Five investment strategies to mitigate systemic risks before the next pandemic
As we watch unemployment numbers rise and markets flounder, it is painfully clear how pandemics not only impact individuals’ health and well-being, but also devastate the entire global economy. The scope and scale of COVID-19 and its related economic fallout stem in large part from the fact that the world’s social and financial systems with their interconnected businesses and supply chains have become so intertwined and interdependent that a disruption to one can ramify, rapidly wreaking havoc for all.
Yet, most investors continue to operate on the assumption that they somehow operate separately from these systems and that systemic risks are beyond their control. We believe they’re wrong. We think individual investors and the financial system at large can and should invest and lend in ways that intentionally enhance, and not destroy, these systems.
Although finance cannot prevent the threat of the next pandemic, intentional system-level decision-making by investors and lenders can help us prepare for it more effectively and mitigate its worst societal and economic impacts. We need better guardrails. By taking a few decisive steps, we can help put these in place.
Here’s what we need to do.
1. Invest in resilient government
Allocate assets to the sovereign debt and municipal bond markets. Only local and national governments have the authority to take the draconian steps necessary to slow or stop pandemics. Investors need to invest in governments strong enough and with deep enough pockets to build guardrails and kindle economic recoveries. In addition, through the municipal bond market investors can support those non-profit hospitals that make up the vast majority of our acute care healthcare system and disproportionately serve low-income communities.
Many institutional investors, in search of yield today, have drastically cut their allocations to fixed income, chasing short-term returns by shifting assets to alternatives such as private equity and hedge funds. This is a short-sighted decision.
Investors should also stop investing in companies that don’t pay their fair share of taxes and in financial services firms that promote tax avoidance services. What they are doing may not be illegal, but they are starving government of one of its most basic sources of revenues.
2. Invest in forward-looking corporations
Insist that companies understand their business models and prepare backstops for their meltdown. Today’s airline industry may never recover. Why? Because it did not understand that it is in the business of bringing people together: uniting families, convening businesses, solidifying friendships. If it had, it would have invested in Zoom or established its own telecommuting subsidiaries. “Flight delayed? Stay at home or stop by our lounge and use our remote conferencing platform.”
Today’s fossil fuel companies, with few exceptions, lack the imagination for anything more than running out the clock on their current business models in as orderly a manner as possible, although decades ago some among their leaders had active renewable energy portfolios that they since opted to sell. At least the automobile and electric utility industries have an inkling that they should adapt to a future of alternative fuels.
3. Invest in preparedness
Be willing to invest in firms that invest in the health of systems and prepare for potential systemic breakdowns. Excess manufacturing capacity may not be the most profitable way to run a business, but efficiency is not about letting people die because no one planned for ramping up ventilator production. The pursuit of efficiency has to stop short of abandoning all protection against disaster. If a firm makes belts, investors should ask whether they have a suspender line in the wings. Suspenders may be redundant and inefficient but it’s best not to be caught with your pants down.
Pharmaceutical companies that emphasize vaccines, generally a less profitable line of business than patented prescription drugs, deserve credit for understanding that prevention, particularly of pandemics, is part of their industry’s mandate. A drugstore chain can remake itself into a full-service preventative healthcare provider. Invest in the system today or pay the price tomorrow.
4. Forgo and forgive
The financial community thrives on lending. Debt is the most efficient way to boost the consumer economy. It works its magic for corporations too. Except when it cannot be repaid. We lent profligately to the housing market in the lead up to the 2008 financial crisis. Corporations loaded up on debt in the days before COVID-19 hit. The bonds of debt are excruciating to unwind; it can feel like forever; it can turn worlds upside down. The economic, social, and human costs of doing so destabilize.
The equivalent of belts and suspenders for lenders is the willingness to forgo a loan that is in fact too risky and to forgive those that cannot be repaid through no fault of borrowers. That means tough love to strengthen borrowers and lenders both. That strength will be needed to get through the next systemic crisis, pandemic or otherwise.
5. Be prepared
Being prepared means anticipating the worst, building in circuit breakers and guardrails, assuring redundancy and resilience, even when the worst seems unimaginable. Being prepared means investing in the health of fundamental systems.
We may be lucky and dodge the worst-case scenarios of the current fast-moving pandemic and the slow-motion train wreck that global warming will bring, but the 21st century will see other such systemic disruptions and we had better be ready for them.
Read the full article on ImpactAlpha here.
William Burckart and Steve Lydenberg are the authors of the forthcoming book “21st Century Investing: Redirecting Financial Strategies to Drive Systems Change” (Berrett-Koehler Publishers, 2021).
