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Philippe Desfossés, Director, RAFP: Governments must design regulations that value ESG/long term
A glut of debt and unsustainable pension promises requires an ESG and long-term institutional sustainability fix.
Philippe Desfossés
For too long, western economies have been indulging themselves in cheap credit and over-consumption. As Herbert Stein once said “If something cannot go on forever, it will stop”. In its 78th report (2007) the International Settlements Bank made a clear statement “The unsustainable has run its course”. Here we are. The question is how we reached this point of near collapse when so many clear signals should have warned us. It appears that the West chose to grow through mass consumption. The counterpart, as well as the means to finance this profligacy, has been through credit. One could just read what was written in 1929. On October 4 of 1929, the New York Times quoted the Secretary of the Treasury M. Snowden for whom investors “acted as if the price of securities would infinitely advance.” After World War II, the reconstruction, the baby boom and a strong optimism concurred to make it possible to raise standards of living as well as to finance a generous welfare state. It is this model that begun to weaken in the 70’s with the first oil shock. The whole building is now falling apart. It is obvious that some social benefits schemes look like gigantic Ponzi schemes and that there should be a strong adjustment to bring them back to a sustainable path. The deleveraging is going to be painful and will last several years. In that respect, socially responsible investment will be a guiding principle for the 21st century.
Let’s consider the three themes encompassed by the ESG acronym: social, governance, and environment. During the last 20 years, there has been a massive concentration of revenues and wealth that has made it more and more difficult for the middle class to live without recourse to credit. Businesses under pressure to deliver an ever increasing return to their shareholders had no choice but to limit direct salaries (trying sometimes to defuse anger from their employees by granting them under-priced social benefits1). Those same households leveraged their balance sheet through cash credit and by borrowing more and more against their home. Now that a large deleveraging is underway, a more balanced distribution of revenues is necessary to allow cash strapped households to resume consuming. Considering what has happened in the emerging markets, no sustainable development is achievable without allowing the local population to get a just return on their efforts. In that respect, the level of investment in countries like China, beyond the question of the efficiency of all these investments, raises the issue of the sharing of growth and the need to achieve a more balanced growth. For investors, it also means that in a fully connected world it will become harder and harder to ignore how large western businesses can benefit from low salaries, lack of collective bargaining, and poor social benefits that plague many of their suppliers.
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