The Land of the Rising Sun has had more than its fair share of false dawns since its economic bubble burst in 1989, but now there is a growing expectation among some analysts that the current share market rally is sustainable in the long term.
Bigger isn’t always better when it comes to member services. Megafunds might be able to mass customise, but when you’ve got two million members it’s tough to bring the personal touch.
Why sustainability is inflationary (but the alternative is worse)
One of the lasting impacts of the Covid-19 pandemic was the onset of inflation cause by supply chain dislocations and expansionary monetary policy meant to protect economies from the worst ravages of a forecast downturn. That acute crisis serves as a dry run of what a disorderly climate change transition could look like, according to Impax portfolio manager Kirsteen Morrison (pictured).
“If you think about the pandemic, there wasn’t the opportunity to prepare,” Morrison says. “It came as an event out of nowhere, and you could only adopt crisis management. And in crisis management the best decisions are not always made… The fact was that the dislocations it created caused all kinds of supply side disruptions.”
Hopefully that disorderly transition won’t be as bad, Morrison says, because extreme weather events caused by climate change (say, an unusually bad storm that damages a shipping port) won’t necessarily be occurring coincident with each other. But they are going to get bigger, and happen more regularly, and that will cause substantial disruption – both as a result of the immediate impacts and because of reactionary monetary and fiscal policy responses meant to ease their effects.
“As more parts of the world get caught up in problematic climate change, there’s more chance of there being the same kinds of disruptions to people, to logistics, to supply chains, to inventory,” Morrison says. “And there may have to be a government response that could cause inflation again. A disorderly transition is going to have pockets of inflationary shock coming through.”
An orderly transition with investment in mitigation and adaptation will be inflationary too, but it will also “smooth the impact”. It’s like not insuring your car and not getting hit for 20 years and then having to write it off, Morrison says; you’re fine for 19 years and then there’s something “quite problematic” to deal with. Spreading the cost of that over time will help economies weather the storm without the same negative consequences.
“Is ESG inflationary? I believe the cost of the funding that’s going to be necessary to smooth the impact will be inflationary in the short-term,” Morrison says. “But it’s going to lead to a much smoother transition and less inflationary impact overall than doing nothing.”
“If you think about environmental mitigation and some of the situations that can unfold, there’s going to be some inflationary pressure. But that’s where innovation can help – new business models coming in, but also bringing down the cost of new technologies… You can see there is change coming that can have an offset.”
