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As communities and businesses around the world grapple with the ramifications of the COVID-19 pandemic, we owe it to our clients and beneficiaries to recover better – a recovery that is sustainable, inclusive and with concrete reforms. For responsible investors, that means upping their game on policy engagement.
A recent Oxford Smith School paper concluded that “progress on climate change will depend significantly on policy choices in the coming 6 months”. Critically, “the right choices could drive a long-term downward trend in greenhouse gas emissions”.
And indeed, policy makers in Canada, Germany, France and Korea – to name a few – have set out their expectations for a sustainable economic recovery. Earlier in May, the European Commission published its proposed recovery called “repair and prepare” which set out how a “recovery plan must guide and build a more sustainable, resilient and fairer Europe for the next generation.” And despite political headwinds, the PRI shared feedback with US policy makers in a recent House subcommittee roundtable, which examined the impact of the pandemic on capital markets in the US.
A framework for recovery
For investors who want to proactively support the recovery, the PRI is drawing up concrete actions they can take via their engagement with policy makers. For example, investors should:
· Use reasonable arguments, based on technical expertise.
· As much as possible, talk with one coherent voice.
· Engage simultaneously at all levels of policy making – lower house, upper house, and regulator.
· “Be on time” in the legislative process – we need to work to policy maker timetables, not our own.
· Work together harmoniously as signatories, trade associations and trade bodies.
· And understand better the relevant dynamics of policy decision-making across committees and groups.
We need to send the right message, to the right people, at the right time, in the right way. That means undertaking detailed stakeholder mapping to assess who makes decisions and who has the influence to accelerate change – in short, backing up statements with policy implementation. And crucially, we need to understand the pressures that policy makers face – that their decision-making is imperfect, with significantly shortened timescales, and incomplete datasets.
Preparing for change
So, how can we ensure a sustainable recovery is inevitable?
First and foremost, it’s important to recognise that the fundamentals of climate policy will not change in the long-term – but therein lies a short-term opportunity. The sectors that need to decarbonise remain very much the same as they were pre COVID-19. What may have changed, however, is the timeline for decarbonisation. Policy makers can bring forward planned policy implementation, such as the phase-out of combustion engines or the retrofitting of buildings to improve their energy efficiency. This is due to the ‘economic multiplier’ of taxpayer investment in the ‘industries of the future’, which will inevitably be higher than the economic multiplier of ‘sunset industries’. Investors could – and should – be engaging policy makers to bring forward planned policy change.
We may also see long term changes in consumer behaviour that will support a sustainable recovery. Some high carbon industries such as aviation may have ‘peaked’. The 24-hour round trip from New York to LA is demonstrably not necessary. And, as proven in this period of remote working, it is possible to close a deal via on-line conference call. Other changes might include a preference for local tourism, reduced consumption or shortened agriculture supply chains; although it is evident that one side-effect of the pandemic is an increase in single-use plastic. From an investor perspective, we expect increased attention to systemic risk across the board, from pandemics to climate change.
A spotlight on fairness
“We’re all in this together”. “War effort”. We have become accustomed to slogans and messages like these from policy makers and the media. And going forward, both investors and companies are also likely to face a heightened degree of scrutiny on fairness.
An obvious starting point is corporate purpose, as a new social contract begins to develop between companies and communities, with an increased focus on tax, executive pay and lobbying. The attention to fairness will undoubtedly be rooted in fundamental human rights, which includes the Just Transition – the framework for connecting climate action with sustainable growth and inclusive development. And there will be increasing scrutiny of how capital markets function and behave, including dividend policies, share buybacks, and market concentration.
Ultimately, we significantly underestimate the positive role that the responsible investment industry can play in achieving policy change. There is real potential for our clients and beneficiaries in meeting our sustainability objectives through policy change, which can deliver a sustainable, inclusive recovery and reform for all.
For further information or to get involved in our research project in the sustainable recovery, you can email the PRI at email@example.com
Will Martindale is Director of Policy and Research at the Principles for Responsible Investment