Ethical Finance

Virtual Ethical Finance Round Table: the Role of Ethical Finance in Rebuilding the Economy after Covid-19

In response to the coronavirus pandemic, on 21^st May 2020 the GEFI team hosted its first virtual Ethical Finance Round Table to explore the potential role of ethical finance in rebuilding the economy post Covid-19.

The coronavirus pandemic has impacted financial markets with unprecedented speed and ferocity. It has led to a re-evaluation of many assumptions about the global economy, with health security now joining the climate emergency as the most pressing challenges of our generation. This session provided an opportunity to hear from leading global experts on how the macro-economic impact of Covid-19 might catalyse financial institutions and economic systems to better serve people and the planet.

The session opened with an update from Rupert Watson, Head of Asset Allocation at Mercer. With their AUM totalling $304.5 billion and advising on a further $15 trillion in assets Rupert was able to provide a unique insight into Mercer’s economic and market outlook. Mercer has identified three interdependent high level economic impacts of the coronavirus crisis:

1. Direct impact – what we see with our own eyes resulting from the enforced temporary shut down of the economy
2. Indirect impact – businesses in a vulnerable financial position are placed under additional stress, often requiring increased borrowing as consumers become more cautious due to the economic shock and threat of job losses
3. Policy impact – unprecedented financial support from Government and central banks has attempted to freeze the economic picture and restart it three (or more) months later.

Despite the high levels of discretionary fiscal easing, unemployment in the US will jump to its highest level since the depression. Although global GDP and corporate profits will undoubtedly plunge in Q2 Rupert nevertheless expects the recovery to begin in Q3 as activities start returning to normal. The US is likely to experience a slower recovery than the UK due in part to the job retention scheme helping to sustain UK employment and consumer spending power.

In terms of the recovery, Rupert suggested that not only what consumers are allowed to do as the lockdown eases but what they are willing to do would be of significance. The speed of the rebound will therefore depend on reaching the point where the population’s fear of Covid-19 infection is substantially diminished. A critical success factor is the availability of an effective vaccine and this is not something Rupert expects this calendar year.

Michael Moe, CEO of Silicon Valley-based GSV Asset Management and one of the world's pre-eminent authorities on growth investing, followed Rupert with his views on the response from asset managers. Adam Smith’s "The Wealth of Nations" marked the birth of modern free market capitalism which, according to Michael, has created unprecedented prosperity and inequality.

Although as many people will have died over the period of the lockdown through lack of access to clean water as have died from Covid-19, the fact that virtually the entire planet been impacted by the pandemic has led to an almost immediate global response. Covid-19 is a ‘game changer’, a mind-altering event similar to Hiroshima and 9/11 that will result in permanent global change. Michael distinguishes this paradigm change as BC (Before Coronavirus) and AD (After the Disease).

Michael highlighted that BC the venture capitalist mindset of optimising shareholder value was already under attack and in his view as we enter AD there will be a surge in recognition that the best businesses will generate a profit (as required by shareholders and for sustainability) with purpose (serving the needs of employees, communities, customers and the environment). This is not a purely philosophical idea: it is here and now. The best companies will combine the drive of for profit with the heart of a not-for-profit.

For Michael, expediting and accelerating important trends (such as the overnight shift from physical to digital and to profit with purpose) is an exciting outcome of the coronavirus pandemic.

The final speaker was Liz Grant, Professor of Global Health and Development at the University of Edinburgh who presented on the role of well-being and compassion in the new economic paradigm. Messages around compassion and well-being have gained prominence during the coronavirus pandemic.

According to Professor Grant the concept of compassion is best articulated by a quote from CS Lewis’ commemorative stone in Westminster Abbey: “I believe in Christianity as I believe that the sun has risen, not only because I see it but because by it I see everything else.”

The coronavirus pandemic has turned humanity upside down, shining a light on an economic system that increases rather than reduces inequality. Although mortality rates for malnutrition, malaria and HIV are far higher, due to its global proliferation, the response to Covid-19 has been unprecedented in terms of the speed and range of health, social and economic measures taken.

As we look to the future the SDGs provide a blueprint and ‘meta-narrative’ for a new and better society. The Global Goals are underpinned by planetary health through a recognition that the health of humans is interconnected with the health of the environment. Professor Grant offered a sobering reflection by challenging the notion that we have mortgaged the health of future generations for economic gains in the present by suggesting that we have in fact now entered the territory where we are suffering today.

Compassion is not merely about acts of kindness or goodness; it is about seeing the world through someone else’s viewpoint. Professor Grant suggested a 4 step process for demonstrating compassion:

1. Notice
2. Interpret
3. Empathise
4. Alleviate

Professor Grant then pointed to the legacy of Francis Hutcheson, a major exponent of the theory of the existence of a moral sense through which man can achieve right action.

As we look beyond the pandemic Professor Grant argued that, as a global family, we must both care for ourselves and use compassion to awaken and drive action to reduce the suffering of others. Although the SDGs set out the end game they do not define our individual and collective roles. Embracing compassion can therefore be a transformative strategy and a mechanism to shape the way we see the world and provide motivation to do things differently.

The session concluded with an engaging question and answer session of which these were some of the key points emerging:

• Timescale for economic recovery (Rupert)
  • Near term – watch the speed of the lockdown unwinding
  • Income maintenance – Governments making up shortfall so preserving capacity for people to spend when lockdown eases
  • Little desire for immediate period of austerity
  • Policy approach is to grow out of crisis (higher inflation) and reduce the level of Government debt (cf. post WW2)
  • Some possibility of severe austerity of up to 10 -15 years but reasonably confident that economy will come back quickly

• Resilience of asset managers (Rupert)
  • Trying to avoid moving client and investor money too frequently
  • Positioning clients so they are reasonably protected across all eventualities
  • Stress test – imagine what might go wrong, test and do not panic!

• Resilience of asset managers (Michael)
  • Difficult to know what will happen in the market so focus on fundamentals of business
  • Level of fear has created opportunities for those who can take a long term perspective
  • Challenging and exciting times for growth investors as ‘future accelerated to the present’

• Shifting towards action in the finance sector (Professor Grant)
  • Individuals
    • Define their inward motivation (what is it that each of us find meaning in life / why are we doing what we are doing?)
    • Identify their inner journey (does it matter that there is inequality, injustice etc and do I see my connection to that?)
  • Institutions and organisations
    • Recognition that there has to be a different way of being
    • Model of compassion - not just about employees but about the practice of work
    • How important is profit and should it be at the expense of someone else / is it destructive?
    • Proactively embed a culture of compassion as compassion fundamental to sustainability

• Shifting towards action in the finance sector (Michael)
  • Introduction of B-Corp is well-intended but does not go far enough
  • Need to incorporate approaches that can be embedded into how businesses operate

• Impact on Europe (Rupert)
  • Lingering worry that EU may be pulling apart but Italy withdrawing would be devastating for the country and the EU
  • Publication of joint statement by France and Germany on supporting the broader region (health strategy, recovery fund, green / digital transitions and single market resilience) is a positive development and critical for Italy to achieve economic growth for living standards, employment, welfare.

• Human (Professor Grant)
  • Consider unintended consequences of intended good action – think collectively and ethically through a lens of compassion

• One thing to lose post-coronavirus (All)
  • Business travel (Rupert)
  • Quarterly earnings reporting (Michael)
  • Replacing thinking about what we want and need with what others want and need (Professor Grant)

by GEFI