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The three most important themes of our time

| Investments

By Jason Liddle, head of Distribution at Sanlam Investments

The world is changing and 2020 has shown us that change can be unexpected, instantaneous and extreme, resulting in powerful structural shifts. Effectively navigating the future requires understanding and consideration. At the end of 2020, many of us find ourselves reticent to think about what 2021 and the future may offer but there’s important reason to do so – especially as we consider our role within asset management in shaping better outcomes.

In the past year we reached many inflection points, marking the start of significant change. According to the International Telecommunication Union, more than half of the world’s population now has access to the internet for the first time. We are increasingly interconnected across our devices but at what cost to our privacy and security? Powerful demographic shifts are leading to structural social change, including a shrinking of working age populations in advanced economies (United Nations World Population Prospects) and the dark side of urbanisation in emerging economies.

According to the World Economic Forum’s Global Risk Report Survey, three themes rank as the most important environmental, social and governance matters of our time (by likelihood and impact):

  • climate change
  • rising inequality and
  • cyber insecurity

These themes deserve special attention. We need to consider a change in our approach, recognising that the cost of inaction far outweighs the cost of deliberate action. Any positive outcome is also only likely to come about if the collective rallies through purpose-driven partnerships and multi-stakeholder networks where the private sector’s skills and capital play an increasingly important role. As these trends involve complex interconnectedness, isolated one-dimensional problem-solving would be sub-optimal. On a positive note, while these megatrends seem daunting, they do provide unique opportunities.

Climate change

It’s clear that the economic themes that dominated prior to 2015 have given way to environmental and climate themes at recently held World Economic Forums. For the first time long-term climate issues dominate discussions. Perhaps this is because climate change has become very visible over the last decade with wildfires, cyclones, droughts, floods and other extreme weather conditions putting pressure on governments to take action. But a fractured geopolitical environment makes a multi-lateral approach difficult.

Pressure is also mounting on the private sector to act. Some regulators are already demanding more transparency (stress testing) from banks and insurers and other forms of voluntary disclosure, like the Task Force on Climate-related Financial Disclosures, are also in play. Climate Action 100, a group of investors representing trillions of dollars, is pushing companies to take bolder steps toward climate change. Ratings agencies are also including climate in their risk assessments, even employees are demanding action, and strong customer preferences are already being exercised. Pressure from this broad stakeholder base will compel businesses to improve disclosure, be part of positive change and engineer resilience to climate risks. Commercial opportunities for many companies will also be present. Accessing new and expanding markets (like renewable energy) that relate to climate change, novel forms of agriculture, financing climate-resilient investments and infrastructure or developing innovative insurance instruments that transfer risk from the public to private sector are among some of the exciting commercial opportunities that lie in wait.

Rising inequality

Since Thomas Piketty’s seminal book, Capital in the Twenty-First Century, inequality (both wealth and income) has become a dominant topic in political debate and the social consciousness. According to the IMF Fiscal Monitor there is fresh evidence that shows while global inequality has narrowed between countries, it has sharply risen within countries. South Africa also carries the unenviable distinction as the world’s most unequal country according to the World Bank. Economic studies highlight the following contributing factors to inequality worldwide:

  • globalisation and migration’s effect on access to cheaper labour supply
  • a rising share of the economic pie being declared as corporate profit while the share toward labour has decreased
  • devastating corruption
  • technological advancement, automation and its impact on production processes (and demand for highly skilled workers) and
  • the effect of expansionary monetary policy on asset prices

As an investor it is important to appreciate that the evidence (OECD: Focus on Inequality and Growth) suggests that moderate amounts of income inequality can indeed be positive for a free market economy’s growth but beyond a certain threshold it has extremely bad implications for a country’s economic development, stability and social cohesion. Investment in (lifelong) skills development and education are vital. In addition, social and physical infrastructure need to offer subsidised but functioning basic services such as public transport and healthcare.

Cyber insecurity

While the world is becoming increasingly connected with a growing number of mobile devices, marvelous socio-economic benefits abound. However, the accompanying costs and associated risks are compromised privacy, the lack of a common global technology governance framework, and cyber insecurity, including data fraud and theft. An increasingly fractured geopolitical environment may also result in a fragmented cyberspace build and even present a fertile ground for state sponsored cyber operations and attacks on critical infrastructure.

As investors, the immediate and fast-growing cost of creating safe online infrastructure for both clients and employees is a concern. These costs are not too onerous for companies right now, but the world is changing and the online environment is running ahead. The real issue for businesses is the potential impact and financial cost of an actual successful data and privacy breach.

These megatrends and risks are unnervingly complex and interconnected. Multi-lateral approaches across a broad base of stakeholders will be vital if we are to reach a positive outcome. It is the joint responsibility of governments, companies, investors and others to safeguard a sustainable future for ourselves and the generations to come. The United Nations Sustainable Development Goal 17 will surely need to be heeded as we revitalise our global partnership toward the implementation of sustainable development.

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