Building Back Better

As Asia leads the gradual rollback of Covid-19 lockdown measures globally amid the looming risk from the “second wave”, investors in the region are confronted with a landscape that is being termed the “new normal,” although it is anything but normal.[1] Rock solid certainties just a few months ago – that international tourism would continue to grow, for example – have been dissolved by the pandemic.

In the place of these old convictions, there is widespread confidence that the crisis will cause lasting shifts in the economy and business models. For now, though, we only have hypotheses and questions about what those shifts will be and how they will play out: it is simply too early to be sure.

Sketching a picture

We have to start sketching a picture of the new normal while it is still emerging from the chaos caused by the pandemic. And this picture will naturally vary across different countries and regions: it is likely to look quite different in Asia, for example, than in the United States or Western Europe.

It should come as no surprise that the United Nations’ Sustainable Development Goals (SDGs) are a useful guide to this new reality. The pandemic affects almost every one of the global community’s aspirations for a better world by 2030, casting a shadow over prospects for better health, education, gender equality and much else besides.

And, as governments seek to revive stalled economies, the SDGs should provide policymakers with a touchstone to remind them of what matters most: something that all of us have had the chance to reflect on while experiencing varying degrees of lockdown. Indeed, there is a strong consensus around the world that the recovery should not seek to turn back the clock, but rather to “build back better.”[2]

Shift towards clean energy

Achieving a decisive shift towards a lower carbon economy after Covid-19 is emerging as a goal for growing numbers of governments, organisations and individuals around the world. Asia is home to three of the world’s five biggest emitters of carbon dioxide, but it is reasonable to expect the region to turn away from coal as countries deliver on their commitments under the Paris Agreement.

Korea just become the first country in the region to pledge that it will achieve net zero emissions, setting itself a 2050 target that brings it into line with the European Union and United Kingdom.

After the hottest decade on record, a sense of urgency about climate change is growing in the region and around the world. Cheap oil will be tempting as an alternative to coal for a while but, over time, the new normal will need to be powered more and more by clean energy.[3] Governments in some countries are recognising  this as they design economic relief packages that incentivise lower carbon emissions.[4]

Supply chains and infrastructure

Covid-19 has also given us a powerful reminder of how much we depend on the seamless operation of supply chains that stretch across the globe. In its aftermath, many believe the shift towards de-globalisation will gain momentum. Some argue for the security of bringing supply chains home, others for more distributed networks of suppliers that can prevent companies from being too vulnerable to disruption in any single economy.

It can be hard to separate reality from rhetoric in this highly politicised domain, but the potential re-routing of some supply chains could have a profound impact, positive and negative, on economic clusters all over trade-oriented Asia.

And then there is infrastructure like roads, railways and ports. The Asian Development Bank has forecast that developing countries in the region need to invest US$1.7 trillion per year in infrastructure until 2030 to maintain growth, reduce poverty and respond to climate change.[5]

Before the trade war and Covid-19, weak infrastructure was a bottleneck to growth in many markets. After Covid-19, government spending on infrastructure projects – which can create powerful knock-on effects for local employment and smaller firms – could be critical in stimulating the recovery while the private sector remains depressed.

Investing for better

The energy transition, shifting supply chains and new transport infrastructure are just three examples of the kinds of changes that could shape the new normal. There could be others: the move towards online learning, virtual medical consultations and other contactless services should be just part of a broader shift towards a more digital economy supported by the build-out of 5G networks.

But those “old economy” transitions are worth highlighting because of what they have in common: building new wind farms, factories and railways will all involve colossal amounts of investment.

Providing that capital will accelerate the existing trend towards more sustainable finance and investing. There are already promising signs. Global social bond issuance has exploded from US$14 billion in all of 2019 to more than US$33 billion by the end of April this year, for example, as issuers use proceeds to fund Covid relief measures.

The Asian Infrastructure Investment Bank and Asian Development Bank, which have stepped up in funding initiatives to combat Covid-19, should also help to “crowd in” private capital to finance a more sustainable recovery.

Evidence is also growing that investing in line with Environmental, Social and Governance (ESG) principles can enable portfolios to outperform the market as a whole. [6] This strengthens the argument that we should change the way we invest – and that the wealth management industry has a responsibility to work with clients to help them achieve positive impact and sustainability in their portfolios, whether that means supporting gender diversity or protecting biodiversity.[7]

Perhaps the first shift we should recognise, then, is the one towards a more sustainable financial system. This is the transition that can, over time, help make possible the other shifts by providing them with the capital they need. Through a more sustainable financial system, investors across Asia have the opportunity to contribute towards building back better.