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Prudential - The Great Reset: Why it's time to invest for a sustainable recovery

12 August 2021
Ben Constable-Maxwell
Head of Sustainable and Impact Investing
6 minutes read

By investing in companies that offer solutions to the world’s pressing environmental and social challenges, investors can play a part in rebuilding a post-pandemic economy that is more resilient and sustainable.

It is unlikely that 2020 will be remembered fondly. The COVID-19 pandemic has claimed more than a million lives worldwide and attempts to curtail the spread of the virus have laid societies low.

The global economy has suffered its deepest contraction since the 1940s, shrinking by an estimated 4.4% in 2020, according to the International Monetary Fund. Many economies have shrunk far more sharply. This contraction could push an additional 207 million people into extreme poverty, the UN Development Programme projects, setting back progress in tackling penury by three years. The actual numbers could be much worse.

Economic recovery is therefore urgently needed to alleviate the pandemic’s harmful effect on livelihoods, and so on health and security, around the world. Yet it is imperative that we think hard about the type of recovery we want.

With a pressing need for action to combat climate change, we cannot afford to allow the environment to pay the price for increased human activity. I believe it is time to hit the reset button and rebuild a more resilient and sustainable global economy.

Let’s not just ‘get back to normal’

In the depths of the pandemic-induced lockdowns of 2020, we have all craved a return to normality. Happily, scientific success means that mass vaccinations against COVID-19 will be possible in 2021.

While this should hopefully allow us to return to doing more of what we enjoy with those we love, galvanising the economy in the process, we should avoid succumbing to old habits – on both a personal and societal level – that are unsustainable.

Indeed, green measures account for less than 1% of the trillions of dollars in COVID-related stimulus spending in 2020, according to Bloomberg New Energy. In their efforts to grease the wheels of recovery, governments should resist the temptation to lower standards, or to row back on bold initiatives to address environmental and social challenges.
As we look to recover economically from the pandemic, it is perhaps a unique opportunity to consider how we can recast the model for creating shared prosperity in a way that better harnesses the planet’s resources over the long term.

I believe we have a responsibility to ensure that the recovery is both sustainable and fair. By building a post-pandemic economy that is more resilient, global society can become less vulnerable to future shocks.

As long-term investors, we can look to play a role in realising this aspiration.

Let’s move towards a circular economy

Climate change poses a real and present danger to the well-being of people and the planet. The next decade presents a critical window in which we can still shape its trajectory.

The United Nations Environment Programme has estimated that global greenhouse gas emissions must fall by an average of 7.6% a year from 2020 to 2030 to get on track to limit the increase in global temperatures to 1.5°C above pre-industrial levels. Meeting this target would limit the most extreme impacts on natural ecosystems and human health posed by climate change.

Moving to a more circular economy can play a major role in addressing climate change by supporting the transition to a resource-efficient, low-carbon economy with resilience built in.
The principles of the circular economy – designing out waste, keeping materials in use for as long as possible, and regenerating natural systems – can enable the global economy to decouple economic growth from the extraction of resources.

By optimising the use of scarce resources and reducing waste, circular processes can dramatically reduce greenhouse gas emissions from the way we produce our goods and food. According to the Ellen MacArthur Foundation, the transition to a circular economy could cut global carbon dioxide emissions by 45% by 2030.

Achieving this goal requires investment. However, as expectations build that producers will bear the costs of pollution and waste, designing and making products with their disposal or re-use in mind should make economic sense. Accounting for the true costs of environmental damage, as impact-weighted company accounting does, for instance, will drive behavioural change.

Let’s focus on corporate purpose

If a company is to thrive for many years to come, I believe it needs a clear purpose.

Having a sense of what it is in business to achieve, beyond simply generating profits for its shareholders, can be a motivating force to propel a company to success. Indeed, academic research indicates that companies with a clarity of purpose have delivered better long-term financial and investment performance.


We can’t predict the future. Past performance isn’t a guide to future performance.
Ever more companies have been embracing non-financial targets to convey a sense of social purpose. While a positive step, pledges need to be more than just a box-ticking exercise, as some unfortunately appear to be. Signs of authenticity include having targets that are defined, ambitious and relevant, as well as transparent reporting on performance against them. It often helps for management incentives to be linked to key indicators of non-financial performance.

Less than a decade remains to achieve the UN’s Sustainable Development Goals (SDGs), which articulate the world’s most pressing environmental and societal challenges. With progress towards most of the 2030 Goals set back by the pandemic, it is more important than ever that companies act with purpose, and support communities and the environment through what they set out to do.

While we support the UN SDGs, we are not associated with the UN and our funds are not endorsed by them. 

Investing sustainably in the 2020s

As investors looking to achieve long-term financial returns sustainably, we can aspire to help global society ‘build back better’ by investing in companies that are part of the solution, rather than being part of the problem.

We need to embrace a more complete understanding of what it really means to create ‘value’ – beyond simply financial, to consider human and natural capital too. Companies should no longer be seen as creating value if they are instead really extracting value, from the planet or its people.

Long-term trends are already driving positive change, even without government support like the European Green Deal, a plan to make the EU’s economy sustainable. For example, even without subsidies, solar and wind energy generation are now in many countries competitive with polluting alternatives like coal and gas.

From pioneering healthcare solutions to enabling others to reduce their carbon emissions, many companies are looking to play a role in addressing the challenges facing global society. Where they are successful, I believe they can present compelling opportunities for long-term investors aspiring to foster a sustainable recovery in 2021.

The value of any investment [and any income taken from it] can go down as well as up so your customer might not get back the amount they put in.

 

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