ESG Focus: Covid, The Aftermath – Part 2

ESG Focus | Oct 23 2020

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

In Part 1 of this series, FNArena examined the massive post-covid stimulus – the division between clean aid and dirty aid – and the broad directions of funds. In this article we examine the rise of the S in ESG, stakeholder capitalism and the acceleration of Modern Monetary Theory onto the global economic stage and its links to ESG.

ESG Focus: Covid, the aftermath - Part 2

-MMT to fund social and environmental investment - behold the rise of the State and stakeholder capitalism
-How to balance the issuance of covid stimulus against inflation, moral hazard and corruption
-Big institutional investors expect covid will accelerate ESG investing

By Sarah Mills

The new normal

Covid-19 is forcing a recalibration of the world’s investment markets. 

The production of a safe vaccine is the only scenario under which the world is likely to return to any kind of normal, but even then the shock to the economy and the chain of events set in train will, combined with broader global policies, set the world on a new trajectory.

Covid-19 will strengthen forces already in play, accelerating changes in trade, technology, finance and economic policy.

Much of this article focuses on the rise of the “S” in ESG, the role of post-covid Modern Monetary Theory (MMT), and how ESG fits into this big picture. It’s a long read but it’s a broad subject. In our next article, Part 3, we will focus on the broader investment impact of these trends on the E, the S (Social) and the G, as well as the likely winners and losers.

Recession and lay-offs sharpen focus on inequality 

One of the most interesting effects of covid-19 has been to propel issues of inequality and wealth distribution to the top of the political agenda as the recession and high unemployment pressure governments around the world to attend to the “S” in ESG.

Covid is expected to increase social inequality (a key ESG theme) with developing economies proving particularly vulnerable given pandemic concerns are likely to accelerate another ESG-related trend of corporate on-shoring and continue to hamper international tourism. 

These economies were also more vulnerable under an ESG roll-out given the push to remove slavery from supply chains.

There are multiple reasons for the sudden focus on social issues.

 Even prior to covid-19, many speculated that a massive recession was imminent. Marx’s capitalism-threatening surpluses bloomed as China industrialised.

Then there is the impending fourth industrial revolution, which is expected to further increase surpluses (of all kinds) while destroying old industries; not to mention the potential for new technologies to replace jobs (possibly before new jobs are created).

Then there is the potential for big data, extended networks and economies of scale to concentrate more power in the hands of fewer organisations (which reduces competition and employment - and hence consumption, which is necessary to mop up the surpluses).

On top of this, serious environmental concerns and the shift to a circular economy represent a further threat to business-as-usual consumer spending and the value of capital in some industries.

But it is global demographics that are proving the biggest bugbear. Ageing populations typically exhibit reduced consumption.

The combination of all of the above is resulting in a state of affairs known as secular stagnation, a situation of rising inequality and falling global growth – a recipe that could upend the status quo.

Grappling with this problem is a key preoccupation for policymakers. One of the solutions has been to propel social concerns to the top of the policy agenda.

The State is expected to take a more central role (as we have seen post-covid); universal basic income has been mooted; and more immediately evident is a dramatic transformation of monetary policy to fund new ESG-related infrastructure such as a circular economy, renewables and recycling.

New age of stakeholder capitalism

Given the ideology of the day favours a private over a public approach to solving social problems, much of the post-covid stimulus is likely to be channelled to corporations that address key gaps in social services by way of grants and loans, rather than to governments as service providers.

This is likely to result in a sharp increase in “social” corporations, or social enterprise, which we discuss in Part III of this series.

Of particular interest is that recipient corporations of government and ESG fund investment (both green and social) will be answerable to more than just shareholders, as will other non-recipients as legislation and regulation tightens in response to social concerns.

The Economist’s Schumpeter and CBNC suggest the post-covid focus on social inequality may have serious implications for investors.

In particular, they point to the sudden rise of the “growing stakeholder” approach.

This trend has been dubbed stakeholder capitalism and The Economist’s Schumpeter is scathing of the concept, arguing that it is not efficient to serve so many masters. 

CNBC also notes the trend’s growing influence post-covid.

“All this goes under increased number of stakeholders,” says CNBC. 

“As a function of government intervention, or just moral persuasion, shareholder value in the form of share buybacks, and dividend payments may be less prioritised …

“Some companies have already cut dividends as some of the hardest-hit struggle to stay afloat, and buybacks are also expected to slow this year. Longer term, the ‘shareholder first’ attitude may prove a thing of the past."

“Or, as JPMorgan sums up: ‘Covid-19 is accelerating the trend of stakeholder capitalism and challenger shareholder primacy’.”

Sceptics doubt that it will eventuate. Then again, they also doubted the oil price would plunge to US$20 a barrel. It is a new world in which nothing is certain. 

But for the cautious, the early ESG catchcry of “who cares wins” is holding sway.

Grand ambitions require grand funding – enter Modern Monetary Theory

From whence will this massive social funding come? From where it has always come – the printing presses.

Covid-19 has accelerated the adoption of Modern Monetary Theory, with printing presses whirring around the world to crank out enough money to fund the new social and environmental enterprises.

“A profound shift is now taking place in economics as a result, of the sort that happens only once in a generation,” reports The Economist in one of many articles discussing the subject.

“Much as in the 1970s when clubby Keynesianism gave way to Milton Friedman’s austere monetarism, and in the 1990s when the central banks were given their independence, so the pandemic marks the start of a new era. 

“Its overriding preoccupation will be exploiting the opportunities and containing the enormous risks that stem from a supersized level of state intervention in the economy and financial markets.”

The role of the State

A key policy difference between pre and post-Covid MMT will be the elevation of the State given the increasing impotence of interest rates to re-fire the economy and the moral hazards associated with free money.

Because rate rises often cause indiscriminate unemployment, supporters advocate placing more power in the hands of regulators to break up monopolies to stimulate productivity and loosen supply constraints, or to assiduously use taxes to control demand and debt obligations. 

Increasing fossil fuel taxes has been mooted as just one option (noting that the global fossil fuel industry attracts global subsidies of US$400bn a year). Investors will need to keep a close eye peeled to the tax environment.

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