It took massive public-sector bailouts financed by unprecedented levels of borrowing to reverse the global financial crisis of 2008-09 brought on by rash lending and investment policies of banks in the United States and elsewhere. With the world on the brink of a coronavirus-triggered recession, how is it different this time?
“In 2008, the banks were to blame for the crisis, but the real economy was not in crisis,” CSSF CEO Claude Marx observed recently. “Now we are in the reverse situation, where a health crisis is causing an economic crisis, and…the banks are part of the solution.”
In fact, the abrupt cutback of bank lending in 2008 and 2009 contributed to the plummet of most countries’ economies into recession.
However, Marx notes, the confidence enjoyed by the banking sector is a critical aspect of governments’ response to the current coronavirus pandemic. One reason: new rules designed to ensure that institutions are substantially better capitalised than 12 years ago, as well as guarantee schemes expanded to protect retail deposits.
Increased transparency affecting both regulators and investors, as well as tools such as stress tests, have been established to prevent both a ‘business-as-usual’ mentality and disregard of the lessons of the century’s first decade.
In the grand duchy in particular, cautious business practices are a well-engrained habit already. For that, we can credit the two Luxembourg institutions that required state rescue: Dexia BIL and Fortis Banque Luxembourg, both brought down by the imprudence of their parents abroad.
For the most part, privately-owned commercial banks have played the key role in channelling government funding into loans and guarantees to preserve businesses and jobs.
But Marx acknowledges that the risk of a recession brought on by the coronavirus cannot be ruled out altogether.
If the economic shutdown prompts widespread bankruptcies and defaults on the share of government-backed loans where the risk is retained by commercial institutions, as well as on previous lending, we may be headed again for trouble.
Because of the banks’ capital strength, and in several cases deep-pocketed shareholders, the risk of a coronavirus-based recession affecting Luxembourg is lower than in most other countries.
But policymakers worldwide must consider seriously the risk as the confidence of a rapid rebound that was widespread just months ago — remember the famous V-shaped recession and recovery? — has begun to fade.
Federal Reserve chairman Jerome Powell has argued that US economic activity could contract temporarily by as much as 30% and that a full-scale recovery may be delayed until the end of 2021. He says it depends on people regaining confidence that their risk of illness is low, which in turn may rest on the widespread availability of a Covid-19 vaccine.
He expects unemployment to continue to climb for at least another couple of months before a rebound begins in the second half of this year.
Already, the Fed has warned in its semi-annual report on financial stability that US banks are at risk of material losses that could strain even their post-financial crisis capital and liquidity buffers, as well as the billions of dollars they have set aside in provisions for potential non-performing loans.
Any renewal of volatility in financial markets could create additional financial stress if asset prices fall, it adds.
Encouraged by the European Central Bank’s ultra-low interest rates, companies have been loading up on debt in the form of bank loans and bond issues for years.
“The risk is that by putting French companies that were already not in good health on life support, we could be adding a financial crisis to today’s consumption crisis, perhaps in a year, when companies are no longer able to refinance themselves and banks may be closing the credit taps,” worries Pierre-Arnoux Mayoly, a partner with law firm McDermott Will & Emery.
Apart from general concern about businesses, especially small ones, and households whose financial equilibrium may have been eroded by loss of income since March, policymakers are closely examining companies in particularly vulnerable sectors, along with those that were already heavily indebted before the pandemic took hold.
Potential problem areas that were already causing concern before the pandemic include highly-leveraged hedge funds disproportionately affected by market volatility and asset price declines.
They also may have contributed to the turbulence by having to sell assets to meet margin calls or reduce portfolio risk. A year ago 14% of US hedge funds accounted for half the industry’s net borrowing.
Leveraged but not covenanted
Red flags are also waving over so-called leveraged loans — lending to companies that were already highly indebted, typically with debt exceeding five times their earnings before interest, tax, depreciation and amortisation (ebitda).
These include a significant number of private-equity-owned companies burdened with debt from their acquisition cost or from special dividends paid to investors — paid not out of profit but additional borrowing.
Analysts say the two high-profile, private equity-owned US retailers, J. Crew and Neiman Marcus, that have filed for bankruptcy over the last two months were crippled by debt burdens — $1.7 billion and nearly $5 billion respectively — that prevented them investing to meet the challenge of e-commerce and new shopping habits.
The sector’s problems aren’t purely coronavirus-recession-related. Indeed, they have been worsened by the steady erosion over the past seven years of loan conditions imposed by banks, especially for leveraged loans and private equity-backed companies.
This trend has developed over the past decade amid rock-bottom interest rates that prompted lenders to compete for the business of more lucrative but riskier borrowers.
According to Moody’s, syndicated leveraged loan covenant quality set a decade-long low in the fourth quarter of 2019, with the majority of credit agreements permitting, for example, collateral-stripping asset transfers, the retention by owners of excess cash flow of the proceeds of asset sales, and substantial ebitda adjustments.
Easing capital rules to avoid a coronavirus downturn
Meanwhile, central banks and regulators have been accommodating with banks in the interests of keeping loans flowing into the economy, allowing institutions to draw on capital buffers introduced since the global financial crisis and to delay for a year compliance with new Basel III capital standards, measures designed to prevent a repeat of the banking sector’s problems in 2007-09.
