Provision Newsletter

By Emily Connell Nutritional Medicine

Self-care – it’s a bit of a ‘buzz’ word. Everyone is telling us we need more of it – can’t pour from an empty cup and all that. But it’s harder than it sounds! It’s so much more than pedicures and massages (don’t get me wrong – these are great!), but it’s actually about scheduling in regular time for YOU.

As a mum, dad, daughter, son, business owner, partner, colleague, volunteer, retiree…whatever combination it may be for you, there are some common conversations we have with ourselves when it comes to self-care:

#1 “I don’t have time for this self-care business” and
#2 “How can I even justify putting me first when so many others need my help?”

Newsflash! It is exactly these thought patterns and belief systems that get us into trouble in the first place, leading to burnout and fatigue, that ironically means we can’t help anyone, despite the best of our intentions.

We can’t truly understand self-care without first providing context and explaining this concept of ‘burnout’. Burnout, another popular saying, especially in the corporate sector, can be a term thrown around the office or home flippantly – but it is a real thing.

It is now recognised officially by the World Health Organisation, so it is about time we took it seriously! Here are some burnout signs:

• Feeling tired all the time?

• Lacking motivation where you were once so driven?

• Struggling to find joy in the everyday?

• Not sleeping and mind racing?

• Gaining weight, health niggles starting to surface mixed with a good splash of coffee and sugar cravings?

• Moods that mean you answer every question with your middle finger?

• You just know that you are not feeling like your best self.

Welcome to the world of burnout!

But how did we even get here? We have relentless schedules and can’t say no. Or we dread the thought that we might have a spare 5 minutes of unscheduled time in a day where we can allow ourselves to sit down and have a cup of tea. God forbid – we might fall asleep in the chair, or even worse, breathe! Guilt and ‘shoulds’ (“I should be more”, “I should do more”, “I should do better” – I know you hear me) are our closest friends. But let’s face it, it’s really nice to have some friends because our relentless schedule doesn’t allow for any real-life catch-ups. Most of all, we are reluctant to admit we’re struggling – because vulnerability is the enemy! But the reality is, as humans, we are not made for this, and burnout is the inevitable consequence.

Self-care is not a luxury – scrap that! It’s an essential practice, critical in being able to serve those we love and care for in the best way we can. It’s about taking a pause, making an appointment with yourself, and discovering the little acts of self-care that work for you in each day, in each moment. It is these daily intentional acts that have such a profound impact on our health and wellness – mentally, physically, spiritually and emotionally.

Ultimately, it’s about knowing what works for you, scheduling it in, and then making a commitment to making it happen. I’ll repeat – MAKING A COMMITMENT to yourself! Is it about going to bed a bit earlier because those hours before midnight are the most restorative? Is it about moving your body each day? Is it about having an extra glass of water? Is it about eating less out of a packet and enjoying some ‘real’ food? Is it about challenging those negative thoughts and perfectionist tendencies that keep us on the hamster wheel of burnout? Is it about breaking up with the ‘guilt’ of ‘I should be everything to everyone’ and stopping to connect with a friend in real life? Is it actually about accepting the care of others – because we need to receive support to give support?

Your self-care challenge right now – write down a list of what brings you joy and schedule one thing in. We all know, if it’s not in the diary, it doesn’t happen so get out your calendars! Be kind to yourself so you can be well enough to be kind to the world. Live your best life.

Source: Emily Connell Nutritional Medicine

Emily is a Nutritional Medicine practitioner, writer, speaker, facilitator & trainer. Emily combines her skills in Nutritional Medicine with her background in Occupational Therapy, mental health & management to support people to achieve health, inspire wellness and banish burnout. Emily facilitates wellness workshops and is available for online clinical consultations and corporate speaking events.

Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

From wildlife-filled jungles to some of the world’s most spectacular beaches, sustainable travel is on the rise across the globe. While there’s nothing like swaying in a hammock with a cocktail or two, it’s even better when you know your holiday dollars help to support communities and environmentally-friendly practices, while protecting cultural and natural heritage.

Sink into that hammock at one of these sustainable travel destinations.

Republic of Palau

Turquoise lagoons, volcanic landscapes and magical underwater worlds await in Palau. This diver’s paradise in the Western Pacific not only captivates holiday-makers with an adventurous spirit, it’s one of this year’s winners in the Green Destinations Sustainable Top 100 Destination Awards. 

