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STR 2020
04 Economy & Finance
4.1Key trends
4.2Climate change risk (and opportunity) is being integrated into financial services
4.3Economic faultlines and the need for an inclusive recovery

4.1

4.1 There were signs the economy was becoming fairer shortly before the pandemic hit

Figure 113: Labour share in US, Japan and euro area, 1995-2019

Labour share is defined as: workers’ compensation as a share of GDP

Figure 114: Wage growth, by income quartile, US, 1997-2020

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The world faces an unprecedented economic shock
Figure 115: GDP growth rate, by world region, 1980-2020
Figure 116: Unemployment rate, US, 2010-20

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There are still huge gaps in economic opportunity and security. Many people do not have access to modern financial services
Figure 117: Underbanked and unbanked Americans
Figure 118: Bank accounts, by country, latest estimate

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Moves are under way to integrate climate-related risk in the finance sector

A quarter of global emissions are now under carbon-pricing schemes, while recent research shows that some stocks are at high risk of climate-related disruption.

Figure 119: Muni index share at risk of climate-related GDP loss, 2020-2100
Figure 120: Share of global emissions covered by carbon-pricing, global, 1990-2021

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Mainstream economics institutions now recognise the irrationality of investing in unsustainable industries

In many countries, stocks with the highest sensitivity to temperature earn lower returns than the others, after controlling for standard risk factors.

Figure 121: Differences in stock-return performance between firms with high temperature sensitivity and all other firms, by country

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Many corporates have work to do to incorporate sustainability into their operating framework

Reporting of sustainability metrics by global companies is still relatively low. It is particularly low in some Asian countries.

Figure 122: Share of MSCI ACWI disclosing sustainability metrics, by type, 2010-19
Figure 123: Share of MSCI ACWI in Asia disclosing sustainability metrics, 2010-19

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Choices made in the COVID-19 recovery phase will determine whether we can achieve the Sustainable Development Goals

There is a massive infrastructure deficit globally, limiting the effectiveness of countries’ responses to climate change. But, infrastructure investments are crucially aligned with the transition to net-zero. China's 14th Five-Year Plan, to be agreed soon (for the years 2021-25), will be crucial to establishing a more sustainable global economy.

Figure 124: Infrastructure spending, latest estimate

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4.2

4.2 Climate change risk (and opportunity) is being integrated into financial services

The number of financial institutions taking sustainability seriously is growing rapidly

Financial institutions are joining Science Based Targets initiatives in large numbers. The number of institutions committed to responsible investment is soaring.

Figure 125: Responsible investment assets under management, global, 2006-19
Figure 126: Financial institutions which have joined the Science Based Targets initiative, 2015-20

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Companies are responding to calls from regulators and investors to provide enhanced climate-related risk disclosures
Figure 127: Members of the Taskforce on Climate-related Financial Disclosures, 2017-20
Figure 128: References to non-financial accounting, including externalities inclusion and true costing, 1950-2020

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Sustainable investment continues to increase in popularity

The share of assets under sustainable management has grown strongly, while green bonds are becoming more popular. Green bonds were created to fund projects that have positive environmental and/or climate benefits.

Figure 129: Sustainable investing as a share of total managed assets, 2014-18
Figure 130: Green bond issuance, 2015-19
Sustainable debt is reaching a meaningful scale
Figure 131: Sustainable debt issued by instrument type, 2012-19
Finance for carbon-intensive projects is out of line with climate goals
Figure 132: Total financing for fossil fuels, global, 2016-19

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Rating agencies have more work to do in integrating ESG
Figure 133: Wish list of ESG investors for ratings agencies
More work is needed to improve ESG data
Figure 134: Reasons ESG considerations are not fully included in assessments of competitors, suppliers and/or capital projects, % respondents
Climate change risk (and opportunity) are being integrated into financial services
Accelerating sustainability trends

The financial sector is starting to take climate-related risks and alignment with the Paris Agreement seriously. Although there is a long way to go, we believe this is a critical ingredient for tackling the climate crisis. The COVID-19 shock will only strengthen the growing emphasis on managing systemic climate risk.

Climate action

It is increasingly accepted that sustainable investment helps optimise risk and return. The question now is whether this shift can be applied and adapted to all capital in the economy. We believe the EU Taxonomy will help with eradicating “greenwashing”, as will the new focus from the SEC on this topic.

