Category: Links to External Postings

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The Global Risks Report 2021 (World Economic Forum)

Synopsis: In 2006, the Global Risks Report sounded the alarm on pandemics and other health-related risks. That year, the report warned that a “lethal flu, its spread facilitated by global travel patterns and uncontained by insufficient warning mechanisms, would present an acute threat.” Impacts would include “severe impairment of travel, tourism and other service industries, as well as manufacturing and retail supply chains” while “global trade, investor risk appetites and consumption demand” could see longer-term harms. A year later, the report presented a pandemic scenario that illustrated, among other effects, the amplifying role of “infodemics” in exacerbating the core risk. Subsequent editions have stressed the need for global collaboration in the face of antimicrobial resistance (8th edition, 2013), the Ebola crisis (11th edition, 2016), biological threats (14thedition, 2019), and overstretched health systems (15thedition, 2020), among other topics.

The immediate human and economic cost of COVID-19 is severe. It threatens to scale back years of progress on reducing poverty and inequality and to further weaken social cohesion and global cooperation. Job losses, a widening digital divide, disrupted social interactions, and abrupt shifts in markets could lead to dire consequences and lost opportunities for large parts of the global population. The ramifications—in the form of social unrest, political fragmentation and geopolitical tensions—will shape the effectiveness of our responses to the other key threats of the next decade: cyberattacks, weapons of mass destruction and, most notably, climate change.In the Global Risks Report 2021, we share the results of the latest Global Risks Perception Survey (GRPS), followed by analysis of growing social, economic and industrial divisions, their interconnections, and their implications on our ability to resolve major global risks requiring societal cohesion and global cooperation. We conclude the report with proposals for enhancing resilience, drawing from the lessons of the pandemic as well as historical risk analysis. The key findings of the survey and the analysis are included below.

http://sustainablefinanceblog.com/wp-admin/post-new.php

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The Future Turns 50 This Year (WSJ)

From computers and money to relations with China, 1971 changed the world in many ways.

Fifty years ago, Amer­ica en­tered a mag­i­cal year. Any year could hold mo­ments of great sig­nif­i­cance, but 1971 stands out. Af­ter a decade of up­heaval, the coun­try was seek­ing a new start. These events launched it.

https://www.wsj.com/articles/the-future-turns-50-this-year-11609537573?st=p8qa8vab3w7nwft&reflink=article_email_share

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Short-termism Revisited (CFA Institute and Fund Governance Analytics)

Improvements made and challenges in investing for the long-term

In 2020 CFA Institute convened a panel revisiting the topic of short-termism and commissioned Fund Governance Analytics to quantitatively analyze the issue as we found many companies reluctant to step away from the short-term earnings guidance game.

https://www.cfainstitute.org/en/advocacy/policy-positions/short-termism-revisited

Overview

Issuers and investors have begun to understand the importance of issuer–investor communications in getting both sides on the same page on many long-term strategic issues. In the years since our 2006 report was published, investors and issuers have increasingly invested in resources dedicated to fostering engagement. Both parties realize that building a trusting relationship can increase understanding and avoid the adversarial relationships that often existed between the two groups in the past.

These improvements in the short-termism and long-termism landscape should indeed be celebrated, but more work remains to be done. Many companies have traded in short-term earnings guidance for either long-term guidance or a more diverse set of metrics that better informs investors. 

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The Proposed DOL ESG ERISA Regulation and the Public Reaction (Albert Feuer, Yale)

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3669462

ERISA plan fiduciaries select investments to make (1) directly on behalf of plan participants and beneficiaries, or (2) indirectly on behalf of plan participants and beneficiaries by selecting investment options to offer them. The DOL describes ESG investments as including socially responsible investing, responsible investing, and sustainable investing (ESG/sustainable investing). The DOL proposed regulation would direct those fiduciaries to look askance at ESG/sustainable investments. In particular, the proposed regulation would provide that

(1) ESG/sustainable investments are only permitted if the plan fiduciary overcomes burdens not applicable to other investing approaches regardless of the economic value of the investment, and 

(2) ESG/sustainable investment alternatives for self-directed plans, regardless of their economic values, may not (a) be a qualified default investment alternative or a component of such an alternative, or (b) include alternatives if the fiduciary acknowledges having used any ESG/sustainable investment considerations that are not “objective risk-return criteria.”  

