PLANET PAPERS: How to build a responsible global recovery

The impact of COVID-19 exhausts superlatives. At the height of the crisis, seemingly every news report started with some combination of “never before”, “not since” or “in living memory”. As self-isolation met social distancing, schools closed and working from home became the new normal for most in a desk job.

Meanwhile, those in more vulnerable jobs faced the twin threat of a global health crisis and an uncertain financial future. Once the scale of the crisis became clear, the response was swift and powerful.

Any talk of fiscal discipline was banished at once, as the UK government promised, in bizarre capital letters, to do “WHATEVER IT TAKES”. French President Emmanuel Macron promised that no French firm would collapse, and governments and central banks across the developed world launched support packages worth trillions of dollars.

Meanwhile, the problems that grabbed the world’s attention in 2019 — climate change in particular — are not going away. The nagging need for systemic reform of the global economy stays constant. Indeed, the pandemic only highlights the weaknesses of the current system.

But it could also be a catalyst for accelerating the move towards a more responsible capitalism, and an opportunity to direct stimulus towards building a more sustainable economy. (You can read why Rathbones believes every long-term investor should care in our research report Responsible capitalism.) Responsible recession Despite stumbling out of the blocks owing to this unforeseen event, as a society we must remember the race to achieve the SDGs is a marathon not a sprint.

If we are to build a more resilient economy with our stimulus, the steps we take to get the world moving in response to the short-term shock of COVID-19 must be done in alignment with the long-term necessity of meeting the SDGs.1 Global crises such as the COVID-19 pandemic have a peculiar feature — they are nobody’s fault.

The 2008 financial crisis created clear villains in the form of those creating speculative financial instruments; ‘greedy bankers’ were everyone’s enemy.

Bailouts of banks were necessary, but met with a public outcry. With a global pandemic, while you can argue about which government responded ‘best’, we can agree that we all face a common threat. Political divisions about who benefits most from the coming financial stimulus, and whether such moves are ‘fair’, are diminished.

This is an opportunity of historic proportions — at the moment when society needs it most. Though the 2008 crisis was of a very different nature, it does have lessons for how we respond to our current crisis.

Back in 2008, I was a 20-something postgrad student in voluntary isolation, holed up with my parents while I finished my studies. The key difference between my predicament back then and the one faced by today’s students is that I was on leave from a fully fledged career, with a job to return to… or so I thought.

The day before my final exam, Lehman Brothers collapsed. I’d focused on ethical and sustainable investing; would I have a career to go back to? Back then, the knives were out for nascent Environmental Social and Governance funds, and the well-worn argument for investing in traditional, defensive stocks still echoes today: ‘invest in stocks that have steady demand’.

That means alcohol, tobacco and arms companies, whose demand doesn’t tend to be affected by the vagaries of the market. For the income seeking investor, it’s a case of ‘any port in a storm’ — or any dividend in a pandemic.

Then as now, ‘values’ are seemingly in conflict with seeking value; can we afford to push responsible capitalism in the current environment? It won’t come as a surprise to learn that we think we can and should.

Rathbones has been a signatory to the UNsponsored Principles for Responsible Investment for over a decade.2 Today we see the need to practise responsible capitalism as greater than ever. Sustainable stimulus How much of a shock was COVID-19? It’s clear to us that a more responsible form of capitalism could have helped prevent the worst impacts of the pandemic. The warning signs about the vulnerability of our globalised world were there for everyone to see.

Bill Gates, one of history’s greatest capitalists, was sounding the alarm back in 2015: “If anything kills over 10 million people in the next few decades, it's most likely to be a highly infectious virus rather than a war. Not missiles, but microbes… we're not ready for the next epidemic.” He went further, noting that we had all we needed to be better prepared — the technology, the building blocks of a response system — but not the will to spend a little to save millions of lives.

A similar thing could be said of investment in antibiotics, the bedrock of the global healthcare system, where investment has slowed to a historically low rate and been largely abandoned by big pharmaceutical companies.

But the response to COVID-19 has shown us that capitalism has enormous power for good when it comes to finding solutions to urgent medical needs, and that gives us hope for the future of antibiotics too, which we explore in the next section ‘A healthy recovery’ A ‘sustainable stimulus’ isn’t a new concept.

There was talk and then delivery of a green stimulus in the wake of the 2008 financial crisis as key players like the US and China focused recovery efforts on cleantech and renewables. Writing at the time, HSBC estimated that governments around the world “allocated more than $430 billion in fiscal stimulus to key climate change investment themes.”

The following decade saw two major and significant developments: the drastic fall in the cost of solar power, and the collapse in investor confidence in coal.

Correlation is not causation, but it’s fair to assert that such targeted stimulus had the double benefit of getting the economy moving and delivering on global goals. Now it’s a question of converting plans into action.

Leading economists, including Nicholas Stern and Joseph Stiglitz, have made the case for fiscal recovery packages that meet both economic and climate goals, such as investment in clean physical infrastructure, retrofitting buildings for greater energy efficiency and natural resources.

To this end, Rathbones has recently signed an investor letter, coordinated by the UK Business Group Alliance for Net Zero and the Institutional Investors Group on Climate Change, calling on the UK government to ensure that the economic recovery plans support a sustainable, inclusive and resilient UK economy, aligned with the UK’s target of net zero emissions by 2050.3 Our hope is that rather than be a hindrance to investing in a sustainable future, the pandemic will prove to be a catalyst.

As Vladimir Lenin wrote, “There are decades where nothing happens; and there are weeks where decades happen.” A rapid acceleration in some positive changes, such as the move to more flexible working, is one silver lining in the dark economic cloud that COVID-19 has cast over the world.

"Global governments have a window of opportunity to shape a decade of recovery that will address the yawning gap in wealth inequality, improve health and education and tackle climate change. Our actions now will affect the decade before us — could a truly sustainable economy rise from the ashes of COVID-19?

www.rathbones.com

• Click here to read part two: A Healthy Recovery - How our actions now will affect the decade before us