The smarter way to go about spending $20b
We could invest responsibly in the post-Covid recovery, or we could be stupid. Which will we choose, asks David Hall.
Twenty billion dollars. A country can do a lot with that. A lot of good, or a lot of stupid. This is how much Finance Minister Grant Robertson set aside in his recent Budget for further economic stimulus, with $3b earmarked for infrastructure. It was a smart move. Ill-conceived infrastructure could create a ‘‘double liability’’ for New Zealanders: firstly the debt incurred for building new assets, secondly the costs of repairing, upgrading or decommissioning this infrastructure if it proves unfit for purpose.
How then to avoid the stupid? The Government should adopt a ‘‘responsible investment’’ approach. As defined by the UN Principles for Responsible Investment, this incorporates environmental, social and governance (ESG) factors into investment and active ownership decisions. It is becoming standard practice for big financial institutions.
The driving force is prudent risk management. It isn’t that bankers and asset managers are trying to usher in a green utopia of hemp-wear and tofu burgers; it’s that they’re reducing exposure to foreseeable, material risks.
In other words, this isn’t a selfless exercise. Empirical research shows that ESG-aligned investments generally outperform the wider market on standard financial metrics. The present crisis affirms this.
An analysis by Simon O’Connor, chief executive of the Responsible Investment Association Australasia (RIAA), reveals that ESG-aligned companies and indexes are performing better during the financial turmoil of the last few months. This reflects these companies’ reduced risk exposure, lower cost of capital, and better operational management – all qualities that we should also wish upon our public infrastructure.
So what would a responsible investment approach to the post-Covid recovery look like?
First, do no harm. This is the first principle of medical ethics – and equally relevant for investment. In financial lingo, this involves ‘‘negative screening’’ – excluding investments that cause demonstrable harms. Negative screening typically excludes investment in weapons, gambling, tobacco, alcohol, pornography, mining, and projects that breach indigenous rights.
Increasingly, it also excludes investments that contribute to climate change, such as fossil fuels and cement production. As former Bank of
England governor Mark Carney argues, this is for the self-interested reason that climate risk is financial risk. High-emissions assets are like hot potatoes that investors don’t want to be holding when the music stops – that is, when the world gets serious about reducing emissions. The oil and gas sector’s growing volatility, exacerbated by the Covid-19 crisis, is further reason for caution.
Negative screening should also track the physical risks of climate change, such as sea-level rise, drought, wildfire and flooding. Infrastructure proposals can be tested against scenarios of likely climate impacts. One example is the proposed $18 million upgrade to Muggeridge’s pump station, which Waikato Regional Council put forward for ‘‘shovel-ready’’ funding. Yet the council’s own Coastal Inundation Tool shows how exposed the area is. Nearby Nga¯ tea already has $175m worth of assets at risk from sea-level rise. We shouldn’t be burdening our children with debt for infrastructure that may be submerged in their lifetimes.
But there is more to responsible investment than doing no harm. It’s also about doing good by using a ‘‘positive screen’’ to scale up visionary investments. The Government already does this by using the Living Standards Framework to set priorities for its wellbeing budgets.
While these priorities were ‘‘put on ice’’ this year, their relevance was affirmed by a recent Oxford University analysis that highlighted the economic benefits of clean electricity infrastructure, energy efficiency, education and retraining, natural capital investment, rural support schemes, and clean R&D spending.
The Government can also use its procurement power to make dumb and dirty infrastructure cleaner and smarter. A good example is Ka¯ inga Ora’s commitment to build all new social housing to the Homestar 6 standard for energy efficiency. The Government might have chosen the cheap option, but used its purchasing power to support long-term cost savings and wellbeing benefits.
What other procurement choices lie ahead? A wood-first policy for new public buildings? Mandatory micromobility lanes and low-emissions asphalt for road upgrades? Sustainability training for apprenticeships? Carbon-negative growth for the healthcare sector, which already produces between 3 per cent and 8 per cent of New Zealand’s total greenhouse gas emissions?
This isn’t about sacrificing present wellbeing for the future, or trading away economic for environmental gains. It is about achieving both, while managing the risks of a turbulent few decades ahead. Anything else is irresponsible.
This isn’t about sacrificing present wellbeing for the future, or trading away economic for environmental gains. It is about achieving both ...
Dr David Hall is a lecturer at AUT, andserves on the Technical Working Group for Aotearoa Circle’s Sustainable Finance Forum.