In addition to a one-year delay, the European Banking Federation also is backing an existing measure that would allow national regulators to exclude deposits held at the European Central Bank from their balance sheet total for the purposes of calculating the ratio.
Some governments want to go further. France’s finance ministry says the government-guaranteed loans issued by banks should receive the same treatment. There are even calls for the state debt on banks’ books to be excluded from leverage ratio calculations, a measure already temporarily in place in the US.
So while the banking industry may be confident right now that this time it is not the problem but the solution, a little caution is appropriate — the potential of a coronavirus recession is very real.
Neither the Covid-19 pandemic nor its economic consequences are close to being fully played out, and not even the most prescient expert can predict with assurance where all the chips are going to fall — or when.
Luxembourg City to extend retail rent suspension until June
The City of Luxembourg has extended its suspension of rent on retail properties it owns until June 1 to protect owners of shops, cafés and restaurants during the coronavirus pandemic, according to first alderman Serge Wilmes. The provision could be extended for cafés and restaurants, which have not yet been given a date for reopening. The suspension of rent will cost the city an additional €80,000 this month, bringing the total amount of rent foregone to €240,000.
Luxembourg private equity sector looks to rebound as Covid-19 fears subside
Jean-Nicolas Braun, head of independent asset managers and asset structuring at EFG Bank Luxembourg, says the country’s private equity sector is confident of a rebound in dealmaking worldwide once Covid-19 lockdowns ease, involving both private equity firms and listed companies. Private equity funds worldwide are estimated to have as much as €2.5trn in ‘dry powder’ capital ready to be invested. Gorka Gonzalez, head of private equity at Quintet Private Bank, also believes that transaction activity will pick up once concern over Covid-19 subsides, pointing to a number of distressed sectors that represent ideal investment opportunities for the sector.
European Central Bank sets new weekly record with €45bn in bond purchases
The European Central Bank’s asset purchase programme set a new record last week with the purchase of around €45bn of assets, including €34bn of bonds and other debt instruments acquired as part of the ECB’s €750bn Pandemic Emergency Purchase Programme. During April the ECB acquired instruments totalling €103.4bn, with the proportion of Italian state bonds substantially higher than their previous quota limit, and German bonds significantly below.
ESMA points to risks in rating of collateralised loan obligations
The European Securities and Markets Authority says the main supervisory concerns and medium-term risks in relation to the credit rating of collateralised loan obligations in the EU include the internal organisation of credit rating agencies, their interaction with CLO issuers, operational risks, commercial influence on the rating process and the need for proper analysis of CLOs. ESMA says it expects rating agencies to continue to perform regular stress-testing simulations and to provide market participants with granular information on the sensitivity of CLO credit ratings to economic variables affected by the Covid-19 pandemic, noting that the current economic environment poses significant risks for CLO instruments.
BaFin adds two banks to ‘intensive care’ list over Covid-19
BaFin has added two unnamed banks to its intensive care list, indicating that the institutions are having problems and require closer oversight. The regulator has also received information that foreign banks are retreating from the German market due to the coronavirus pandemic, while domestic institutions have begun reporting losses and increased provisions against non-performing loans.
Spanish government prepares to add unit-linked assets to wealth tax scope
Spain’s budget ministry is preparing a wide-ranging tax reform that is expected to eliminate the exemption of unit-linked contracts with an irrevocable beneficiary from the country’s wealth tax. The Socialist Party had unveiled the proposal in 2018, before needing two further elections to secure a ruling coalition, and is now set to bring it forward due to increased funding needs as a result of the coronavirus outbreak. While the wealth tax is effectively not paid in several regions, including Madrid, advisers to ultra-wealthy clients expect a minimum rate for the levy to be imposed nationally over the coming months to ensure it is collected everywhere. Unit-linked assets in Spain reached €14.3bn at the end of last year, but the proportion of contracts that name an irrevocable beneficiary is unknown.
US Fed starts buying corporate debt starting with exchange-traded funds
The US Federal Reserve has launched its corporate bond purchasing programme, starting with exchange-traded funds that invest in corporate debt. The Federal Reserve announced on March 23 it would begin buying corporate debt in the secondary market and directly from issuers.
Best source: Les Echos (subscription required, in French)
North Korean hackers reported to be increasing crypto-currency manipulation
A surge in activity by North Korean hackers manipulating crypto-currency platforms has prompted South Korea’s ESTsecurity to alert investors to dealings by the so-called Lazarus group, which is believed to have been behind hacking attacks on Sony Pictures in 2014 and the central bank of Bangladesh two years later. A US government advisory last month also noted increased activity by North Korean groups as the country seeks to build up financial resources through the crypto-currency markets using extortion, blackmail and money laundering. The US is offering a reward of up to $5m for information about North Korean cyber-crime.
Best source: Les Echos (subscription required, in French)
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I also shared my deep hopes that with our full support as corporates and private citizens, decision-makers “will dedicate the same energy and authority toward the development and deployment of a similar action plan to cure and save the lungs of our planet, i.e. our forests and trees”. Indeed, as Indian author and environmental activist Arundhati Roy puts it: “Historically, pandemics have forced humans to break with the past and imagine their world anew. This one is no different. It is a portal, a gateway between one world and the next.”
