It is finally the last month of 2020, a year that will go down in history! The Covid-19 pandemic and the Great Lockdown that came with it have changed the world, to say the least. The global economy has emerged from the sharpest slump seen in many years and synchronised monetary and fiscal policy support has helped to head off some of the worst economic effects of the pandemic.
As we look ahead to 2021, we see signs of improvement in the economic outlook, with monetary policies worldwide remaining highly supportive. Central banks have mostly hinted that interest rates will stay in the current range (or go lower) over the next three years. In the last recession, the 2008 global financial crisis, the US Federal Reserve held interest rates at historic lows for about seven years before deciding to hike them — on the basis that growth was finally sustainable and inflation was starting to spike.
In such an environment, the hunt for yield will be on investors’ minds. We prefer Asian credits as fixed-income vehicles for two reasons: They command a higher yield than other issuances and they have much better debt discipline than the rest of the emerging markets.
The other key factor for recovery in 2021 would be the availability of Covid-19 vaccines. We remain cautious as cases are expected to stay elevated until early next year, as drug companies ramp up production and fix supply chain issues in the distribution of vaccines to billions of people globally. Nevertheless, the combination of promising vaccines alongside more predictable and less disruptive US policymaking by the Biden administration gives us the confidence that 2021 will be a recovery year.
In a post-Covid-19 world, we see an increasing number of firms putting greater emphasis on environmental, social and governance (ESG) principles. No longer considered merely a “trendy” topic, ESG integration has seen rapid growth at both government and corporate levels over the last few years. Furthermore, while the pandemic has triggered a global economic downturn, it also has the potential to act as a catalyst for ESG agendas in 2021 and beyond.
So, why choose ESG investing? ESG investing (also known as sustainable investing) adopts a more stringent stock-screening process by incorporating ESG considerations, thus reducing investment risks due to lower reputational, regulatory and credit risks. Taking this approach also means investing in the future, as the key consideration would be the long-term sustainability of the company. Essentially, companies with strong ESG profiles will have better risk management, which is what investors are looking for.
The world is changing. We face challenges on global sustainability — the environmental element, or “E” in ESG. Greta Thunberg, a 17-year-old environmental activist, has warned that the world is speeding in the wrong direction in tackling the climate emergency. Her recent campaign #fightfor1point5 #fightforclimatechange advocates that national leaders increase their pledges for emission cuts.
China President Xi Jinping announced in late September that the country aims to be carbon neutral by 2060, while South Korea and Japan said in October that they target to be carbon neutral by 2050. While the US has been lagging behind in terms of climate-positive policies over the last few years, president-elect Joe Biden’s promise to rejoin the Paris Agreement paints a more positive future for the current and next generation than was imagined a decade ago.
Singapore, too, has implemented a multitude of sustainable measures as part of a commitment to be a leading ESG force in Southeast Asia. Its policies are focused on green finance, sustainable infrastructure and waste and water management.
Bringing things closer to home, I have lost count of the number of times we have experienced water cuts in Selangor just this year alone. Other than having to deal with the pandemic and the stay-at-home order, what could be more stressful than no clean water supply?
Something must be done to those who have been polluting the source of water. Factories need to be environmentally responsible in disposing their industrial waste. Otherwise, a hefty fine should be imposed, and this will pose a greater risk to investors. We need to start taking things seriously as water pollution is one of the biggest ecological threats we face today. Given this, companies that reduce emissions and waste, reuse natural resources and deliver products and services that support the overall decarbonisation of human activity are likely to attract greater interest and investment capital.
The outbreak of Covid-19 coupled with mass demonstrations calling for social equality have encouraged governments and corporates to place an emphasis on the social element, or the “S” in ESG. These include issues such as the narrowing of the social divide, as Covid-19 has caused more than 80% of the global workforce of 3.3 billion to be affected. All this comes back to the fundamental of good governance, which is the “G” in ESG. With broader governance responsibilities, companies will have to consider how best to enable society to recover from the pandemic in more sustainable ways.
As we head towards greener pastures in 2021, the pandemic has given more reason for consumers, corporates and governments alike to become more socially responsible entities. With countries coming together with carbon-neutral goals, and permanent disruptions to various industries, ESG is here to stay. We remain hopeful for that and more in the year ahead.
Michael Lai is vice-president of wealth management research at OCBC Bank (Malaysia) Bhd