Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: The following podcast was recorded for publication on the 24th of October, 2024 by HSBC Global Research.
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Speaker: Hello, I'm P.S.
Speaker: Bartlett in London and welcome to The Macrobrief.
Speaker: When it comes to environmental, social and governance investing, or ESG, the landscape has developed quickly over recent years.
Speaker: So how are UK corporates thinking about it these days?
Speaker: And is their approach evolving?
Speaker: James Ridge, head of ESG research for EMEA, has been traveling the country, speaking to a wide range of large businesses to find out about their climate and sustainable growth ambitions.
Speaker: He joins me in the studio now.
Speaker: James, welcome.
Speaker: Thank you, Piers.
Speaker: Good to be here.
Speaker: Indeed.
Speaker: And in fact, the last time we had you on the podcast, it was to talk about your report on climate change vulnerability in the context of G20 countries preparedness.
Speaker: And those vulnerabilities may vary from country to country, but
Speaker: They exist in all of them.
Speaker: And so I was interested in this latest report that you allude to the fact that there is a popular ESG pushback narrative.
Speaker: So maybe let's start with that.
Speaker: Well, I'd actually call it a rethink.
Speaker: The popular term is pushback.
Speaker: But I think most people are rethinking ESG at the moment because what they've been doing in the past just hasn't been working.
Speaker: So investors, I don't think they've...
Speaker: sometimes used the most sensible methods for portfolio allocation, for example, exclusions and scoring.
Speaker: And that's got a few investors into trouble over the years, led to some very low returns on portfolios.
Speaker: And I think corporates as well, they're revising how they think about ESG.
Speaker: And it's all in the name of doing it better so we can take stronger action.
Speaker: It's not actually pushback because we don't want to do this.
Speaker: So you went out into the field in the UK, you met some large corporates, and I guess it was encouraging to discover that it's a rethink, but it's not a pushback.
Speaker: And they are looking at these areas.
Speaker: What's driving this?
Speaker: Well, I think there's a realization that sustainable growth is the only way forward for a business in the future because all the other options like high carbon growth are being closed off by regulation and changes in community values over time.
Speaker: And companies are realizing they're going to have to really get serious about this.
Speaker: Let's drill down in a couple of the aspects.
Speaker: Firstly, you mentioned that the corporates are saying that their customers are influencing them, are asking about their climate change strategies and their carbon strategies.
Speaker: So often customers are demanding that they have much stronger carbon strategies.
Speaker: Not in all sectors.
Speaker: It depends, especially where you are in the supply chain.
Speaker: So if you're selling to a customer, higher up a supply chain who's not that interested in it, then there's less incentive for you to do anything.
Speaker: But often a lot of the new regulations and disclosures are flowing through supply chains, and there's a lot of pressure on customers.
Speaker: companies to not only set ambitious targets for emissions, but to do other things like drive circular economy and other types of efficiencies.
Speaker: And water was another factor?
Speaker: Water was a big factor that came up quite often.
Speaker: Water's been something that's always been around the corner for the last 30 years.
Speaker: At primary school, they told us it was coming the next few years, but I think we're really reaching a stage now because we can see the global impacts emerging and water stress is becoming a major issue and companies are generally not prepared.
Speaker: And so a lot of stakeholders are starting to demand of management.
Speaker: What are you doing about water?
Speaker: How are you managing the risks?
Speaker: The one I thought was interesting was when you talk about people and the fact that actually the transformation of the workforce as younger people are entering, who have perhaps more at stake in terms of climate change, are starting to influence the way that companies are managed.
Speaker: So we heard that younger staff are far more engaged on sustainability and the older staff tend to place less priority on it and more priority on their pensions and retirement packages.
Speaker: So when a younger CEO comes in, it can totally transform the way the business looks at and starts to take action on sustainability.
Speaker: And it's also about spreading the responsibility more widely than one person in some companies.
Speaker: We often find that one or two people are solely responsible for setting targets, having them validated through the Science Based Targets Initiative and so forth.
Speaker: And if that person leaves, can derail the whole process.
Speaker: So it's about partly generational change and
Speaker: I'm not saying that some older leaders are not very climate aware, and many are, but often the younger generation, it's more ingrained in their values.
Speaker: And also there was this point about communication that often a company may have just said, right, we'll have somebody...
Speaker: to your point about there being one person, but it sounds like companies are communicating better in terms of the person setting or the group setting, the growth agenda is now kind of saying, oh, let's check that we can achieve this growth agenda whilst achieving our ESG targets.
Speaker: Exactly.
Speaker: So there's been a big tension, I think, in the past where the finance people want to grow the business and get the highest return on capital, which is fair enough.
Speaker: And sustainability people want to reduce emissions, manage ESG risks.
Speaker: And often they've not spoken to each other.
Speaker: And so they've appeared in conflict.
Speaker: But now they're starting to speak to each other.
Speaker: And the sustainability people are learning about finance and the finance people are doing courses on sustainability.
Speaker: And they're coming together to say, oh, okay, if we're going to grow the business and cut emissions, there's this big space and we don't know what to do yet.
Speaker: So coming together is forcing people in the business to think about what the solutions might be that enable them to grow and reduce emissions at the same time.
Speaker: And once they start to think about that, I think the finance people are saying, gee, this is going to cost a lot.
Speaker: This is going to take some really big investments and actually is a pretty profound transformation of our business.
Speaker: But they're starting to work out through that process the ways to do it.
Speaker: And we don't know often what the ways are, but...
Speaker: It's only by these processes of learning by doing, by experimenting, by involving people on the shop floor who are actually working on the products, for example, day after day, that you start to innovate and find the solutions.