Personally, I don’t see why this shouldn’t hold true in our current context or why we would be too foolish to miss this opportunity to mend what is broken.
As Winston Churchill noted, “we should never waste a good crisis”!
Let me develop this idea further by first repeating the direct links between this virus and climate change followed by an investigation of the major parallels, but also differences between the two. In doing so, I aim to provide some reflections on the lessons learned from COVID-19 and ideas on how to take this fight forward.
COVID-19: A message from nature!
The COVID-19 virus attacks our lungs or, more precisely, the pulmonary alveoli at the exact point where the exchange between air and blood takes place. Scientists have made it very clear that forests and trees play a similar role for our planet as lungs do for us.
As such, forests and lungs are integrally connected. In 2011, when Milda Sebris turned 100 at the Ellen Memorial Health Care Center, she described this symbiotic relationship so beautifully: “To breathe is to live embodied. Without this exquisite process going on day after day, year after year, moment after moment we would not be functional – we would not be alive! Trees help the planet breathe by turning carbon dioxide into clean, pure oxygen. Plants are considered the lungs of the earth because plants produce oxygen, which is necessary for all life, so in essence, since our lungs keep us alive and trees keep our lungs alive, we can consider trees to be a part of our lungs’ existence. This is all part of the deep interconnectedness of all life”.
Scientists provide any evidence we need (except for those who cannot or do not want to understand) as to how much our increased CO2 emissions and our continued killing of forests, and the global warming that comes with it, have been deeply linked to the development of dangerous viruses over the last decades. Of all emerging infectious diseases, 75% come from wildlife and our destruction of the natural habitat for farming, mining, housing and energy.
So, we need to make a choice: Do we want to live in harmony with nature, or will we keep fighting it?
It’s obvious – and we’ve received a clear demonstration of it over the last weeks – that the planet does not need us to survive but we desperately need it. In fact, we are the most dependent of all different forms of life. Nature on the other hand, existed long before us, and even seems to be better off as we humans are confined. As we have been immobilized, Nature serenely carries on; it keeps growing, keeps breathing, keeps giving life irrespective of the turmoil humankind is currently facing.
Inger Andersen, Executive Director of the United Nations Environment Program (UNEP) states it so well: “Nature is sending us a message…we are intimately interconnected with nature, whether we like it or not. If we do not take care of nature, we do not take care of ourselves. And as we hurtle towards a population of 10 billion people on this planet, we need to go into this future armed with nature as our strongest ally“.
I hope we get this wake-up call nature sends us!
Parallels and differences between COVID-19 and climate change
A sad parallel can be
drawn around the president of the United States, who has denounced both
COVID-19 and climate change respectively as a “Chinese hoax” and as
topics embraced by Democrats in hopes of winning the November elections. With
both crises far from being a hoax, we must look deeper and analyze the serious
parallels and differences that exist between COVID-19 and climate change. They
must be laid out and understood with clarity so that we may generate
much-needed buy-in from the public and become proponents of a well-thought-out
strategy that can tackle climate change with the urgency it deserves.
The first major parallel
between COVID-19 and climate change is that both seem primarily to hurt the
most vulnerable segments of global population. Climate change, through its
global warming effect, has disproportionately impacted developing countries that
often lack the required infrastructure to cope with such drastic changes in
climate, weather, and natural disasters.
Even within OECD
countries, the most vulnerable people of the population suffer the most, for
example the elderly, those with pre-existing health problems and those whose
immune functions have been weakened by their living conditions. Therefore, as
we discuss which segments of our population should be most protected and
receive priority access to health services, we must realize that in developing
countries, and even some developed countries, health care is far from a given.
In fact, half of the world’s population has no access to the health care it
Similarly, with respect
to climate change, it is those countries — at this stage at least – that are
the least affected by the effects of global warming and which have the required
infrastructure to cope with its effects — and are responsible for the vast
majority of CO2 emissions. Here again we can draw a parallel with the current
pandemic where those who are most responsible for spreading it are not
necessarily those who will suffer the most!
Another major parallel
is the need to react and act with the highest sense of urgency! Both COVID-19
and climate change have the potential to be catastrophic for humanity but they
operate on different timescales. If the degree of emergency is the same for
COVID-19 and climate, the speed of our respective reactions is far from the
This does not come as a
surprise as both are not actually perceived with the same sense of urgency. In
terms of the pandemic, we feel it and we suffer from it today; climate change,
on the other hand, started by affecting the more southern countries first and,
as such, is perceived by us (if at all perceived) as a remote and not immediate
threat. It’s not knocking at our front doors the same way COVID-19 is.
I dare to hope, though,
as the link between climate change and an increased risk and frequency of
pandemics is clearly proven, that this pandemic will allow us to understand and
perceive the real gravity and urgency of the climate issue before it might be
devastating in its impact and possibly become irreversible.
In fact, there is
another major difference here: while health conditions might eventually go back
to normal, many of the damages caused to our environment are irreversible. So,
we need to accept that if we do not change anything, we will globally surpass
the Paris Agreement targets by 2028.
