Change is happening around us at an exponential rate: artificial intelligence, the digitalization of funds and finance, the crypto crash, climate change, war.
The mood was gloomy against a backdrop of surging inflation, tightening monetary policy and low market returns, no one is entirely sure whether the recovery from Covid-19 is taking longer than expected or we’re in a new crisis, or both. Cause and effect is all so tightly linked it’s difficult to separate out.
Investors, businesses and politicians somberly discussed the nature of these events and their various effects on the global economy. The effects of macro regime change are unclear, the worry is around potentially oversteering the world’s economies into a recession no one wants. On the other hand, what is the solution to potential wage/price spiral setting in?
Business leaders worry about staff shortages. It has been so difficult to hire staff in some jurisdictions, corporates are willing to pay over the odds to keep current staff. If that’s the case, wage/price spirals are of concern, as is the fact that in the US the Federal Reserve looks at unemployment as the main demand reduction indicator.
Investors meanwhile look to build resilience within their own portfolios during this uncertain time and can only agree that more diversification is a good thing: there are no obvious plays here.
Experience of the 1970s means some investors want to load up on inflation protecting assets like energy and commodities, with some real estate. The 2000 playbook makes investors cautious over the hundreds of tech startups looking for investment. There’s an eyewatering amount of startups for every sector, when realistically only a handful can be successful and only a few will actually dominate. What happens to the rest?
Climate change is another key area of concern and large portions of investor money have flowed towards making a greener economy in recent years, rewarding companies who have or built a market and are able to solve small parts of the problem quickly.
Regulations are reinforcing this, for example with the EU’s SFDR, taxonomy and RTS Level II regulations, which aid institutional investors to find investments with the deepest shade of green.
On the one hand, this means we should expect the number of funds that are labeled as environmentally conscious to increase further. On the other, it also means investors and lenders are stigmatized for lending or investing in non-green businesses, which can substantially slow their efforts to decarbonize.
As an industry, the move away from crude scorecards and understandings of ESG is welcome. The change here is coming from the largest investors, whilst others watch. However, some forget that there’s more than the physical risk of climate change in discussion here, there’s also the risk that slow-moving investors are caught holding the wrong types of assets amidst government policy changes, further regulation or even become subject to litigation.
That said, regulators discussed the various risks that they are facing due to the increasing number of investors demanding more information about the sustainability of their products and services. They also noted the need to prevent asset managers from misleading their customers by greenwashing. There was some agreement that financial market participants should work together with regulators to ensure that the ESG strategies of financial firms are not abused.
What’s the word on the way forward from a rather bleak Davos?
Investors, businesses and governments need to work together to address the today’s challenges, which are coming more frequently and are frequently more unpredictable and complex.
Time is not an ally, but the financial services industry can, uniquely, play a vital role in helping solve all these issues.
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