Liontrust Sustainable Investment Annual Review 2021 - International - Report - Page 46
One of the consequences of falling labour productivity growth, for a
company or employer, is the impact it has on profit margins, which
become progressively squeezed as the ability to reduce wage
costs through productivity growth declines. In fact, this pressure
on margins sets up an uncomfortable conflict between dividends
and future investment possibilities. It also tends to squeeze wages
and leads to growing inequality: the idea that wages are paid
according to labour productivity began to disappear as soon as
growth in the latter started to fall.
Economic growth was supposed to deliver a more equal society
and, in certain periods, it did: between 1946 and 1980, the bottom
1% of earners achieved approximately 6% average annual growth
in their income whereas the richest percentiles had below-average
growth. Since 1980, however, that trend has dramatically reversed
and the top 0.001% of earners now achieve that 6% annual growth
while the poorest 5% have seen their wages not just stagnate but fall.
This is a dangerous situation, leading to rising political tensions and
a sense of being left behind among many communities.
Through this lens, the pandemic becomes a tale of two very different
crises. The livelihoods of wage earners have become increasingly
precarious. Unemployment has a tendency to grow precipitously
during crises. It did so in 2008 and it did so again in 2020
during the early stages of the pandemic. More worrying is the fact
that most predictions suggest we have not seen anywhere near the
peak of unemployment that will come once furlough schemes and
policies are withdrawn.
A somewhat different story is evident when looking at the S&P
500 over the same period. The financial crisis caused the Index
to plummet followed by a slow return to growth. But during the
pandemic, the blip in performance is hardly noticeable. There
was a sharp decline early in 2020 but it was followed by an
extraordinarily quick recovery. Clearly, this had a lot to do with
the actions of the Federal Reserve in the US and central banks
elsewhere, pumping enough money into the system to convince
investors it is still worth trading on the stock market.
But comparing the S&P500 against unemployment over this period
presents a worrying picture of stock markets no longer aligned with
economic fundamentals. Governments are essentially pitting those
who earn their income from investing in companies against those
who work for those companies. The drive to protect share prices
in an attempt to maintain market stability rewards shareholders but
fails to protect workers.
This situation should force investment to interrogate its ultimate
purpose: is it to protect the value of stocks despite declining economic
fundamentals and the loss of livelihoods or is there another role it
should be playing? How should we respond to the limits that a finite
planet and a precarious pandemic have faced us with?
US author Wendell Berry wrote that ‘human and earthly limits,
properly understood, are not confinements, but rather inducements…
to fullness of relationship and meaning’. What he is suggesting is
that the current crisis provides an opportunity to think about what
our economy is for.
This is something I have been considering for some time now.
In a book called Prosperity without Growth, I attempted to tease
apart the building blocks of the economy and ask these questions.
Should enterprise really be about profit maximisation, making and
selling products as fast as possible, or could it be conceived as the
organisation of work to deliver the services people need to thrive?
This concept of enterprise as service-led is a fundamental one in the
context of the pandemic. Over the last year, we have been given
an object lesson in what matters in society; not mass production
of consumer goods but healthcare, social care, distribution, retail,
and efforts of frontline workers. And yet these are exactly the people
whose working conditions have been systematically eroded under
the economic fundamentals of the last decades.
Just as it is possible to reframe enterprise, and recognise the
fundamental value of work, we must also reframe our vision for
investment. We have to find avenues to invest in society in ways that
protect the livelihoods of those most important to our quality of life,
and that deliver the infrastructure for a net zero carbon economy.
One of the most fascinating avenues of possibility lies in bringing
these two goals together. A sector such as social and personal
services, for example, which includes many of those frontline workers
who saved our lives during the pandemic, has high employment
intensity and low carbon intensity. It represents a ‘sweet spot’ for
sustainable investment that promises higher employment and lower
impact on the planet.
It also makes the social purpose of investment much clearer: what
we need to do, as far as possible, is move sectors with high carbon
intensity onto a trajectory towards the employment and emissions
profile of areas like social and personal services. This is a different
kind of investment. Financial markets are no longer a gambling
casino where a minority make returns from the market while the rest
of the economy falters. Investment becomes a commitment to our
common future.
These possibilities offer real hope for an economy that works for
everyone. Beyond the privatisation of benefits and the socialisation
of costs, lies an economy of care, craft and creativity, which can
help the world recover from the pandemic.
46 - Liontrust Sustainable Investment: Annual Review 2020