Yes, in 2028 and not in 2050 as planned in the Paris agreement. Despite the good intentions of all the signatories of the Paris Agreement, today there is only one single country that has developed and deployed a concrete action plan to meet the commitments taken by all, and that is Morocco. However, Morocco cannot win this battle on its own.
Major lessons learned
Optimist by nature, I am
pretty confident that most of us – whether policy-makers, decision-makers,
businesswomen and men, citizens, elderly, young, wherever we may live – will
come out of this crisis with a strong commitment not to go back to ‘normal’, as
‘normal’ has clearly proven to be ‘the’ problem. And I hope that we will learn
as much as we can from the present crisis to avoid repeating the same or
similar mistakes going forward.
First, COVID-19, as well
as climate change, are global issues, and as such they need a global response:
we need to listen to the warnings and trust the assessments of scientists and
The present crisis has
proven that despite the level of the crisis varying by country or community, we
try as best as we can to align approaches among countries and are ready to help
each other when needed — for example, China helping Italy, or Luxembourg
taking on emergency cases from Lorraine.
Yes, there will always
be selfish decision-makers (like in the US or Brazil) who continue to defy
scientists and who do not see the value of global cooperation. But that should
not serve as an excuse to all others not to join forces. And I dare to hope
that the citizens and voters of countries who refuse to buy into a shared
strategy will be smart enough to realize over time that the personal
selfishness that drives their leaders’ actions will not pay off in the medium
and long term.
But more importantly, I
hope we realize that we need to acknowledge and react to the warnings we
receive. Though we’ve had scientists pushing us to recognize the increasing
risk of pandemics for some decades now, we must admit that we have not done
much to prepare ourselves for that risk over the last years. It is now that we
need to make the fight against climate change a priority, combat its root
causes and reduce CO2 emissions to zero.
Time is of the essence
if we want to avoid dire emergency situations going forward. It is crucial that
we embrace the warning calls with respect to climate change and act now. The
Paris Agreement cannot remain a best intention only. All the countries that signed
it now need to develop a serious action plan – not only a best intention plan –
to make it happen. Morocco has shown us the way!
This COVID-19 crisis has
demonstrated clearly that it is those countries — South-Korea, Taiwan, New
Zealand, Finland, Norway, Iceland…– which were the fastest in trusting expert
opinions as to the magnitude and risk of the issue, and which were the fastest,
in partnership with those same experts, in taking appropriate measures, and which
are coming out of this crisis the best.
The fact that many of
these countries are currently under the leadership of female top decision-makers
should make us reflect on whether there is a clear root cause relationship
between both. This interesting topic has generated a lot of discussions lately
around questions like: Is there a cultural aspect to it? Meaning, is the culture of
those societies encouraging and supporting female leaders more than others, or
do citizens trust female political decision-makers more? And if ‘yes’, why is
this the case? Do women have better competencies to deal with crisis
situations? Are they less selfish?
It is definitely not my intention to enter into that discussion here. I leave it to the experts. Although I realize that all those countries that have best handled this COVID-19 crisis seem to have something in common — following the experts’ advice and learning from the experience of first-hit countries, they all developed a crisis action plan which:
gives the highest level of priority to public welfare, not only in the short term but also in the medium and long term (as opposed to continuing to pursue short-term economic and financial gains)
was not led by, what I would call, selfish ‘action heroes. Quite the contrary: these plans favored constructive cooperation over selfishness and a competitive spirit.
And — surprise, surprise
– I dare not to hope this time but, rather, to confirm that again this is
exactly what is needed to fight the large looming climate crisis!
In fact, as we speak
about climate change or the broader sustainability challenge, we tend to speak
about ESG (Environment, Social and Governance), or more specifically about the
triple bottom line of PPP (People, Planet, Profit) — for example, about
strategies that do not chase only the highest short-term profits but also those
that recognize a healthy balance between serving, developing, rewarding and
respecting people at all levels, not harming the planet and generating
And what makes me even
more hopeful, not to say confident, for the future is that large parts of the
respective populations agreed to these strategies and accepted all the
sacrifices of being confined, of not being able to see family members and
friends and to shop freely, having to wear masks, on and on. And they all
endorsed a crisis management strategy that re-prioritizes objectives, puts the
public well-being at the top, recognizes that sacrifices need to be made by all
and redefines the roles of each of us.
So, if the citizens endorsed it for COVID-19, why should we not utilize this momentum and build on their compliance for a thoroughly developed climate change action plan? The impetus is there. What’s left to do is to realize the urgency of fighting climate change and developing a plan that clearly defines the expectation and role for each of us.
Way forward – we all have our role to play!
Going forward, all of us – political or economic decision-makers, associations, media and journalists, employees or workers, retirees, teachers or students – need collectively, but also individually, to adopt this ESG, or triple bottom-line mindset. If most or all of us collectively and as individuals assume our respective responsibilities, there is no doubt we will win the fight against climate change. We have demonstrated that we can make it happen for the COVID-19 crisis. We have realized that “if we replace the ‘I’ with ‘We’, even ‘Illness’ becomes ‘WEllness’“. There is no reason we should not be able to do the same with the climate crisis.
