As we await clarity on the direction of our country, money is marching with determined purpose toward a solution to the trifecta of environmental, social and governance crises.
To date, roughly $20 billion has flowed into exchange-traded funds (ETFs) with an Environmental Social Governance (ESG) mandate. That is more than double the $8 billion that came in last year, and infinitely more than the year prior. Those figures are for ETFs only — global ESG assets are estimated to have grown to $40.5 trillion, or roughly 40 percent of total global assets under management. Signatories to the UN Principles for Responsible Investment (UNPRI), or asset managers who commit to incorporating ESG analyses into their processes also grew 28 percent — another record increase.
While money may talk, investor allocations to ESG focused asset managers cannot be the only voice. To make real change happen, the partnership that currently exists between asset managers and policy makers needs to be both broader and deeper.
In the 20 years I spent working in global fixed income, I regularly traveled to meet with politicians, government officials and other stakeholders who had vested interest in meeting representatives of the firms that financed their country’s budget deficit. These conversations are fundamental to the analysts and portfolio managers. They are a firsthand look at the quality of policies that support what we call “debt sustainability,” also known as the ability of a country to pay back its debts.
Similarly, for the policymakers and other stakeholders, it is crucial to understand what asset managers consider to be important or relevant. Otherwise, efforts that are lost on asset managers may mean the country has less demand for its bonds, leading to higher interest rates or worse, lack of funding. (To put all of this into sharper context, consider the fact that China owns over a trillion of U.S. treasury bonds.)
While these mutual needs are fertile ground for in-depth discussions, the scope is narrow and generally short-sighted. Most asset manager/policymaker meetings are focused on growth, inflation, budget deficits and political interests — over six to 12 months.
If these conversations were to be had in the spirit of the ESG mandates, the conversations would be focused on the long-term drivers of all those same issues. A long-term focus would mean:
A sharp awareness about the costs of a hotter planet. Policymakers would be involved in identifying the country’s needs, and the finance community would be busy figuring out the best way to partner with governments in financing those needs.
Insurance for national catastrophes would be taken into consideration when analyzing fiscal deficits.
In short, global bond managers would continue being primarily concerned on countries’ ability to pay back its debts, but the focus would not be so myopic as it is today. This broader understanding would lead to profound changes in the way governments, and government bond markets function.
I was present at the International Monetary Fund’s (IMF) annual meetings in October last year when Kristalina Georgieva took over as the IMF’s managing director. At the town hall meeting, she assured all of us present that the IMF would remain exclusively committed to macro stability — but that there was no need for macro stability to be so narrowly defined. Indeed, a hotter planet, corruption and inequities detract from macro stability, and she believes we can — and should — do better.
One hundred years ago, when politics were also divisive and millions of lives were lost to a pandemic — the Spanish Flu — investors wondered whether a novel idea, namely that politics should be informed by economics, was a fad.
In 1918, when John Maynard Keynes, the father of modern economics, was negotiating reparations for the First World War, he stormed out of the conference in outrage because politicians were making decisions that were divorced from economic reality. Everyone knew Germany was not capable of paying the sums demanded. Mr. Keynes’s book “The Economic Consequences of the Peace” became the foundation for what we now consider obvious: that politics and economics go hand in hand.
Economic decisions are being made without consideration for the environment. Investments are being made as if we do not live on the planet, and ESG is the response to a careless procession toward our collective end. One hundred years after Mr. Keynes poured his frustrations into a book, investors are pouring their frustrations into ESG funds — and it’s not just Millennials.
We need a new partnership between asset managers and policymakers — one that honors the economy, the people and the planet. Because we are the economy, and we cannot live on another planet.
Bianca Taylor is a Fellow with the OpEd Project and the Yale Program on Climate Change Communication. She is also the founder of the Tourmaline Group, an ESG research boutique serving institutional investors and a member of the Bretton Woods Committee.