Speaker: So what do you say to the people that make the argument of degrowth or stagnation?
Speaker: Why is that not a viable alternative?
Speaker: Well, I've never found that a viable alternative.
Speaker: There's a lot of research lately that looks at the arguments of degrowth and deconstructs them, and it finds that they're not very rigorous.
Speaker: They basically say we should have a managed decline of consumption and production across the world.
Speaker: And we know that would be terribly environmentally destructive because if people can't meet their basic needs, because we're reducing consumption and production, they'll resort to exploiting nature to meet those.
Speaker: And we saw that in COVID, for example, it was a sort of foretaste of what would happen if the world declined.
Speaker: We don't manage decline very well in the world, and there's likely to be other kinds of implications as well.
Speaker: So I think that's not an option for the world.
Speaker: And actually stagnation and staying the same is not an option either, because at the current levels of emissions, they're already driving temperatures to probably two, three, four degrees.
Speaker: And so I think the only option is to grow the economy.
Speaker: It might sound a bit counterintuitive, but actually the only way is to do sustainable growth.
Speaker: So it's a particular kind of growth.
Speaker: What are the ways that companies can achieve this?
Speaker: What came out of some of the discussions that you had?
Speaker: So companies were talking about circular economy.
Speaker: There's lots of barriers, of course, to implementing circular economy, and it requires a lot of investment.
Speaker: So companies were often saying, well, there's not enough materials to recycle, or we're not rewarded by our customers for doing this, and so why should we do it?
Speaker: So there are a lot of barriers to circular economy, but it's huge potential as well, and it will reduce damage to the environment.
Speaker: if done well.
Speaker: But the biggest way to do sustainable growth, and this is analogous to how you do it at the country level as well, is to drive productivity.
Speaker: And so managers have to look at their capital and their labor, and they have to
Speaker: work out ways to really drive profound improvements in productivity.
Speaker: Because it's productivity that drives growth.
Speaker: And is AI, because productivity is, I mean, I know it's a bit overhyped, but nevertheless, AI is seen as a key to productivity.
Speaker: Does that come into the discussion?
Speaker: It will be a lot of these new technologies that help us move and drive productivity at a rate that we haven't seen in many, many decades.
Speaker: I think AI has a lot of potential, perhaps not on its own, but when combined with other technologies.
Speaker: But it is these new types of technologies which are really going to allow us to step up and reduce the number of materials we use to produce the same product.
Speaker: That's how you drive productivity and reduce emissions and materials used at the same time, which then means you don't need to produce.
Speaker: buy as many virgin raw materials.
Speaker: We sort of know where we need to go and what to do, but there's nothing on the shelf here that a lot of companies can just pull off and plug in and that's it.
Speaker: They have to actually invest and learn and retool and change the whole production method.
Speaker: And in a way, that's the sort of optimistic point, which is that you could sort of sit here and think the obstacles are insurmountable or that, in fact, you can't actually see what the solutions are likely to be.
Speaker: But you give a great example in your report of how a corporation can have a vision.
Speaker: And even if you don't know how to achieve it today with the incentives and ingenuity, you can actually deliver a tremendous result.
Speaker: And we heard that a lot when talking to corporates.
Speaker: They were saying, we need to have a vision and we need to know what our company is going to look like in 2050.
Speaker: And when they do that, they go, okay, this is going to be a total transformation of our company to something totally different.
Speaker: And we've seen this in the past.
Speaker: And I use in the report the example of Apple, of course, and Steve Jobs, who back in the early 80s said he wanted to create this computer which you could hold in your hand.
Speaker: And everyone said it couldn't be done.
Speaker: And even he said, we don't know how to do this yet.
Speaker: We don't have the technical knowledge and capabilities.
Speaker: But we learned how to do it.
Speaker: And now we're
Speaker: Almost all of us work on these tiny little handheld computers.
Speaker: And we can do this again across the economy and many other areas.
Speaker: We just need to have the leadership, the vision, the learning by doing, the investment, all backed by strong government policy, which is what corporates were always also telling us.
Speaker: They need the strong policy behind them to really push this forward.
Speaker: And then I have every confidence we'll get there.
Speaker: Yeah, so the big takeaway from your travels is that corporates are actually ready and willing to forge ahead on that.
Speaker: They are, rather than complaining and pushing back.
Speaker: That seems to just be a popular narrative in the press sometimes, that corporates are actually starting to realise we have to do something, and it's no longer just setting a target 30 years in the future that current management are not going to be around to even look at.
Speaker: It's, okay, we need to do something now, and they're working out the ways to do it.
Speaker: Well, here's to corporate ingenuity.
Speaker: James, thank you very much for joining us today.
Speaker: Thanks, Piers.
Speaker: Before we go, here are two big reports this week that you might be interested in.
Speaker: In his latest GEMS Investor Report, Murad Ulgun, Global Head of Emerging Markets Research, examines whether there is a window of opportunity for EM assets as we head towards 2025.
Speaker: And in The FX Tactician, Dara Ma, Head of FX Strategy in the US, assesses the state of G10 currencies in the run-up to the US elections.
Speaker: And we're only a few weeks away from the next edition of our live insights.
Speaker: On the 22nd of November, I'll be speaking to James Pomeroy, global economist, about implications of what seems to be an enduring post-COVID boom in travel and tourism.
Speaker: For more details on how to sign up for that and anything else we've talked about today, please email askresearch at HSBC.com.
Speaker: So that's all from us today.
Speaker: Thanks for listening and please join us next week on The Macrobrief.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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