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Supplements » ESG Report 2020

ESG roundtable: One shot at refinancing a fit-for-purpose economy

Funds Europe – The carbon output could fall by more than 5%, or 2.5 billion tonnes, this year according to the Global Carbon Project with the reasons being heavily linked to the Covid-19 pandemic. How can we continue to reduce carbon emissions in a sustainable way that protects jobs and livelihoods whilst addressing highly pollutive industries, and are you placing greater emphasis on skills being upgraded (i.e. education – Sustainable Development Goal 4) in order to transition to a cleaner future rather than being phased out? 

O’Hara – There has been a reduction in emissions during this period and it is largely down to changes in consumption patterns, travel and a reduction in economic output. We see a similar story to this during recessions and economic downturns and emissions increase once the economic recovery starts. This time things need to be different. There is a supply-side and a demand-side issue to address here, and that’s for governments as well as for investors to address. 

A lot of these issues come down to the fact that we live unsustainable lifestyles and we consume in an unsustainable way. In terms of the just transition and how we actually solve this problem, consumption is a massive part of the discussion and it’s not easy to address. Persuading people to eat less meat, use their cars less and public transport more are fundamental challenges facing any developed government trying to bring about a low-carbon future. Recent changes in behaviour have been forced upon us by the coronavirus because of the lockdown, but to sustain that afterwards is going to be a real challenge. That is hard for investors to try and bring about, but there’s no doubt that there will be impacts for our portfolios, investment decisions and our asset allocation decisions. 

Pedersen – There are some bets you can take on that, for example things like online medical advice businesses could do well. The types of businesses that would do less well would be the cruise industry, long-distance tourism and so on. There are some indications that this is probably going to change consumption patterns and ways for consumers to access various types of services. 

O’Hara – That’s the challenge in that this has to be a long-term solution and we want and expect a bounce in economic activity. That might be gradual, more gradual than perhaps some people envisage, but identifying which sectors we can allow to bounce back and which ones we don’t want to bounce back, and which ones are threatened is the real challenge. 

The hospitality sector has really suffered, and the business model has been changed fundamentally. A lot of these industries and these companies have been hobbling along on very low margins and with models that aren’t resilient to any sort of shock, so that is definitely a challenge in terms of addressing the winners and losers and which ones we want to revive and those we are happy to see slowly contracting. The virtual world has provided some of the answers to that, so much of what we did before and took for granted before this lockdown can be done differently, even work, for example, so it’s a big challenge for real estate and landlords and those sectors coming out of this.

Nummela – What’s the opportunity and how can ESG add performance? The risk aspect is really important. What kind of economy is going to be built – will it be a fit-for-purpose economy? Clearly the previous one was not fit for purpose for long-term health and resilience, so the risk aspect needs to be brought into the picture as well and ESG is then not just an alpha generator.

Pedersen – ESG is more of a risk-management tool than an alpha generator. The alpha generation comes then from your allocation to various sectors or companies that might grow quicker than the rest but overall, it’s risk management. 

Arkko – Rather than excluding companies or certain sectors, we try to engage and impact them. How we see this is a gradual change and of course education and training the workforce is one part of the just transition, but we really haven’t thought of this as a Sustainable Development Goal (SDG) 4 topic. 

It’s really difficult to say how we should approach this, because a lot of these things are still fairly difficult to measure, not just if you think about the workforce, but also other human rights related to this climate transition. The methodology and calculation methods are still not standardised, or they don’t exist, that’s why we are struggling with how to approach this topic, but we definitely see it is very important.