The Covid-19 pandemic has accelerated a shift in public discourse, making normal the ideas that were once thought radical. Among these is the move towards sustainable capitalism - the overall theme of this annual report. Sustainability has gone from being a fashionable buzzword to a tangible requirement.
While governments’ immediate priorities will be to control the virus and preserve jobs, we believe that public/private partnerships will strengthen as countries seek to develop better future policy approaches and become more resilient to future shocks.
Public and private spheres intertwine
In the summer of 2019, the influential Business Roundtable of US top executives rejected the idea of shareholder primacy and advocated embracing wider stakeholder interests. This was largely a statement of intent - until Covid-19.
Customers are now demanding greater articulation of values in action on the part of corporates. And companies now see the health of employees, communities and suppliers as vitally important in their decision making, and are seeking to promote their social value. This is especially true where governments have taken stakes in private firms, or where companies have benefited from employee furlough schemes.
Governments have introduced these schemes, alongside measures such as grants, loans, and tax reliefs, in a rush of fiscal activism to combat the virus impact alongside huge monetary stimulus. However, the longer-term risks from these actions are significant given the enormous debt overhang at a level not seen since WWII, the record money supply growth, and the extended social welfare for a labour force still wary of returning to work.
Governments therefore have to think carefully about how to extract themselves from these commitments and get their economies moving again. To remain in power, they need to address the inequalities laid bare by the pandemic and mitigate climate change so as to avoid future instances of widespread disruption. Key to achieving this would be a closer relationship with the private sector.
Green deal for the EU
In the wake of Covid-19, some countries and regions have chosen to accelerate investment plans in public/private programmes that support job creation and sustainability goals. The EU, for example, has re-committed to rolling out its €1 trillion Green Deal over the next decade and becoming carbon-neutral by 2050. The plan - which has been explicitly linked to the EU Recovery Fund designed to help countries rebound from Covid-19 - will be directed at reducing carbon emissions while promoting renewables, electric transport, sustainable farming, and other emerging sectors.
The programme will be funded by the European Investment Bank (EIB) and a combination of public and private sector co-investments. While there is broad consensus among member states on the overall deal, agreeing how to apportion funds will require compromise. Countries with higher emissions and fewer skilled workers in cleaner industries, for example, will need more funds to make the transition than those that have already done so.
While investing in green projects is necessary to tackle climate change, defining what is and is not truly ‘green’ can be difficult. To help clarify this and prevent instances of “greenwashing”, the EU has created a Taxonomy on Sustainable Activities that sits alongside the Green Deal. This detailed classification aims to capture how projects align with positive environmental objectives and avoid negative effects, and is designed to ensure that investors can gear their funds appropriately to what is categorically defined as green.
Employment first, but sustainability too
In other parts of the world, governments have chosen to concentrate first and foremost on employment after devastating job losses and sharp falls in GDP growth. Nonetheless, political and societal pressure is mounting for those governments (and companies) to act sustainably and in a fairer way. In the US, the Democratic election platform will likely include a comprehensive green investment and jobs programme and, following the tragic death of George Floyd and the Black Lives Matter protests, the damage caused by racial inequality is being discussed directly and constructively for the first time by policy-making bodies such as the US Federal Reserve, as well as at corporate board level.
Meanwhile, policymakers such as Mark Carney, the former Governor of the Bank of England (BoE), and Andy Haldane, Chief Economist of the Bank, have publicly called for society to adopt a more sustainable and equitable form of capitalism.  Carney is a co-founder and vocal proponent of the Taskforce for Climate-Related Financial Disclosure (TCFD), an attempt to improve the quality and consistency of disclosure from companies in relation to their climate-related financial risk.
At Fidelity, we see better disclosure as fundamental to improving sustainability within companies. We take the opportunity whenever we engage with companies to recommend that they consider TCFD-aligned disclosure, while also developing our own inaugural TCFD report, due for publication later this year.
Meanwhile, the EU has launched its Sustainable Finance Disclosure Regulation (SFDR), containing detailed and robust requirements for asset managers (among other financial firms) to report sustainability risks, policies and fund classifications. Such initiatives will only help to embed sustainable capitalism further into our economic and social structures. For these changes to be authentically adopted, however, public markets will have to take a longer-term view of the kind typically associated with private markets.
Ultimately, sustainable capitalism is coming of age because it matters to voters, customers and investors, and is likely to determine forthcoming elections. This leads us to believe that the move by businesses to consider the interests of all stakeholders, not just shareholders, is more than just a passing trend. And that sustainable capitalism will increasingly receive attention from all sides, as a means of driving the global recovery and ensuring resilience for economies and companies.
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