In Wealth Management

Will a new “It” sector potentially emerge from the coronavirus pandemic? I think so.

As a financial advisor and wealth management professional, I am always keeping an ear-to-the-ground for a potential next “it” sector – one where I think growth might occur and could be an interesting equity-play.

The Investment Challenge

Right now, we are still in the midst of the coronavirus pandemic; however, government officials, economists, and others are starting to shift thinking from short-term fiscal rescue measures (such as the U.S. CARES Act) towards the direction of forward-looking fiscal and economic recovery measures. Rescue measures are typically those that are focused on short-term defense of individual and business livelihood. In contrast, recovery measures are geared towards reinvigorating the economy – these tend to reshape the economy over the longer-term as well as impact future generations.

A Potential Silver Lining for Investors

While economic activity has plummeted around the world, some see a silver-lining to this pandemic emerging. Globally, declines in human activity have translated to cleaner air, the beginnings of a return to nature, and reduced pollution of all kinds, including green house gases that contribute to climate change. However, many suspect these reductions in emissions will likely be short-lived without intentional efforts to the contrary.

What Some Investors are Thinking

This got some internationally-recognized climate economists thinking – what if you could develop and implement fiscal recovery packages that were also good for the planet. To test out their idea, they developed a survey that they sent out to 231 bank officials, finance officials, and economic experts from 53 different G20 countries. To do this, they looked at over 700 significant fiscal policies that were implemented between 2008-2020, following the global financial crisis. These policies were further grouped into 25 policy archetypes; 6 rescue-type policies and 19 recovery-type policies.

Survey respondents were asked to rate each policy archetype across 3 core and 1 summative metrics:

• Speed of implementation from time of legislation (<1 month to >3 years)
• Long-run economic multiplier (low return for every dollar spent to high return for every dollar spent)
• Climate impact potential (highly negative to highly positive)
• Overall desirability (strongly opposed to strongly support)

After analysis (Figure 1), several themes emerged from this survey. First and foremost, a number of policies were viewed favorably, both in terms of high positive climate impact as well as being economically effective (high long-run multiplier) including:

• Cash support for R&D in green technologies, including electrolysis, heat pumps, energy storage, plant genetics, greenhouse gas removal
• Increased spending in clean electricity and heat generation and storage; upgraded transmission or hydrogen infrastructure
• Clean transport infrastructure and communications infrastructure investment; charging networks for electric vehicles, 5G networks
• Funding for improved teacher training, in-classroom and digital materials and other education capital for pre-primary, primary & secondary, increased support for tertiary students in high- productivity sectors
• Cash support for technology-agnostic research and development programs

While not as high on positive climate impact, working retraining and healthcare investments were also viewed favorably from an economic perspective. Along the same lines, energy efficient building upgrades as well as investments in green spaces and natural infrastructure both held appeal from a positive climate impact. However, they were not viewed as being as particularly economically effective.

Not surprisingly, more traditional measures such as liquidity support, direct cash transfers, and direct provision of basic needs, were all relatively fast to implement, ranked well on the high long-run multiplier metric, and were relatively climate impact neutral. In contrast, other policies, such as non-conditional airline bailouts were viewed very unfavorably in terms of climate impact, economic impact, and speed to implementation.

Figure 1. Twenty-five policy archetypes by climate impact and long-run multiplier

Combining their findings with evidence from the literature, the authors of the survey concluded the following five recovery policy types stood apart from the rest in potentially delivering on the twin goals of stimulating economic activity/recovery and positive climate impact:

• “Clean physical infrastructure investment in the form of renewable energy assets, storage (including hydrogen), grid modernization and carbon capture and storage technology
• Building efficiency spending for renovations and retrofits including improved insulation, heating, and domestic energy storage systems
• Investment in education and training to address immediate unemployment from COVID-19 and structural shifts from decarbonization
• Natural capital investment for ecosystem resilience and regeneration including restoration of carbon-rich habitats and climate-friendly agriculture, and
• Clean R&D spending” (in lower- and middle-income countries, this could be replaced with rural support spending)

The Takeaway for Investors

So, what does this all mean for Sapling Wealth Management’s clients?

It means, as an financial planner, investment advisor, and wealth manager, I will continue to listen to what thought leaders are saying. I will also keep an ear open for fiscal and economic policies, legislation, and market demand coming down the pike. Along the same lines, I will also keep an eye out for companies and funds that are poised to potentially benefit from efforts in these areas and may serve as a suitable investment option for individual wealth management strategies.

Lastly, on a personal note, I like to think that there may be future opportunities that are good for both the economy and the planet.

Hepburn, C., O’Callaghan, B., Stern, N., Stiglitz, J., and Zenghelis, D. (2020), ‘Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?’, Smith School Working Paper 20-02.

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