Alliance Notes: Coronavirus and the Fiscal Stance, ESG Integration and Engagement Strategies with Mike Lubrano

Thursday, May 7, 2020

This Week at the Alliance

Announcements

  • On Tuesday, May 5, 2:00 EDT / 19:00 BST / May 6, 6:00 NZST (note the changed time), the Debt and Fiscal Governance Working Group will feature Ian Ball, Professor of Public Financial Management at Victoria University of Wellington and Chair of the Audit Committee for the financial statements of the New Zealand Government. From 1987 to 1994, Ian served as Director of Financial Management Policy and then as Central Financial Controller for the New Zealand Treasury, where he led the design and implementation of the financial management reforms that have made New Zealand the gold standard for public financial management. Professor Ball will discuss the effect of the coronavirus crisis on public sector balance sheets, and how fiscal policy and public financial management could change in the wake of the pandemic.
  • On Friday, May 8, 10:00 EDT / 15:00 BST, the Agriculture Working Group will host a call with Paolo Pianez, Director of Sustainability at Marfrig Global Foods, the second-largest beef producer in the world. Paolo will present on the company’s sustainability progress and achievements in 2019, as well as new initiatives currently underway. For any inquiries regarding this call or working group, reach out to Nadine Cavusoglu.

Coronavirus and the Fiscal Stance

Surgical masks selling for 70 THB each in Thailand, almost 60 times the normal price. © Chainwit. under a Creative Commons Attribution-ShareAlike 4.0 International license.

As the scourge of coronavirus cascaded into global financial crisis in late February, our Debt and Fiscal Governance Working Group featured Richard Hughes, Research Associate in the Macroeconomic Policy Unit of the Resolution Foundation. Richard, whose experience includes careers at HM Treasury and the IMF, joined our call to discuss how governments can mount an effective pandemic response while addressing preexisting liabilities and increasing transparency and sustainability.

Richard’s recent paper, “Safeguarding governments’ financial health during coronavirus: Learning from past viral outbreaks,” examines the fiscal outcomes of three historical epidemics, exemplifying possible scenarios for coronavirus: the global Spanish Flu pandemic of 1918-1919, the Asia-concentrated SARS outbreak in 2003, and the protracted East African Ebola crisis in 2014-2016. He found that the key driver of losses in these epidemics was not fatality, but duration: The longer the need for public health restrictions, the greater the impact on real GDP and fiscal deficits.

The likelihood of a long timeline for the current pandemic is daunting for everyone, but especially emerging economies, many of which were already struggling to service debts and arrears. With productive activity on hold, the crisis response becomes a cash management challenge: To support public health and pave the way to reopening, governments must direct spending towards medical and social support programs. In EM, however, access to cash and liquidity presents a further problem. As the rest of the world runs its own deficits to manage lockdowns and emergency expenditures, countries lacking deep domestic capital markets face new barriers to financing. Hoarding of savings and capital controls abroad could push EM governments to fill the gap using risky measures, such as money-printing and central bank loans. These policies can harm economies over time, especially as governments tend to fall back on them well past their temporary mandates.

In such a situation, it is tempting to dismiss fiscal governance reforms as an unaffordable luxury. Richard suggested, however, that strong cash management and transparent accounting will be essential for any recovery. As governments turn to novel interventions and off-budget vehicles to meet their financing needs, they will need transparent practices in order to use these new instruments responsibly and without losing the trust of their stakeholders. Moreover, when the economy comes back, there will be an opportunity to harness demand-side stimulus to finance a green transition. There is no way to force countries to do this in the near term, however; the IMF tends to ease back on lending conditionality during crises. – Asprey Liu

ESG Integration and Engagement Strategies with Mike Lubrano

Source: Lubrano Advisory Services.

Last month, as part of its monthly call series, our ESG Initiative addressed ESG integration, corporate engagement and advocacy with guest speaker Mike Lubrano, Principal of Lubrano Advisory Services and Education Programme Advisor of the International Corporate Governance Network (ICGN). Mike is a longtime champion of corporate governance in emerging markets, having pioneered the International Finance Corporation’s work in this area from 1997 to 2007 before co-founding Cartica Management, where he headed its corporate governance and sustainability practice.

Mike’s long career has allowed him to witness the expansion of investment decision-making criteria beyond fundamentals into nonfinancial factors and outcomes. From investment stewardship to sustainable and impact strategies, the rise of ESG has brought new opportunities for success to investors, as well as new risks and responsibilities. Hence the range of philosophies within ESG investing, which Mike reviewed, classifying investors by motivation—the “believer,” the “cautionary,” the “fundamentalist,” et cetera—as well as by approach—“screening,” “impact,” “integration,” and so on. He emphasized that these different approaches tend to involve a trade-off, in which greater impact is usually associated with greater costs, including the risk of a negative “perverse impact.” 

Mike’s work has brought him into engagements with dozens of companies in a variety of sectors and contexts. His central conclusion was that there is no “one size fits all” approach to engagement, and methodologies rightly vary based on investors’ goals and the materiality of specific issues. However, Mike noted that corporate governance is a universal underlying concern and emphasized the importance of “integrity analysis”: if company management is not truthful, responsive and generally operating in good faith, no ESG reforms will go through. 

In his role at ICGN, Mike is deeply involved in planning their upcoming Online Governance, Stewardship and Sustainability Course, which will delve into many of the issues that he raised on our call in greater detail. See Mike’s full presentation here. – Andrew Howell

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