Many commenters suggested that the proposed regulations be significantly revised, and there appeared to be broad agreement on two revisions:

• The regulation should permit an investment alternative may be a qualified default investment alternative for a self-directed plan regardless of whether the alternative makes any use of ESG/Sustainable consideration, such as using the S&P® index; and

• The regulation should distinguish between the use of ESG/Sustainable considerations to determine the economic value of an investment, i.e., the incorporation approach, which may be judged in the same manner as any other valuation tool, and cases in which consideration are used for other purposes.

There was a strong factual disagreement about whether ESG/sustainable considerations are only used to value investments, including as a risk-management tool, in which case there is no reason for any special scrutiny of those considerations. If those considerations are ever used for other purposes, such as to have positive effects for the environment, society, or enterprise governance, some argue ERISA not only prohibits such consideration, but special scrutiny is needed to avoid these so-called abuses. even if the pursuit of those goals does not reduce the economic value of the plan’s investment or plan’s choice of an investment alternative to make available to plan participants and beneficiaries. 

There was also a strong legal disagreement about whether the regulation should, as it does in very narrow circumstances, ever permit fiduciaries to use any ESG/sustainable considerations that do not determine an investment’s economic value to decide between direct investments which have the same expected economic value. 

The paper argues that it is advisable for the DOL to revise the proposed regulation to be consistent with ERISA, the usual practice of prudent ERISA fiduciaries exercising due diligence in making plan investment decisions, prior DOL guidance, and the reasonable preferences of many ERISA plan fiduciaries, participants, and beneficiaries to reflect not only the commenters’ broad consensus but also :

• Delete any additional reporting or review requirements on ERISA plan fiduciaries that the rule would impose only if the name of the investment and/or the investment approach includes an ESG/Sustainable reference;

• State that because multiple options often have the same best expected economic value, ERISA plan fiduciaries making investments need not, and often may not, consider only the investment’s expected economic value ; and

• Permit, but not require, ERISA plan fiduciaries to choose and retain “ethically beneficial” investments that do not sacrifice any economic value by using any non-pecuniary consideration to select or monitor investments if such consideration is not illegal, and does not reduce the expected economic value of the investment.

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Climate change: asset managers join forces with the eco-warriors (FT)

The pandemic has persuaded some investors of the potential financial damage from global warming

As 2020 kicked off, Dan Gocher at the Australasian Centre for Corporate Responsibility, a shareholder advocacy organisation, was feeling “pretty optimistic” about its plans to force big Australian energy companies to tackle climate change.

BlackRock, the $6.8tn asset manager, and other large investors had proclaimed an urgent need to arrest global warming. With the renewed focus on climate change following the devastating bushfires in Australia, the ACCR was hopeful several climate-related resolutions filed at oil and gas producers Santos and Woodside would gain strong shareholder support at their annual meetings in April.

https://amp.ft.com/content/78167e0b-fdc5-461b-9d95-d8e068971364#

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America’s Dumb Reopening (Niall Ferguson)

https://www.advisorperspectives.com/articles/2020/06/22/ferguson-americas-dumb-reopening?bt_ee=ziatguFg8GoJfR54z85sjNljchteq%2BoalUt8fsb5um7CubZbkodg8MozYaQ8FWW6&bt_ts=1593596700247

America is on the road. But is it on the road to economic recovery or a pandemic relapse?

Fans of “On the Road” — Jack Kerouac’s 1957 classic of beatnik literature — will recall that its giddy, low-punctuation style is sometimes a little hard to follow. The same might be said of the data Americans are currently generating, some of which undoubtedly points to a rapid (if not quite V-shaped) recovery, and some of which seems to indicate either a second wave of Covid-19 infections or simply the continuation of the first wave.

The two are not separate stories, but rather a single, intertwined narrative. The best title for this tale was devised by my Hoover Institution colleague, the economist John Cochrane. He called it “The Dumb Reopening.” A smart reopening is the sort that has been possible in countries such as Taiwan and South Korea, which were so quick to ramp up testing and contact tracing that they didn’t need to do lockdowns in the first place. Among European countries, Germany and Greece have also successfully adopted these methods, which ensure that any new outbreaks of Covid-19 can quickly be detected, so-called super-spreaders isolated, their recent contacts swiftly traced and tested, and the outbreaks snuffed out.