Media and journalists
This COVID-19 crisis is
a tragic reminder of the key role played by our media and just how essential
fact-based, outspoken journalism is. It has also demonstrated the crucial responsibility
of journalists to push back on fake news and those decision-makers who try to
hide or even deny plain facts.
During this COVID-19 crisis many journalists have realized and reinforced the kind of public service role they have in keeping us informed as factually as possible and challenging those who tried to spread fake news or hide information. Now we count on them for deploying the same rigor and required urgency towards the most important challenge of our time: climate change. We now need these same media and journalists who have done such an exceptional job in this pandemic to use the same best practices when reporting on climate change and its risks, including the increased risk of future pandemics.
Economic and financial decision makers
As already mentioned in one of my previous articles, I strongly believe that the current crisis will drastically increase the urgency and pressure on companies and their decision-makers to convert to more sustainable business models and adopt a real triple bottom-line strategy.
The objective of such
strategies will obviously remain to generate enough profits to assure their
long-term viability. However, they will achieve this in full respect of people
(employees, suppliers and people in the supply chain, clients, shareholders and
any other stakeholders) and without damaging our planet any further. They need
to realize that it is a matter of survival that extends well beyond the short
The current pandemic has
made all of us more sensitive to the effect of nature on our well-being, to how
desperately we need our family and friends around us. It has made us move from
a pretty materialistic set of values to a more sober set of values positioned
around caring and solidarity or, as I’ve phrased it previously: ‘to be’ has
taken the lead on ‘to have’.
Hopefully, the result of this change in mindset is that in the near future we will all be much more sensitive to these same values when choosing how and with whom to spend our time and money. Companies that do not realize that their ‘why’ (why they exist, i.e. their purpose and values) and their ‘what’ (what they stand for) are much more important than the quantity and price of what they sell, might have no future!
We have realized how
effective many political decision-makers – in close partnership with scientists
– have been in identifying early on the upcoming risk, in developing and
deploying concise mitigation packages and even in preparing for the impacts
that couldn’t be avoided.
Their actions are rooted in the conviction that public welfare must be the top priority in a crisis. I dare to hope that these same politicians, strengthened by the endorsement they’ve received, will now have the comfort and motivation to tackle the climate change crisis with the same determination. Just as they did for COVID-19:
I hope that our political decision-makers will trust our scientists and inform their citizens factually about the looming threats of climate change, not only for their own nations but also for our global population as well as future generations. I have no doubt that the efficiency of their partnerships with media and journalists during COVID-19 can be replicated, even strengthened, in the context of climate change.
I also hope that leaders will not only develop but also deploy targeted mitigation packages: indeed, as signatories of the Paris Agreement, many countries have communicated extensively about their respective commitments. Some have even done a good job of developing thorough roadmaps to accompany those commitments, although we can’t ignore the extent to which deployment plans are drastically lagging behind. The obvious risk now is that with the substantial public support and finance packages centered around COVID-19, deployment of climate change, mitigation strategies might drop down from the top of the priority list.
Climate change mitigation needs to become a core element of these same COVID-19 support packages. It would be irresponsible towards younger generations not to tie eligibility for these support packages to sustainable development obligations from beneficiaries. It would be irresponsible to utilize current stimulus packages to finance dying sectors of the economy that have no future in sustainable business. It would be irresponsible to finance fossil fuel companies for anything other than their transition program to cleaner energy technologies.
Hearing many of the key decision-makers over the last weeks, I am pretty confident that most of them got the message. As the Prime Minister of France recently noted in an interview with the Financial Times:“There is a realization that if people could do the unthinkable to their economies to slow a pandemic, they could do the same to arrest catastrophic climate change”.
I believe that there has never been a better moment to start converting our present ‘labor-based’ tax system to ‘a natural-resources and pollution-based’ system. The present labor-based system causes unemployment as it encourages companies to minimize human resources, while leaving natural resources untaxed, thereby stimulating overconsumption and pollution.
As the COVID-19 crisis will dramatically increase the challenge of unemployment, there could not be a better moment to start this transition than now. An increase in taxation on scarce natural resources not only will allow us to protect our environment but also to reduce the cost of labor, thereby mitigating – at least partially – the risk of unprecedented unemployment levels.
Finally, governments also have realized how crucial it is for them to lead by example and, as such, they should do the same with respect to climate change. Just imagine the strength of the message to our local Luxembourg community, and the powerful global branding opportunity for our financial marketplace, if Luxembourg were the first country able to claim that all of our cash in the public pension scheme is invested exclusively in sustainable finance products and offerings. And nothing, really nothing prevents us from doing so. It just might require that we as citizens (because in the end it is our money managed by public authorities) express our support and, if needed, exert pressure on the public officials who manage our pension funds.
And that brings me to the last category of actors with the means to play a crucial role in all of this.
We the citizens! We the consumers!
The key role lies with
us as citizens and consumers.
I am pretty convinced
that, due to the aforementioned shift in our mindset and values, we as citizens
are ahead of both political and economic decision-makers in terms of our
determination to fight climate change. Therefore, we must use the power offered
to us by technology and mediato make ourselves heard. Decision-makers need to hear
us loud and clear: that we not only support them in their responsibilities in the fight
against climate change, but that we require it from them and that we will sanction those
who don’t act.