Innovative approaches include the ‘Palau Pledge’, which you sign upon entering the country as a vow to protect natural and cultural heritage. New regulations will ban the use of reef-toxic sunscreens in 2020 and it’s also home to the world’s first shark sanctuary. Don’t miss out on kayaking around the Rock Islands and stay on Koror for a blend of tourist facilities and island-hopping fun.

Fraser Island, Australia

When you want to get off-road in a 4WD, float in shimmering, freshwater lakes and camp under the stars, Queensland’s Fraser Island is calling your name. The world’s largest sand island is an irresistible blend of towering rainforests, wild surf beaches and natural wonders, like deep green Lake Wabby and The Cathedrals coloured sand dunes.

Eco-friendly initiatives abound, with Kingfisher Bay Resort leading the way. Designed to integrate with the island, it holds nine Advanced Ecotourism Certifications and has been credited as a Green Travel Leader by Ecotourism Australia. From ranger-led walks to canoeing and bush tucker education, a holiday on Fraser Island means total immersion in nature.

Galapagos Islands, Ecuador

The human footprint is most certainly kept to a minimum on the Galapagos Islands, which is evident in the abundance of wildlife that barely blinks an eye at people in their midst. Around this archipelago of 19 islands, volcanic rocks and islets, expect to see playful sea lions, gigantic tortoises, sun-loving lizards and penguins galore.

Tourism activities in the Galapagos Islands are subject to conserving natural resources, recycling, sourcing local produce and hiring local employees. Different institutions govern sustainable development and ongoing conservation projects help to ensure the pristine state of this incredibly unique destination.

Ljubljana, Slovenia

If you’re looking for an eco-friendly city trip, pop the capital of Slovenia on your European itinerary. Described as a ‘city with a green soul’, it’s been globally recognised for measures including waste management and sustainable development. In 2012, the inner city centre was closed to traffic and free bicycle sharing is the preferred mode of transport.

Along with exploring lush, green pedestrian ways along the picturesque Ljubljanica River, launch into museum-hopping across cobbled streets, coffee-sipping in quaint cafes and foodie trips to local markets.

Petra Archaeological Park, Jordan

Carved into dramatic desert canyons, Petra holds the secrets to the mysterious ancient civilisation of the Nabateans. The sprawling site encompasses the Petra Archaeological Park, with majestic caves, tombs and temples carved into rose-coloured sandstone.

From regional to international collaborations and the formation of the Petra National Natural Protected Area, sustainable travel here has a strong focus on preserving rich culture and otherworldly landscapes.

Whether it’s ancient wonders or sparkling coastlines that beckon this year, sustainable travel destinations offer the best of all worlds.

Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

How the move to electronic payments could be making it easier to spend…and what to do about it.

It’s Thursday morning and almost the end of the working week. You’re walking to the train station and you realise you’ve forgotten to top up your public transport card. No matter…a few clicks later and you’ve transferred $50 over.

At the station you grab a takeaway flat white before the train arrives…tap and go, too easy. At lunchtime you jump online and scroll through your newsfeed. Wow, there’s a pretty good one-day special from your local department store. You end up buying a new pair of pants, a replacement for your old wok and a couple of books.

After work you’ve got a few drinks organised with colleagues before heading home. When it’s your round you tap to pay with your smartphone. That night there’s nothing on TV. A few clicks from the comfort of your couch later and you’re settled in to watch a new movie you’ve downloaded.

Over the day you’ve spent close to $400 without touching a coin or banknote. It’s so effortless online, and the ease of tapping your card or phone at the supermarket or café beats the hassle of carrying coins and notes hands down. Plus with every transaction recorded it makes it easier to track your spending, budgeting and investments. What’s not to like?

Winners and losers

Cash payments in Australia are declining rapidly. Cash accounted for just 10% of all payments in 2017 and by 2022 this will fall to 2%. For all intents and purposes, Australia will be a virtually cashless society¹.

It’s a trend that certainly has government backing. From an official perspective the notes and coins we were happily using for centuries have a lot to answer for. Banknotes and coins cost money to produce, they help to facilitate criminal transactions and they make it easier to avoid paying tax.

So the move to a cashless society dominated by electronic transactions, contactless payments and tap-and-go smartphones can only be a good thing for everyone, right?

Not necessarily. Like any technological development, there are winners and losers. In a cashless society the poor and elderly can find it difficult to access funds and pay for essential services.

Recent research in the UK highlights how much cash is still relied upon by older and poorer citizens. While only 4% of adults rely on cash, that includes some of the most vulnerable members of society. When you look at people who rely on cash day in day out, 39% are aged 65 or over and 62% have an income of less than 9,000 pounds (around $16,170)².