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Enhancing Stewardship with Fund Governance Analytics (Commonfund Institute)

https://www.commonfund.org/news-research/video/enhancing-investment-stewardship-with-fund-governance-analytics/

Strong board performance is critical for every organization dedicated to achieving its mission, which is why Commonfund Institute makes it our mission to advance best investment stewardship practices. We were delighted to present Christopher Merker, co-Founder and Executive Director of Fund Governance Analytics and co-Author of The Trustee Governance Guide: The Five Imperatives of 21st Century Investing. Chris’ research demonstrates that the best run organizations outperform their peers nearly 2 to 1. Watch this video to learn more.

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A Framework for Sovereign ESG Risk Assessment (SAGE Advisory)

https://www.sageadvisory.com/media-assets/a-framework-for-sovereign-esg-risk-assessment/

Even though government debt represents approximately 41% of the $255 trillion global bond market, the level of vigor in Environmental, Social, and Governance (ESG) analysis that is applied to the issuer is not always the same as it is in the corporate space. Sovereign debt, which is issued by central governments, is particular- ly vulnerable to a lack of adequate ESG assessment. It is often passed off as a risk-free asset meant for capital preservation and stability, especially in the case of developed countries’ debt issuance, but events of the past two decades have showcased the need to rethink this notion. Greece struggled mightily after the 2008 fi- nancial crisis, requiring bailouts from the International Monetary Fund, European Central Bank, and the Euro- group, and lenders still took a huge hit on defaulted loans. And possibly even worse, Argentina (on the cusp of being classified as a developed country) has been engulfed in a debt crisis for the past 20 years, and creditors continue to get punished for holding its debt, with no real viable solutions moving forward.

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New assessments of risk and the new world order (Gillian Tett / Ian Bremmer)

This week Gillan Tett (Financial Times) describes how approach to risk is evolving under the crisis, and Ian Bremmer (Eurasia Group) calls what we are living through our first modern Depression. I find his view on how things will evolve on the geopolitical stage more interesting than trying to apply an old name to a new problem.

Is it safe to go to the shops, see a friend or get on a plane?

Gillian Tett on how to assess risk in the age of coronavirus

https://www.ft.com/content/a69afc14-904a-11ea-9b25-c36e3584cda8

Last month, Dayna Polehanki, a Michigan state senator, posted a tweet from the capitol building in Lansing that might have seemed unimaginable only recently. “Directly above me, men with rifles yelling at us,” it read, next to a picture of armed protesters standing in the building, demanding an end to the Covid-19 lockdown in the name of “freedom”. “Some of my colleagues who own bulletproof vests are wearing them.” It might be tempting to see this as just another sign of American political polarisation. But that would be a profound mistake. Over this bizarre and frightening scene hang questions that will affect us all in the coming months, be that in Lansing, London, Lagos or Lisbon: how do we define and measure risk? Who gets to do that? And who deals with the implications?

Ian Bremmer: Silver Linings in the COVID-19 Pandemic

https://www.advisorperspectives.com/articles/2020/05/18/ian-bremmer-silver-linings-in-the-covid-19-pandemic

Even though a lot of our institutions are structurally broken or eroded, the orientation and weighting of capital coming out of the COVID-19 crisis will be much more able to address and fix those problems, he said.

Bremmer also described how the crisis will affect the world’s three superpowers: the U.S., China and Europe. In the sense of the crisis, China has an advantage of being a surveillance state that can make huge, strategic investments to help the country recover economically much faster than the U.S. and Europe. But the caveat is that as China’s economy recovers, it is going to be dominant with all of the weak and poor-performing economies of the world while at the same time being decoupled from the U.S. and Europe, he said.

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The Bearer of Good Coronavirus News (WSJ)

https://www.wsj.com/articles/the-bearer-of-good-coronavirus-news-11587746176?mod=opinion_lead_pos5

In a March article for Stat News, Dr. Ioannidis argued that Covid-19 is far less deadly than modelers were assuming. He considered the experience of the Diamond Princess cruise ship, which was quarantined Feb. 4 in Japan. Nine of 700 infected passengers and crew died. Based on the demographics of the ship’s population, Dr. Ioannidis estimated that the U.S. fatality rate could be as low as 0.025% to 0.625% and put the upper bound at 0.05% to 1%—comparable to that of seasonal flu.