Here again, there is no
better way to exert pressure on economic decision-makers than to lead by
example. We need to change our behaviors clearly: fly less, and if we do fly,
then choose the company with the most sustainable offer; consume less and
consume locally; spend our euros on companies with a clear sustainability
focus; use the most sustainable transportation offerings and all become active
agents of a circular economy. We have demonstrated that we can do it if our
hand is forced – so why not take a more preventive (and comfortable) approach
over time for climate change, as opposed to a delayed, reactive (and
uncomfortable) approach once the panic spreads?
We need to realize that
it is all in our hands! If we citizens start to move in this direction,
political and economic decision-makers, even the media and journalists will
have to follow – or else they won’t survive.
So, in my opinion we are
all set to unleash a similar arsenal of mitigation and management strategies to
the climate change crisis as we have with COVID-19. There is no doubt about
this. The last remaining challenge is to adopt the right behavior. This can be
difficult in our western countries, where the climate crisis is not yet felt as
dramatically as in other parts of the world.
The most powerful illustration to convey the required sense of urgency might be the famous “boiling frog” fable that says:
If a frog is put suddenly into
boiling water, it will jump out and survive – this is exactly what happened to
us in the COVID-19 situation.
But if the frog is put in tepid water
which is then slowly brought to a boil over time, it won’t perceive the danger
and will be cooked to death – this is exactly what risks humanity if we fail to
realize the urgency of the risk posed by climate change.
To conclude, I will leave you with the powerful words of Inger Andersen, whom I already referred to in the introduction: “The better we manage nature, the better we manage human health…because keeping nature diverse, rich and flourishing is part and parcel of our life’s support system….we need to see how prudent management of nature can be part of this ‘different economy’ that must emerge, one where finance and actions fuel green jobs, green growth and a different way of life, because the health of people and the health of planet are one and the same, and both can thrive in equal measure.”
(N.B. Big thanks to you, Julie and Felix, for your support)
As it touches every aspect of life and business, already the coronavirus is impacting sustainability. The big question now: what can we expect in the long-term?
Among the myriad uncertainties of the Covid-19 pandemic, there is one sure thing: The natural environment has been a beneficiary of economic shutdowns and human lockdowns.
With virtually no cars on the road, nor factories belching smoke, the skies over New Delhi and Shanghai have turned from brown to blue.
Atmospheric pollution has diminished from the near-disappearance of air traffic.
Carbon emissions have shrunk dramatically as industrial production plummets.
Now, we all must ask whether these benefits will be temporary. Around the world, governments are looking at how to restore normal economic activity as soon as possible without risking a fresh wave of infections. This process is already underway in China, although the country’s economy remains constrained by the slump in demand for goods and commodities elsewhere in the world.
Indeed, some countries have announced or are considering measures that would, at least temporarily, lower environmental standards or defer efforts to curb carbon emissions. Their rationale? The need to re-ignite economic activity and preserve jobs is currently more pressing than protection of the natural environment or restraining climate change.
They also argue — not without justification — that poverty and deprivation also impact human health, physical and mental.
Don’t be fooled
The choice, however, is a false one, according to David Boyd, United Nations special rapporteur on human rights and the environment. Such policy decisions, he warns, “are irrational, irresponsible, and jeopardise the rights of vulnerable people. [They] are likely to result in accelerated deterioration of the environment and have negative impacts on a wide range of human rights, including the rights to life, health, water, culture, and food, as well as the right to live in a healthy environment.”
Boyd argues the coronavirus outbreak itself has underlined the importance of a safe, clean and sustainable environment. “People living in areas that have experienced higher levels of air pollution face increased risk of premature death from Covid-19,” he says. “Access to clean water is essential in preventing people from contracting and spreading the virus.”
Epidemiologists also note that the majority of new infectious diseases affecting human beings — including Ebola and SARS, as well as Covid-19 — have been transmitted from animals to humans, and argue that they’re becoming more common as human encroachment on animals’ habitat brings species into closer and more frequent contact that facilitate the spread and evolution of disease.
It’s far from certain that current arguments in favour of sustainability will prevail over the drive to restore economic activity and prosperity (and to relieve governments of the financial responsibility for providing their citizens with the necessities of life and preventing companies from collapse).
Is Covid-19 proving that sustainability is more profitable?
However, the impact of Covid-19 has added weight to arguments that sustainability-focused investment often performs better than portfolios that ignore environmental, social responsibility and governance factors (ESG). A key claim of ESG advocates is that the risk of unforeseen environment-related events is greater than commonly believed.
According to financial analytics provider Morningstar, during March investment funds that incorporate ESG factors into their strategy outperformed comparable vehicles that do not. Share prices of the latter crashed around the world after governments imposed lockdowns and closed many businesses to prevent the spread of the infection.
Morningstar found that ESG-filtered or sustainability-focused, Europe-domiciled actively managed funds performed better in three investment categories — although they did worse in a fourth — and all categories of ESG and sustainable exchange-trade funds outperformed non-ESG peers.
It may be that March, a month that saw extreme market volatility, wasn’t particularly representative of ‘normal’ trading conditions. ESG funds generally avoid sectors such as the airline industry and oil and gas companies, which were especially hard hit by the shutdown of international travel and the evaporation of energy demand.
