our industry surviving this crisis, but helping the world to find the focus to solve some of the most important problems our society has ever faced.

We are all referring to the ‘new normal’ – but what does that mean and look like?

Having been through a number of financial crises in my career I’ve always been amazed at how quickly people forget. Or more specifically — how quickly people start reinvesting in bubbles that exploded and assets that were once deemed bad! Given the length of this pandemic, we have been forced to really focus on what is important for our families, friends, colleagues and clients. And I really hope that people don’t forget that too easily.

Lockdown has stripped us all back to basics in a way and I think that longer-term thinking will become more important. There is still a long road to recovery after such a fundamental shock to the system — therefore things like unnecessary consumption will be reviewed and considered carefully by individuals, governments and companies. I think companies will reconsider adding new product lines and individuals might be less likely to impulse buy, for example. Similarly, I expect this thinking will apply to investments too, to ones that may not be for our benefit but for future generations, including healthcare investments and infrastructure for example, to mitigate the climate crisis. 

From a governance perspective, ‘stakeholders’ was already a buzz word in 2019 and 2020 – but now I hope it will become fully embedded. The crisis has really landed the concept, especially because of the importance of supply chains. The fact that many of our supply chains were long and far away was an issue. Where were supermarkets getting their groceries from? Hopefully this crisis has sparked us to think not just about the financial gains, but more about how to support our local community and prioritise the societal elements of our lives.

How has the coronavirus crisis changed the environmental, social and governance (ESG) agenda?

The positive effects of the crisis on the environment and society are impossible to ignore. It is of course, a critical theme here to stay. But for some time now, I have also been a strong supporter of social bonds and their importance alongside green bonds. For truly sustainable solutions as we head towards net zero economies, both elements need to be thoughtfully considered and we need to achieve an equilibrium of sorts, rather than have one outweigh the other.

So far, there has been over US$80 billion worth of new issues aligned to the coronavirus crisis — and that really is incredible. It has focussed minds, and people are only now really beginning to understand the ‘S’ in ESG. It has a massive and integral role to play. That said, we have hit the other extreme and now need some more green bonds to balance things out! Although the green bond market has seen slightly less growth in the first quarter of 2020 given the pandemic, we’re already starting to see a renewed interest and now a greater recognition of the interconnected relationship they have with social bonds.

Has the coronavirus crisis been the final push the world needed to recognise and appreciate the importance of ESG?

There will always be ESG investing sceptics just like there are climate change sceptics. Unfortunately, the pandemic has provided the volatility and market shock for analysis to test whether ESG funds really do offer the stability and sustainability they claim. And the initial learnings we’ve been able to measure from ESG asset performance during the crisis very much support the role that ESG will play in the future. The bottom line? ESG assets have held their own.

Between investors experiencing less outflows from their ESG funds to better performance of ESG leaders versus the laggards, financial materiality is being collected by the leading institutional investors to further support the integration of ESG into their strategies. Some have already indicated their interest to expand their offering to include impact investing funds taking ESG to the next level of engagement. This will inevitably give more credence to ESG and overtime reduce the voices of ESG sceptics because it benefits their own performance. Gone are the days that ESG sits in the philanthropic bucket, but the more financial performance we have as evidence that it pays to do ESG — the more people will sit up and listen.

A core part to the strong performance of ESG assets is the long-term nature and interests of their investors; so much of what we do vis-à-vis ESG investing, especially environmental and social, are longer-term projects. There is a reason we refer to net-zero in 2050 — projects like this take time. So one change we might see is a shift away from shorter-term reporting and quarterly analysis. Although it is commonplace, it isn’t very helpful for longer-term ESG investors in my view, nor the respective infrastructure required to achieve the long-term goals.

ESG awareness has come on leaps and bounds over the last decade. And so has responsible investing. What development will the next decade bring?

For many, the idea that ESG becomes essential is totally unthinkable. For me? I know it will. At the moment, the non-financial disclosure of ESG products is more difficult to quantify and therefore treated as an additional component of the analysis. However, I predict that within the next ten years, ESG evaluations will be embedded to the point of measuring a company’s impact – both positive and negative. Some investors are already doing this by ranking companies accordingly and now this will become more common place, bringing about more key performance indicators, clearer reporting and better standards. Hopefully, this will incentivise business decision-making to include impact into the risk-return analysis, eliminating negative impact and creating positive impact for its stakeholders, as well as the wider society and environment.

