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Does a ‘Better Form of Capitalism' Really Exist, and Will It Actually Work?

Written by: Nicola Michel

Key messages and lessons learned from t he 2020 World Economic Forum Annual Meeting

Speaking at the recent World Economic Forum (WEF) Annual Meeting in Davos, Switzerland, Founder and Executive Chairman Klaus Schwab opened by saying that people everywhere are revolting against the ‘economic elites’ they believe have betrayed them. It was a confronting opening statement, but it is by no means a new concept. Rising income inequality was described by Barack Obama in 2013 as ‘the defining issue of our time’ when he said that the rich are becoming richer as middle-class incomes stagnate thanks to advances in technology and declining unions. And proof of the backlash against capitalism and globalisation, which many see as creating systems which exacerbate rather than alleviate inequality, is being felt in the rise of nationalism and election results around the world. Mr Schwab went on to say that belief in the betrayal by economic elites combined with the world’s inability to keep global warming to 1.5 degrees Celsius means 2020 is shaping up as a year in which we are at critical crossroads, more than ever before. And helping the world decide which path to take, which they described as aiming to give concrete meaning to “stakeholder capitalism”, was where this year’s WEF Annual Meeting really focused its efforts.

Reconciling seemingly contradictory aims

Navigating the right path forward will be tricky, not least because at first glance, convincing ‘economic elites’ to modify their behaviour and alter decisions and actions which have created the sense of betrayal, while at the same time tackling global warming, appear to be unconnected aims - the first anchored in economics, and the second in climate change are carbon emission reduction. The key takeaways from the Forum’s Chief Economists Outlook for 2020 didn’t paint a particularly rosy picture of the health of the global economy either - or its capacity to change. The new decade was described as opening with a ‘fragile growth outlook, social tensions over the evident polarisation of economic outcomes and high levels of uncertainty. On the other hand, it wasn’t all bad news either – the Chief Economist also pointed to signs of increased ‘policy agility and business reform which may lead to a different, better kind of economic growth’.

Is there such a thing as ‘better’ economic growth?

In the end, it was the big question about economic growth and specifically our capacity to create ‘better’ economic growth which took centre stage. Whether it is possible as wealth inequality soars and social mobility reverses, to reshape economies so that we increase rather than destroy cohesion, whether we can create growth which benefits the many and not the few, and ultimately, how do we ensure that the engine of human development we have built is sustainable. And the answer? Well, it ranged from the more radical “our broken economic model is robbing dignity and burning the planet” view, which advocated increasing taxes, building better infrastructure, rewarding jobs that matter, and putting an end to what they described as the ‘billionaire bonanza’ – to be achieved through a fundamental shift in recognition by leaders. But it also encompassed less dramatic solutions more easily embraced by individuals, such as an increased focus on creating a fully circular economy – one aimed at eliminating waste and the continual use of resources. So, what were the big-ticket items and findings this year?

The 1973 Davos Manifesto was updated .

This year Schwab’s proposed a major update to the Davos Manifesto - the guiding principles which have shaped the work of WEF and have remained unchanged since 1973. A new, re-imagined “ Davos Manifesto 2020” was unveiled - one that offers a universal ESG scorecard for companies and governments alike, and which promotes a ‘better kind of capitalism’.

Making capitalism better while maintaining a profitable private sector

One of the challenges for the WEF is its belief that the success of its agenda relies on the existence of a well-functioning, economically stable and profitable private sector. The argument goes that without a profitable private sector, no enterprise or industry will have the means to serve its clients, shareholders, employees and society. This seems self-evident, but it does create challenges when seeking solutions which involve major change. Reconciling the apparently incompatible aims of addressing climate change while offering industries (particularly high-polluting industries) realistic solutions to their reliance on fossil-fuels which won’t send them broke, seems like an almost impossible task. Despite efforts to achieve net-zero by 2050, emissions continue to rise, and despite efforts to reduce our reliance on fossil fuels, around 50% of the world’s current greenhouse gas emissions result from the extraction and processing of natural resources.

Can we move to zero emissions in an economically viable way ?

One big question was whether moving to zero emissions, or even 1.5 degrees is actually possible. Definitely was the overwhelming answer happily - and here’s the good news - according to one report, all it will take is to build a solid business case for sustainable energy to drive the transition. And we have the technology means to achieve this already. In practice it means taking steps to make fossil fuels less economically, (and morally) attractive, through a range of initiatives, which include everything from removing subsidies for fossil fuels, to strengthening climate education and engagement.

So, can financial services save the world?

Of most interest to us in financial services was step two in the report which laid out a path to win the fight for zero emissions. Step two said we must encourage financial markets to divest of assets linked to fossil fuels, to divert investment towards less-polluting technologies, and ultimately to leave investors keen to avoid the prospect of holding ‘stranded assets’ tied to fossil fuels. This is an important step, because in the same way that the WEF recognises that a company or industry’s profitability is key to its ability to act and implement change, without the means of transitioning towards net-zero emissions in a realistic and affordable way, such profitability will be illusory. In their words, we must offer a roadmap for all industry, including ‘hard-to-abate’ industries like aviation, transport, and steel to help ‘build innovative low-carbon solutions and competitive markets'. The good news from our perspective is that we are already seeing many of our clients, and their customers, move towards sustainable investment decisions. More and more investors (whether directly or via the investment manager or superannuation fund they choose) are talking with their cheque books, and investing only in companies and industries they see as contributing to a better society – or at the very least avoiding those industries and companies which aren’t. The days of needing to forego investment performance to achieve good ESG outcomes are long gone, there are too many examples of returns and sustainable outcomes going hand in hand – and superannuation funds and other investment managers are increasingly offering investment options which deliver both outcomes. It may be one small step for each individual fund, and each individual investor, but it will be a giant leap for the planet if we all get on board.

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