More fundamental factors may be at play, argues Hortense Bioy, Morningstar’s director of passive strategies and sustainability research. “Companies that score high on ESG tend to be large, well-run businesses that treat their stakeholders well, address environmental challenges, enjoy more conservative balance sheets, and have lower levels of controversies,” she says. “Many such companies tend to be more resilient during market downturns.”
These arguments would suggest that in the future, discerning investors will pay greater attention to ESG factors and that companies failing to meet the criteria or to demonstrate a move toward more sustainable business models will find it harder and more expensive — and perhaps eventually impossible — to finance themselves.
Meanwhile, there are indications that some of the changes in human habits and practices forced by the pandemic and lockdowns may have a long-lasting effect.
Companies have been obliged to accommodate the reality of teleworking, and both they and their employees may continue to embrace benefits such as the absence of commuting, reduced workspace costs and the huge savings offered by teleconferencing over business travel.
Coronavirus could usher end of low-cost flying’s golden age
Already stigmatised by climate activists, the airline industry may be transformed by Covid-19 and the golden age of low-cost air travel abruptly brought to an end. Analysts see a wide range of possible effects, including the largest aircraft grounded permanently, many carriers bankrupt or their numbers drastically cut, and far higher air fares.
At a time when renewable energy is starting to compete with fossil fuels on cost, the collapse of oil prices may shake up the industry, for example, with many shale oil ‘frackers’ and other high-cost producers driven out of the market — although the lowest oil prices in nearly two decades don’t immediately encourage the transition to renewables at a time of economic constraints.
Raymond Schadeck, a member of our International Advisory Board asks “To have and to be: what if we inverted our values?”
In my last article, when referring to Maslow’s famous pyramid of needs I noted that in this period of crisis, basic primary needs tend to regain in importance at the expense of other more material and ancillary needs. I also expressed my hope that the moral reappreciation of certain professions, which have become the keystones of the management of this crisis, could serve as the basis for a thorough re-assessment of the real impact of all professions in our society and respective adjustments in remunerations.
A utopia ?
These two ideas, at first sight seemingly foreign and separate, in my opinion indeed should be directly correlated and complementary.
Maslow’s pyramid of needs
Abraham Maslow was an American psychologist best known for his “hierarchy of needs,” which he elaborated in his 1943 paper “A Theory of Human Motivation.” In his model, Maslow postulates that individuals are motivated by five different levels of needs:
The bottom four levels are also referred to as “deficiency needs” as they arise from a lack or deprivation of something, while the highest level of self-actualization is referred to as a “growth need,” something we aspire to.
Maslow discovered that even though all of these needs are present within us at all times, we might feel some more strongly than others. In fact, the most basic needs must be met – at least partially – before progressing on to higher level needs. For example, it is only when our basic needs for food and shelter are mostly met that we might orient our energy towards the more psychological needs of belonging and esteem. He also proposed that while every person has the potential to move up the hierarchy, this doesn’t always happen in a straight path. As we’ve all undeniably been experiencing lately, different life experiences will see us fluctuate between different levels of the pyramid. And the turmoil we are presently facing makes us all become much more driven again by deficiency needs – needs we thought we had well-covered.
We refocus on deficiency needs
Despite this reorientation towards more basic needs, I dare to hope that we will be able to appreciate today, at its fair value, the enormous privilege we have in Luxembourg to be able to continue to have our physiological needs (food, water, air) met despite the crisis, thanks to the continued effort of farmers, truckers, delivery people, restaurant workers, storekeepers and cashiers who are going above and beyond.
But I also hope that we will know to be more sensitive to the magnitude of distress of all those people who are not as fortunate as us. In fact:
more than 90% of the world’s population live in areas with levels of air pollution that exceed the World Health Organization’s limits, and seven million people die from air pollution every year;
the French Observatory of Inequalities reports that 10% of the worldwide population, roughly 800 million people, are affected by malnutrition (insufficient intake of calories for a healthy life);
2.1 billion people (more than 20% of the world population) lack, per United Nations statistics, access to drinking water – even though such access is officially considered a fundamental right.
The second level
Our serenity with regard to the first level of physiological needs seems to fade as we progress to the second level, the safety needs (shelter, personal safety, job security, mental and, above all, physical health…). Until recently, safety, too, was a need we took for granted with all the public protection and support schemes in place (the right to housing, physical safeguard systems, social benefits and unemployment systems, social security, etc.), assets for which the main responsibility fell to the public authorities.
Yet here we are, suddenly realizing that these assets are no longer a sure thing and that, collectively and in full solidarity, we also have a crucial role to play in all of this. And that in the long run, even the protection systems we still have in place risk being overwhelmed. Concerns about housing, job and income security and, most of all, physical and mental health and well-being are destabilizing us while we continue to face the daily fear of an unknown future as we remain, for the time being, “sheltered in place.”
