Make green the new normal of financial services
On the 26 March, the UK was bedding in to the first week of a “new normal”.
Lockdown had just begun and we were all adjusting to a completely different way of interacting with our colleagues, friends and family.
On the same day, $26 trillion was wiped off the value of global equity markets, as the industry held its breath and prepared for a potential repeat of the 2008 financial crisis.
Yet despite that moment of collective nervousness, lost ground was regained and, ultimately, the UK and European capital markets have continued to function during the Covid-19 pandemic, demonstrating resilience despite increased volatility.
In fact, €50bn of investment grade corporate bonds was issued in the first week of April — a reward which balances the losses in IPOs. The landscape has shifted, but markets have continued to play their role in providing liquidity.
I’ve spent the last decade heavily involved in financial services regulatory reform and, like so many of my colleagues and counterparts across the world, I’ve watched with a mix of pride and relief as the market infrastructure has survived some of the most profound stress-testing. And I’ve seen how a change in focus in financial services can have tangible, positive benefits for society.
The financial services regulatory framework put in place after the last crisis involved extensive and costly legislation — like EMIR, Mifid II, CSDR, and SFTR — which tried to formalise infrastructure oversight and rulebooks to ensure a safer system overall that was more resilient to global shocks. The performance of financial services so far shows how effective this has been — and now there is scope to do more, putting sustainability at the heart of this sector.
The UK government is understood to be mulling the potential benefit of an asset resolution scheme, ultimately stepping in and recapitalising some of the country’s most vital firms and industries. For some, it may feel like an excessively interventionist approach. But we are in uniquely testing times and innovative new ideas may be essential to keep the wheels of the economy well oiled.
The creation of a so-called “bad bank” structure, whereby the government holds stakes in struggling companies in strategic sectors, does raise questions over financial exposure, but there are opportunities as well as risks. Asset resolution schemes or the establishment of a UK Structural Investment Fund could lay the foundations for a more sustainable, innovative approach to economic planning.
The fiscal reforms of the last decade have paid off only because they worked in conjunction with intervention and global collaboration on a scale not witnessed since the early twentieth century. Treasury departments in every country working in partnership with regulators and market supervisors have helped to ease the pain of an immediate Covid-19 shock. The benefits have been apparent in stabilising economies.
So can we do more? As we look to recover and rebuild, our own economic “phase two” needs to place sustainability at its heart.
The coronavirus pandemic has acted as an accelerant, driving environmental, social and governance (ESG) factors further up the corporate agenda. As political leaders explore financial and measures linked to a “green recovery”, it’s incumbent upon all business leaders, not just those seeking government support, to take their own steps to drive lasting change and re-evaluate what “normal” looks like.
Central to such radical reform must be an acknowledgement that environmental and sustainable governance is much more than a regulatory compliance exercise. Those companies which take a proactive approach, placing purpose at the heart of their recovery and long-term growth strategies, should gain the maximum benefit — with society at large benefiting too.
We’ve seen the benefits that new regulation, global reform, and a change of mindset in the financial services sector have had in the last few months. Now there’s a chance to be more radical, and combine our economic recovery with the green agenda.
Market reform has proven a crucial tool in the past when it comes to economic stability. As we come out of this crisis, it can do the same to ensure that the “new normal” paves the way for a greener, more sustainable future.
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