How cashless impacts your spending

In the dash to cash we could be in danger of leaving more vulnerable sections of society behind. And the concerns about a cashless society don’t end there.

• What implications are there for privacy when every transaction can be logged and monitored?

• What protections are there against hacking and cybercrime in our electronic world?

• What backup plan is in place if the technology fails during an outage?

But one of the major concerns about going cashless is how easy it makes it to spend money online or with the touch of a card or smartphone.

And you don’t even have to pay for the goods upfront, with AfterPay letting you order online and receive your goods before deciding whether you want them.

Managing our spending has got a whole lot more complex without the tangible reminder of dollar notes and coins in our wallets and purses.

And what about the next generation? It can be difficult to teach kids about money when they see us paying for goods so effortlessly without handing over any cash. Are they equating swiping a card with paying a physical dollar?

5 tips to control your spending in an electronic world

1. Try going out without your credit card to remove temptation—you can still pay for essentials, but you’ll need to use notes and coins.

2. Think about moving from a credit card to a debit card so that you’re not spending money you don’t have—even if it is tap and go.

3. Teach your kids about money by giving them a list of things to buy with a specific amount of cash—if they run out, they’ll need to adjust their budget rather than access easy credit.

4. Embrace the online advantages of monitoring your spending .

5. Ringfence some of your income from temptation by setting up an automatic transfer to a higher interest savings .

The digital revolution is no different to past innovations in its capacity for good and bad. While your smartphone certainly makes it easier to rack up a pretty big bill without too much trouble, it also makes it easier to track your spending and set up a budget.

As the move to a cashless society changes our money habits, our challenge is to harness the power of the new technology to make a positive difference to the way we spend and the way we save.

Source : AMP August 2019 

1 Finder.com.au, The humble cheque to be extinct by 2019, 1 February 2018.
2 RSA Action and Research Centre, Cashing out: The hidden costs and consequences of moving to a cashless society, January 2019

Important:
This information is provided by AMP Life Limited. It is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances and the relevant Product Disclosure Statement or Terms and Conditions, available by calling |PHONE|, before deciding what’s right for you.

All information in this article is subject to change without notice. Although the information is from sources considered reliable, AMP and our company do not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP and our company do not accept any liability for any resulting loss or damage of the reader or any other person.

When’s the last time you used cash? New technologies are changing the way we transact

Two sheep for an axe? A pigskin coat for a sack of grain? Three bushels of wheat for a goat?

We’ve come a long way as a species. Back in the day, bartering was the only way to conduct transactions. It was time consuming, unsophisticated and inefficient—every transaction had to be conducted afresh.

Ever since King Alyattes of Lydia minted the first coin in 600BC, humanity’s relationship with money has been constantly evolving.

Coins actually go further back, with the Chinese pioneering the use of small bronze replicas for transactions as far back as 1100BC and paper money a few centuries later. Europeans finally caught on to paper notes in the 17th century and it was a few hundred years more before the first electronic funds transfer (via telegram) in 1860. The first credit card followed just after the Second World War in 1946.

Fast forward to more recent developments and mobile banking was offered to European consumers as early as 1999, with contactless payment cards appearing in the UK in 2008.

When it comes to money, fashions come and go. But perhaps the best illustration of the changing trends is the lifecycle of the humble cheque.

Cheques—the decline and fall

At one time, the ability to pay for goods and services by signing an authorised slip of paper from your banking institution was cutting edge technology.

Picture the scene. It’s the middle of the 18th century in Britain. You’re a merchant looking to settle an account with a business partner. They present you with a signed note from their bank essentially promising to transfer the payment to your bank.

The idea isn’t completely new…but this is the first time anyone’s thought to print cheques with serial numbers so that customers could pay for goods and services against their bank account.

These signed pieces of paper took days to process, the signatures were easy to forge and settling the transaction involved a complex network of clearinghouses. But at the time they would have seemed the height of sophistication and ease. The concept caught on quickly and so the humble cheque was born.

A couple of hundred years later it’s the early 21st century and cheques have had their day. By January 2012 the number of cheques processed in Australia had declined to 45,900. And by October 2017 there were just 6,549¹.

Until quite recently it would have seemed unthinkable that you couldn’t use a cheque. But many Australians under the age of 40 have never even seen a cheque book, let alone used one.

The cheque is predicted to die out completely by the end of 2019².

