Covid-19 lessons for responsible finance?

Institutions, Pandemic

Center for Disease Control (CDC) Director Rochelle Walensky believes that her agency is still unprepared for the next deadly pandemic, and emerging news about Monkeypox seem to give her reason. Following an external review, she faults her agency for being focused on producing “data for publication” instead of “data for action.”

The latter comment gets our attention because of eerie similarities to responsible investment and ESG disclosure. The  New York Times’ Morning (18 August 2022) identifies three causes which help pursue the analogy: unclear communications, fragmented systems, and a reactive as opposed to proactive approach.

Unclear communication

For Covid-19: Trump’s downplaying of the threat or the CDC’s reluctance to recommend mask wearing. The CDC recognized that its guidance was “confusing and overwhelming.”

For ESG: communication is definitely confusing and overwhelming: are ESG issues, or an approach to investing? Is it about transactions or about governance and power relationships?  is it a bottom line thing? Is it an impact thing? Is it voluntary or compliance? Is it political or not?

The verdict: “Effective public health messaging needs to be honest, said Ellen Carlin, a health security policy expert at Georgetown University. If officials do not trust the public with the truth, then the public will eventually stop trusting officials, too.”

We think that is a direct lesson for ESG advocates: communication has become extremely convoluted as proponents straddle many fences and coddle competing interests. It’s made it too easy for opponents to take advantage of the confusion and tell their own story. We don’t think simplification is the answer. Rather maybe we a return to fundamentals about the role of financial institutions and markets?

Fragmented systems

For Covid-19: “The American public health system is divided — among the federal government, 50 states, thousands of local governments and many more private organizations and workers both inside and outside the health care system.”

For ESG: there are very few institutions with a direct responsibility and accountability for ESG, and many with a strong or sometimes passing interest, from the SEC to the EPA, from PRI to CA100+, from Ceres to labor groups, from pension funds to financial institutions.

The verdict: “The C.D.C. is a key federal agency that is supposed to rise above this fragmentation and help coordinate the national response to disease outbreaks. But throughout the pandemic, as Walensky acknowledged, it has struggled.”

Here the parallel is slightly more complex. No one has a clear mandate to rise above the rest (and maybe that is not desirable). Our own view, having worked in this field for 20 years is that institutions have a very hard time collaborating. Often this is down to competing for scarce resources, territoriality, and we know of one or two egos that haven’t helped anyone but themselves. Sometimes it’s also market dynamics and commercial competition. More resources directed towards collaboration, can help. Beyond this, it is a question for behavioral scientists, systems thinkers or economists.

Reactive, not proactive

Covid-19: “Underfunded, unprepared and issues compounded by the first crisis. Many of these problems could have been avoided with better pandemic preparedness. The federal government could have, for example, bulked up mask stockpiles or manufacturing before the pandemic, easing early concerns about shortages. But the U.S. has underfunded public health for years, experts said. So when Covid first began to spread, officials suddenly had to shift limited resources to deal with a crisis that had caught them by surprise”

ESG: There are many parallels. Underfunding has been an issue. The reluctance of most financial institutions to properly address ESG issues has made much of the field reactive (“let’s get data and disclosure and we will maybe see whether we need to do something, but likely not”). As a result, they are caught by surprise by events and crises, financial or environmental, regulatory or social, however predictable they are (the famous Grey Rhinos). This is compounded by the fact that the events like the pandemic are systemic, and that the processes that investors put in place generally focus on microeconomic tools and responses rather than macroeconomic ones. In short they are often the wrong solutions, based on the inadequate information. And they may not be the best institutions to address systemic issues.

The verdict: the current US Administration is trying got increase funding for public health institutions, and  Congress is ignoring it. All in all, the increased attention is good. Like public health, maybe ESG needs more funding. Being proactive rather than reactive, that is the 1.5 degree question.

At this point, it’s also helpful to remember that none of the institutions in question, whether public health or finance focused, operate in a vacuum. As we have seen, it is way too easy for humankind to pretend that big problems aren’t  actually happening, and way too easy for populist politicians to coddle to them. What pandemic? What do you mean, markets aren’t the solution to all our problems?  Trust me, it’s all going to be fine.

The bottom line

“Nearly three years into Covid, the U.S. is still not ready for the next pandemic.”

And finance is still largely unsustainable.

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