Again, assuming that we remain privileged and safe despite our confinement, I dare to hope that this will make us:
truly assess the relatively favorable situation we are in compared to the 1.6 billion people — approximately 20% of the global population –who even before this crisis lacked adequate shelter and the 100 million homeless who have no shelter whatsoever;
truly realize the terrible and extreme confinement conditions of the 12% of the world population (of which 350 million are children) that currently lives in war zones;
not forget the hundreds of millions of women who are confined at home for cultural and/or religious reasons…
…or the victims of domestic violence whose safety is in complete jeopardy as they find themselves currently confined with their abusers. Sadly, the number and severity of such “intimate terror” have spiked in the conditions created by the pandemic. According to the National Coalition Against Domestic Violence (NCADV), nearly 20 people per minute are physically abused by an intimate partner in the United States alone;
really see the 30 million refugees who for reasons of war, drought, and famine are seeking nothing else than a minimum of safety. And why not even go a step further and open our doors to them in an effort of solidarity? Why not prompt our governments, our corporations and ourselves to do everything possible to help countries that are worse off than ours, where refugees will continue to flee from, now and in the future? Help them find local and effective solutions to the problems that are threatening their basic needs. As one of my best friends, Dr. Ravi Fernando, explains it: “Even if we reach the 2°C target, climate change will, according to the latest forecast, generate a flow of 143 million additional refugees between now and 2050 (more than 85% coming from Africa and South Asia). So we need to realize that unless we help them solve their problems locally, their problems will very soon become our problems, too.” So, better act proactively now than face an even bigger problem in a couple of years.
The third level
So, with our physiological needs fully met and our safety needs at least partially met, one positive evolution that stands out is that we are more than ever realizing how deeply we carry the need for love and belonging within us. Surprisingly, the very technologies that we feared would ruin some deeper aspects of our family lives and friendships, have proven themselves to be beneficial, even essential, to uphold and further develop these very same relationships. This heightened sense of solidarity shouldn’t come as a surprise, however, as time and history have shown us over and over again that in times of crisis, people come together and collaboration and support become the drumbeats of everyday life.
As we cherish these newfound connections to our families, let’s hold on to them as tightly as we can, realizing how lucky we still are while we take a moment to:
remember the more than 100,000 people we have already lost to this virus: grandmothers, grandfathers, mothers, fathers, sisters, brothers, children — people who, just like us, have families, many of which didn’t even get the chance to say goodbye to them;
think about all the families that are being broken up due to wars and immigration;
send our love to all the people who currently feel alone and isolated.
The fourth level
Even the esteem need, i.e. the esteem for oneself, the desire for reputation or respect from others, seems to be experiencing substantial shifts. As just mentioned, we certainly have rediscovered the real value of our family and close friends and repositioned them at the center of our lives. They are there when we really need them; they are the ones we appreciate and love unconditionally — those whose esteem and respect is worth a thousand times more than that of countless superficial friends on our social networks.
And I dare to hope that the real winners of this shift in perspective are our kids for whom, according to Maslow, this need of esteem and confidence is even more crucial. They now benefit from a greater attention and presence from their parents, despite the real difficulties that these cohabitations can pose in terms of maintaining our professional duties and their school activities.
Over the last weeks, many people have had, by necessity, plenty of time for themselves. Some of us seem to try to seize this time as an opportunity: going for walks, resuming physical activity, reading, meditating, practicing self-care, rediscovering some of our passions and by doing so, experiencing some newfound sense of self-worth and esteem, maybe even finding some dignity in all of this. Yet, while for some lucky ones among us this new connection to self and others lets us indulge in a feeling of accomplishment and confidence, let’s not forget to honor the struggle of:
the 264 million people of all ages globally who suffer from depression and for whom this isolation has been punishing, exacerbating already existing psychological challenges;
the 284 million people in the world who have anxiety disorders;
the new people at risk of this same depression and anxiety and for whom this experience has been traumatic;
People who lost their jobs.
Suicide hotline calls have spiked and some officials warn that this current crisis could prompt a second one — a mental health crisis. The longer this pandemic persists, the longer the confinement, the greater the economic toll, the graver the detriment to our mental health and the longer its effects.
I dare to hope that we will realize that our mental health is just as important as our physical health and start giving it the attention and resources it deserves.
The fifth level
The self-actualization need, i.e. the need to reach our fullest potential, seems to be on standby for now. Given the urgency and destabilization of our primary needs and, following the logic of Maslow’s theory, the desire to fulfill our personal potential is no longer our priority. The mad rush for more visibility and recognition has stalled. And maybe that’s for the best.
In summary, the present turmoil is prompting us to refocus on our basic or, one might, existential needs. We are finally caring much more about our personal well-being and that of our loved ones – with an exemplary solidarity that we thought had disappeared – and much less on our “well-having,” which had as its major goal to impress others. Just comparing the messages and posts on social media that circulated before the crisis to the ones we read now makes it clear that “to be” has definitely taken priority over “to have.”
Let’s just hope that this will last.
As many people have stated in different ways: “People were created to be loved, goods are produced to be used.” I dare to hope that after this crisis we will finally stop doing the opposite.
You will understand that it may soon be time to consider the utopia I dare to hope for as a real possibility and to recalibrate the importance of the roles of each person in our society with regards to our most basic needs. Applauding our helpers at 8 p.m. is a tremendous start, yet I dare to envision a standing ovation that lasts well into the future.
(N.B. – Big thanks to you, Julie and Felix, for your support)