Back to the future

The moral of the story is, things change. Technology finds a way to facilitate quicker, easier payments. One day it was notes and coins replacing barter payments…the next day signed cheques and telegrams…the next it’s tap-and-go contactless cards.

As for the next big thing, who knows? Virtual cryptocurrencies like Bitcoin, wearable contactless wristbands from Barclaycard or perhaps even back to the future with Bartercard, an online bartering system that would have resonated with our distant ancestors.

In the space of a few thousand years, we’ve gone from resource exchanges based on the need for survival to quick, instant and virtual money exchanges, driving mass consumption and instant gratification.

And the pace of change is increasing. It took hundreds of years for paper currency to spread from China to Europe. These days, innovations like contactless payments can spread around the world within a decade. And virtual currencies can catch on instantaneously thanks to the world wide web.

Cash is no longer king

So is cash on the way out? It would seem so if we look at overseas trends. Over in Europe, Sweden is moving to a completely cashless society, with cash payments due to be phased out by 2023³. It’s not only about convenience. Among the mooted benefits of a cash-free society are reducing crime, fighting tax avoidance and helping businesses feel more secure.

And it’s not just small Nordic economies going electronic. The world’s most populous country is also moving away from cash. Chinese consumers have embraced mobile payments via QR codes, and spend 90 times more using their smartphones than their American counterparts⁴.

Back here in Australia cards have overtaken cash as the most frequently used payment method, according to the Reserve Bank’s Consumer Payments Survey. Electronic transactions more than doubled to around 480 per person in the 10 years to 2018. And paper-based payment methods such as cash and cheques declined from 320 per person in 2007 to 210 in 2016⁵.

What the future holds for cash

So if we look forward 20 or 30 years into the future—assuming current trends continue—it’s possible that the only place our children will see notes and coins is in the museum.

The implications are profound:

• What does a cashless society mean for people on the margins who don’t have access to credit and rely on physical money to survive?

• What does a cashless society mean for our spending and saving habits?

• What does a cashless society mean for privacy when every transaction we make is logged, tracked and analysed?

Whatever the future holds, we’re living through interesting times as our relationship with money evolves at a pace unmatched in human history.

Introduction

Only last month share markets in the US and Australia were at record highs. But ever since President Trump ramped up the US-China trade war again at the start of August, financial markets have seen a significant increase in volatility. Share markets have had 6% or so falls from their highs to recent lows and bond yields have plunged to new record lows in many countries. This note takes a looks at what is driving the market turmoil, the risk of recession and what it all means for investors.

Market turmoil – what’s driving it

The bout of market turmoil we have been seeing this month basically has three inter-related drivers. First, President Trump ramped up the US-China trade war again with another round of tariffs on China. (See Escalating US-China trade war).

Second, Chinese economic data slowed more than expected in July and the manufacturing heavy German economy contracted in the June quarter. This is on the back of weak global data.

Third, economic uncertainty drove more money into bonds pushing bond yields down and driving a further “inversion” of bond yield curves – which is when long-term bond yields fall below short-term yields – leading to more talk of recession.

This all drove share markets down. Of course, the turmoil in Hong Kong, Brexit, tensions with Iran, political uncertainty in Italy and increasing risks that a Peronist government will return in Argentina aren’t helping. Talk of policy stimulus has provided some relief though with occasional sharp rallies in shares.

Australia is not in the trade war but anything that weakens global growth threatens our exports and confidence, so we are naturally seeing bouts of weakness in Australian shares and bond yields just like we did last year when the trade war started.

Reasons for concern

There are several reasons for concern. First, the trade war still shows no sign of letting up. Optimism on US trade talks with China have been dashed several times now, the threat of tariffs on autos remains and maybe China has decided to wait till after next year’s US elections.

Second, the trade war and the twists and turns it takes is weighing on business confidence and it’s hard to make firm investment plans when they may be rendered uneconomic by a tweet from Trump. This is particularly evident in a slump in manufacturing conditions PMIs worldwide. See the next chart.

View larger image

Source: Bloomberg, AMP Capital

Third, it’s been hoped Chinese policy stimulus will offset the trade war for the last year now, but China has continued to slow.

Fourth, inverted yield curves have preceded post-war US recessions so the recent inversion can’t be ignored.

Finally, global and Australian share markets are vulnerable to weakness after roughly 25% gains from their December lows to their July highs left them overbought and vulnerable to a correction. This risk is accentuated as the August to October period often sees share market weakness.