Those companies that actually do care for the stakeholders we spoke of earlier and the wider society will get a higher rating which will get more investment and get better valuations. This will be driven by the data emerging from companies who were able to respond quickly during the coronavirus crisis to protect their employees while keeping operations open, albeit at possibly lower production rates. This very much underpins management’s understanding of the business, operations and supply chains. And I expect that this type of resilience will be rewarded by investors

What other global event of this magnitude – or bigger – might strike?

Jokes aside — the prospect of serious social unrest, if not social war, is for me the biggest risk over the next decade. I really reflected on this after Christine Lagarde, when asked what her biggest concerns were, answered the two Ws: War and Wave (as in the second wave of coronavirus infection). Without sounding too idealistic, I very much hope that society and its leaders embrace this moment to reflect and incorporate lasting changes to the social and economic balance in countries – but we still have a long way to go. We’ve hopefully learned to some extent to respond to the second wave if it comes. But the social inequality is real and we need to be fully aware of it, since it has only gotten worse during this crisis. For example, foodbanks across the developed world didn’t have enough food. It’s the people who can’t work from home and many of our key workers who, by and large, are on the lower paid scales and needed to leave the safety of their homes. This is something that has to be at the forefront of our minds as we go into the new decade. I am worried about the US, especially.

The idea of two-speed governments is one that would be great to see — and I’d like to see it now! As I mentioned before, much of the work required for sustainable futures are long-term projects. And this is especially true of politics. A single-term government isn’t really enough time to pass, deliver and embed a policy successfully with lasting impact. Normally it takes about one or two years for a policy to develop, be documented and pass through parliament — followed by another couple of years to be implemented and embedded. But after two years, most politicians are thinking of another election. So how can you change the system to ensure that long-term objectives are not getting lost? In my vision of a two-speed government, we elect two sets of officials to run a country: one with the normal four to five-year term for shorter-term decisions and one for 10 years that we're able to contemplate, decide and implement the longer term infrastructure projects — therefore mitigating the short-term cycle of a government’s perspectives.

Some are expecting the crisis to trigger a new industrial revolution. Will it?

Unfortunately, human nature tends to require major events like this for effective change to take hold. Looking beyond the enormity of what has just happened on a global scale and its consequences; this can be looked at as a hugely exciting time. I’m hoping to see a period of acceleration for the new technologies and patents that were struggling to find backers since the balance or linkages between the social matrix and the climate crisis had not yet been fully understood or acknowledged. Given the timing, this is coming to the forefront for innovative products that will create the ‘new normal’ bearing in mind societal and environmental drivers simultaneously, for the required infrastructure and products. In fact, we’re already seeing examples of it: liquefied natural gas — a much more energy efficient alternatives than previously used in China — was financed and utilised for new hospitals rapidly constructed in the city of Wuhan. 

Perhaps affordable housing will also benefit from increasing the square footage of individual units so that working from home becomes an alternative with the option of additional space – or more outside space associated with the development for individual’s wellbeing. Maybe municipalities will create places with more green space, supported by government regulations. I wonder if the rise in remote working will see cities develop split buildings with the lower floors as offices and the above being residential. With more people working from home and more awareness of the climate, we’ll probably all travel a lot less, especially by car and plane. I don’t doubt that trains will become more popular, though hopefully cheaper through state-subsidies once the lines have been re-built. Perhaps virtual holidays with all the sounds and smells of the Serengeti are a touch too unthinkable, but wouldn’t it be great?

How will all this change affect our younger generations?

I love the idea, and actually, it doesn’t feel totally impossible. Education — particularly secondary and tertiary — continues to be a sticking point for many countries. Too many children and young adults are deprived of a good education due to their socio-economic profile. As we (hopefully) shift to a society where equality is better understood and fought for, we may begin to see these principles filter through to education, opening up more opportunities for the underprivileged.

The coronavirus crisis has driven many schools and universities to deliver their lectures and seminars online, some for the first time ever. It’s been a bit of a wake-up call for some of the more traditional universities. If this approach takes hold, the university delivery model will be ripe for a radical change and the scope to finally become more egalitarian. At the most basic level, the digital offering may add more places to courses, or be made available for select students at a lower cost, for example. But this will require a breakdown in the existing ‘elitist’ attitudes and regulatory structures to think out of the box and provide the necessary infrastructure (i.e. broadband and hardware) at reasonable prices.

Taken further, online course material could even see students across the globe pick ‘n’ mix modules and electives from multiple universities to craft unique and specialist degrees. This sort of approach would probably appeal to more post-graduates and mature students. After all, the coronavirus crisis has showed us that the impossible is possible, so why not pick ‘n’ mix degrees?

Decade ahead

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