Foreword
Succeeding in uncertain times by Jérôme Haegeli
A year we had hoped would represent a break from turbulence has turned out darker than virtually everyone anticipated. After two years of COVID-19 disruption, the invasion of Ukraine has shocked us all and ratcheted up the uncertainty level. As we look at the economic outlook, we are facing significant new challenges: higher inflation than previously expected, as commodities, energy and food prices feel the pressure from the conflict; central banks tightening monetary policy into slowing economies, and even the possibility that 1970s-style stagflation may return. The geopolitical implications for international relations, security and the global balance of power are likely to be of even greater significance than the economic consequences. The conflict in Ukraine has disrupted the international security order, and a new order with a much stronger focus on defence and energy security is taking shape. This will have profound long-term structural consequences. Changes in the geopolitical order, revisions of national defence budgets and restructuring of energy supply chains, especially in Europe, will redefine multinational relationships. For example, Germany has already committed 0.3% of GDP to offsetting the large increase in energy prices, and pledged to reach the full NATO spending goal of 2% of GDP on defence. The EU is discussing joint bond issuance to fund energy and defence spending. We see this push for self-sufficiency in energy, agricultural commodities and other areas structurally raising prices for consumers in many countries. ICMA is needed more than ever in this environment. Strong capital markets are the bedrock of the global economy and ICMA’s work underpins their transparent functioning and supports market participants. As we see in these times of high volatility and rapid change, it is critical that investors can trust in the integrity of markets. I am honoured and delighted to contribute to this essential work. The regime shifts in the making have the potential to force a dramatic recalibration in the landscape of ESG investing. The cosy world of old ESG certainties is over. Former assumptions regarding, for example, energy choices – gas in, nuclear out – do not fit with a world in which funds used to buy gas ultimately finance conflict. But if oil and gas are now akin to blood diamonds, what rating will ESG investors place on PAGE 4 | IS S U E 65 | SECOND QUARTER 2022 | ICMAGROUP.ORG
nuclear power? Similarly, the defence industry’s contribution to security and societal resilience is now being acknowledged and could find a home in ESG portfolios. I expect the prioritisation of the “E” in ESG to adjust, to ensure that the “S” of social requirements such as energy security and defence is no longer neglected. As new events create transformation in financial markets, it is crucial to make sure the system is up to the challenge. There are three key transformations that sit at the intersect of economics and capital markets in which I believe ICMA’s work will be crucial for the future. We call these the three “Ds”, of divergence, digitalisation and decarbonisation. Divergence within and between countries is a huge concern as it creates different paths for economic recovery, economic inequality and socio-economic opportunity. Our path forward has to be socially inclusive. Digitalisation – inclusive digital transformation – is essential to “future proof” the world economy, make businesses more resilient and reduce divergence. Decarbonisation, the transition to a net-zero carbon emission world, is needed to end carbon emissions and stop climate change. ICMA’s work in this field is already innovative and influential, such as the Green Bond Principles. Decarbonisation of energy supplies has been given fresh impetus by the latest geopolitical developments, as well as the energy price crisis. The drive for energy security may accelerate this transition. The global economic trajectory and strong capital markets both ultimately rely on us understanding and providing leadership in transitions like these. The global economy is not more resilient today than before the global financial crisis. Recent events are a stark reminder that assumed certainties can evaporate at any time and we must be ready to manage change. Jérôme Haegeli is Group Chief Economist and Managing Director, Swiss Re Institute, and a member of the ICMA Board.