Reasons for optimism

However, while the risks have increased there are several reasons not to get too concerned. First, President Trump is getting twitchy about the negative economic effects of the trade war: he delayed some tariffs last week after sharp share market falls and had a meeting with major US bank heads on share market falls. The historical record shows that US presidents get re-elected after a first term (think Nixon, Reagan, Clinton, Bush junior and Obama) except when there were recessions in the two years before the election and unemployment is rising (think Ford, Carter and Bush senior). Trump would be aware of this. Share markets have regular corrections but major bear markets are invariably associated with recession and so Trump is wary whenever shares take a sharp lurch lower. As a result, our view remains that at some point Trump will seek more seriously to resolve the trade issue.

Second, policy stimulus is being ramped up: with numerous central banks now cutting interest rates and indicating that more cuts are on the way including from the Fed; the ECB looks like it will soon return to quantitative easing; Chinese economic policy meetings indicate that more policy easing is on the way; Germany is reportedly thinking about some sort of fiscal stimulus; and there is talk of more US tax cuts. This is very different to last year when the Fed was tightening, the ECB ended QE and other central banks including the RBA looked to be edging towards tightening.

Third, while the risks have increased, a US or global recession remains unlikely: services indicators have held up well (see the first chart) and the services sector is the dominant part of most major economies; we have not seen the sort of excesses that precede global and notably US recessions – there has been no investment boom, private sector debt growth has been modest and inflation is low such that central bankers have not slammed the brakes on; & monetary & fiscal stimulus will provide support.

Finally, the decline in bond yields is making shares relatively cheap. The gap of 4.8% between the grossed-up dividend yield on Australian shares of 5.7% and the Australian 10-year bond yield of 0.94% is at a record high. Similarly, the gap between the grossed-up dividend yield and bank term deposit rates of less than 2% is very wide. In other words, relative to bonds and bank deposits shares are very cheap which should see them attract investor flows providing we are right and recession is avoided.

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Source: Global Financial Data, Bloomberg, AMP Capital

But what about inverted yield curves?

Long-term bond yields should normally be above short-term bond yields because investors demand a higher return to have their money locked away for longer periods. But sometimes long-term rates may fall below short rates. This happened briefly in the US in the last week in relation to the gap between 10-year and 2-year bond yields but had already happened a few months ago in relation to the gap between the 10-year yield and the Fed Funds rate. See the next chart.

View larger image

Source: NBER, Bloomberg, AMP Capital

This so-called “inversion” is causing increasing consternation as an inverted US yield curve has preceded US recessions so it’s natural for investors to be concerned. But the yield curve is not necessarily a reliable recession indicator at present: it can give false signals (circled on the next chart); the lags from an inverted curve to a US recession averaged around 18 months in relation to the last three recessions so any recession may be some time off; various factors unrelated to US recession risk may be inverting the curve such as increasing prospects for more quantitative easing pushing down bond yields, negative German bond yields dragging down US yields and investor demand for bonds as a safe haven from shares; yield curves may be more inclined to be flat or negative when rates are low; and as noted earlier we have not seen other signs of an imminent US recession such as over-investment, rapid debt growth, excessive inflation and tight monetary policy. So our base case remains that a US recession is not imminent.

The Australian yield curve has also gone negative with 10-year bond yields of 0.94% below the cash rate of 1% but the gap between the 10 and 2-year bond yields only just positive. But it’s worth noting that Australian yield curve inversions around 1985, 2000, 2005-2008 and in 2012 were useless recession indicators.

View larger image

Source: RBA, Bloomberg, AMP Capital

What does this all mean for investment markets?

In the short-term share markets could still fall further as trade and growth uncertainties remain and as we go through the seasonally weak months ahead. This could be associated with further falls in bond yields. In fact, further share market weakness may be needed to get Trump to seriously resolve the trade issue (as opposed to just go through another trade talks/ breakdown cycle again).

However, providing we are right and recession is avoided, a major bear market in shares (ie where shares fall 20% and a year later are down another 20% or so) is unlikely and given that shares are cheap relative to bonds we continue to see share markets as being higher on a 6-12 month horizon.

What should investors do?

Since I don’t have a perfect crystal ball, from the perspective of sensible long-term investing the following points are repeating.

• First, periodic sharp setbacks in share markets are healthy and normal. This volatility is the price we pay for the higher long-term return from shares. After 25% or so gains from their lows last December shares were at risk of a correction.

• Second, selling shares or switching to a more conservative strategy after falls just locks in a loss. The best way to guard against selling on the basis of emotion is to adopt a well thought out, long-term investment strategy.

• Third, when growth assets fall they are cheaper and offer higher long-term return prospects. So, the key is to look for opportunities that pullbacks provide.