Climate-focused investor groups are developing a coherent plan from the finance and investment sector in time for climate negotiations in November 2021. We believe it unlikely that the growing momentum will be derailed by the pandemic and the economic crisis.

Investors also need to demonstrate their commitment through their investment practice. At Generation, for instance, this includes: 1) assessing the implied temperature rise of our portfolios and the implications for Paris-aligned investing; 2) asking companies we invest in to set science-based targets and to double down on climate action in light of the pandemic; and 3) encouraging companies to focus on their long-term strength and resilience.

Radical partnerships

Getting sustainable investment and ESG right requires a joined-up approach with a wide set of stakeholders involved. The sector must be accountable for delivering on climate and other crucial social and environmental commitments. As part of this, we believe ESG data, a key ingredient for how the sector is developed, needs to be more forward-looking and more closely connected to companies’ real-world impact.

4.3

4.3 Economic faultlines and the need for an inclusive recovery

Low-income households are much more exposed to COVID-19 shocks

Low-income people are much more likely to have lost their job to the pandemic. They have seen bigger drops in their income too.

Figure 135: Probability of losing job to COVID-19, by income level

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Small businesses seem especially vulnerable to prolonged periods with low or zero income
Figure 136: Small businesses and hours worked by SMEs, US, March-May 2020
Workers in poor countries are especially affected
Figure 137: Informal workers and COVID-19 lockdowns

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Countries with high public debt and/or high borrowing costs and a large share of SMEs are much more exposed to COVID-19 shocks

Some countries had either high public debt or high deficits leading into the crisis, so can do less to boost their economies. Economies with a high share of micro firms, such as Spain and Italy, are more exposed to COVID-19 shocks.

Figure 138: Percentage of all people employed in firms with fewer than 10 employees
Figure 139: Discretionary 2020 fiscal measures adopted in response to COVID-19*, % of 2019 GDP

* As of June 4th 2020

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Interest in remote work is growing, but most people do not have this opportunity

More people are looking for jobs allowing them to work remotely, while companies which facilitate remote work have taken off.

Figure 140: Interest in remote work, UK, 2004-20
Figure 141: Global daily meeting participants, Zoom, 2013-20

*Zoom public release

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Opportunities for remote work are spread unevenly

Ability to work from home rises sharply with household income, and there are also clear gradients with respect to ethnicity. In some countries, barely anyone can work from home.

Figure 142: Share of people who can work from home, by income level, US
Figure 143: Share of people who frequently work from home, by country

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The impact of the pandemic and the underlying inequalities it has revealed are leading to calls for a new social contract.

Strike action, which picked up in 2018 and 2019, looks set to continue.

Paco Freire/SOPA Images/LightRocket via Getty Images. June 2020, Nissan factory in Barcelona

Figure 144: Number of workers involved in strikes, 1947-2019

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Without action, the impacts are likely to be more severe for disadvantaged groups

Unemployment for both women and African-Americans rose more steeply in the United States during the pandemic, and is taking longer to decline.

Figure 145: Unemployment rate, men and women, US, 2015-20
Figure 146: Unemployment rate, by race and ethnicity, US, 2019-20

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Economic faultlines and the need for an inclusive recovery
Accelerating sustainability trends

Perceptions around the need for social safety nets and the role of the state in the economy appear to be shifting in response to COVID-19 and its impacts. It is unclear precisely how this will play out politically and in practice in the coming years. However, there is both the potential and the responsibility to make a decisive shift to a new sustainable and inclusive economic model in the months ahead.

Climate action

The economic recovery plans of business and government must focus on tackling underlying sustainability challenges, as well as focusing on the opportunities. This will require a huge collective effort and will be decisive in meeting the SDGs in 2030. At present, the world is not on track to meet many of the goals.

Climate action of course requires steep emissions cuts, but it also must include addressing social issues in the transition and enhancing the resilience of vulnerable societies to climate shocks.

Radical partnerships

During the pandemic governments are running up large debts. It is crucial that the burden of paying down these debts is distributed fairly through progressive taxation. We expect this to become an important dimension of the ”just transition“ agenda. A broad societal discussion is needed around the focus of economic policy.

This crisis is a reminder of the importance of international as well as domestic institutions. We are paying the price for the erosion of such institutions since the financial crisis, and a lack of innovation to adapt them to new circumstances. New instruments are needed at the international level to help us build resilience to shocks and avoid unnecessary trade tensions.