• Fourth, while shares may have fallen in value, the dividends from the market haven’t. The income flow you are receiving from a diversified portfolio of shares remains attractive. So for those close to or in retirement the key is to assess what is most import – absolute stability in the value of your investments or a decent sustainable income flow.

• Fifth, shares often bottom at the point of maximum bearishness. So, when everyone is negative and cautious it’s often time to buy.

• Finally, turn down the noise. In times of crisis the negative news reaches fever pitch, which makes it very hard to stick to a long-term strategy, let alone see the opportunities.

If you would like to discuss any of the issues raised by Dr Oliver, please call on |PHONE| or email |STAFFEMAIL|. 

Author: Dr Shane Oliver, Head of Investment Strategy and Chief Economist

Source: AMP Capital 20th August 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

Investors increasingly care about ESG. Traditionally we could rely on authorities to take our concerns into account and update the regulatory framework accordingly. But, with political polarisation increasing, this mechanism is coming undone. As a community of companies and investors, the onus is on us to step in and co-operate to develop an ESG structure that works for all of us.

Until recently, community expectations in Western democracies were translated into rules through a bipartisan legislative approach. That meant investors could reasonably expect environmental, social and governance (ESG) factors to be incorporated into investment guidelines over time. But that’s no longer the case.

Political polarisation is increasing, and community expectations are not being effectively synthesised through the political process. Of course, many issues are partisan, and political impasses around them can reflect genuine disagreements. However, some expectations are either broadly held across the community or rooted in rigorous science and analysis. It’s these consensus and evidence-based expectations which, if they do not flow through political channels, lead to regulatory stagnation.

The investment community is finding it increasingly difficult to have its preferences preserved in regulation, and is seeking alternative routes to achieve that outcome. One way is for large investors to use their clout to influence companies into more ESG-aware behaviours.

The theory of regulation

Economic theory frames regulation in terms of externalities. Companies already efficiently manage what is in their direct interests, but many of their activities create externalities where the benefits of their actions accrue to them, but the costs are paid by the environment and society.

Historically, regulation has been used to force companies to internalise their externalities. Under this framework, companies had to comply with the rules so they could claim they had met community expectations. Importantly, companies only have to meet a threshold to be in compliance; they do not need to go beyond the requirements. This means that the rules must be continually revised and updated to reflect the changing community expectations. When regulations fail to be adequately updated, they stop meeting the needs of the community.

A useful analogy is a ‘tragedy of the commons’ type scenario. Imagine a park where people enjoy having picnics. Once park-goers finish they have little incentive to collect their litter, which spoils the enjoyment of other visitors. The park ranger steps in and enforces a rule that everyone pick up their own litter, restoring the satisfaction people derive from the park. However, over time, the park pavilion suffers wear and tear and needs a new coat of paint, while the turf needs resurfacing. If the community cannot get the ranger to update the rules or charge an admissions fee to pay for the upkeep, the community’s expectations will be unfulfilled and everyone loses out.

In a similar way, what should companies do if regulations are not keeping up with what is in the interests of all stakeholders? They could follow the requirements and go no further in order to maximise profits, but that may prove perilously short-sighted. While companies used to compete with other companies on all fronts, there is now cause for industries to co-ordinate among themselves, if necessary, to achieve outcomes which are mutually beneficial. Competition will always drive some firms to free-ride on the efforts of others, but this does not negate the need to try. If governments are not providing the co-ordinating mechanisms, industry groups may need to fill in the gaps.

The role of investors

Some companies will be slow to adapt to the new reality, but they risk being increasingly shunned by consumers and investors, resulting in a higher cost of capital. Management teams and boards should engage with asset-owners and investment managers to understand what their interpretations of the requirements are.

Investment analysts should cultivate a deep and long-term understanding of the fundamental characteristics of the companies under their coverage, and not exclusively rely on formulaic applications of principles or a narrow perspective from merely speaking with the company.

These two competencies of companies and investors engaging and intimate familiarity with corporate fundamentals, should complement each other and form the basis of an active ESG approach. The worthwhile prize is that ESG outcomes are achieved for each company, at each point in time. And that’s in all of our interests.

By Kate Howitt

Portfolio Manager Fidelity Australian Opportunities Fund

Source : Fidelity July 2019 

Reproduced with permission of Fidelity Australia. This article was originally published at https://www.fidelity.com.au/insights/investment-articles/why-esg-has-moved-from-nice-to-do-to-must-do/

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