I am Optimistic

After any unexpected situation, I often mention a parable that goes like “Good things, bad things, who knows?” to friends and partners (https://www.businessinsider.com/perfect-reason-good-thing-bad-thing-who-knows-2011-5). It refers to a farmer’s wisdom to avoid undue worry and how to find positiveness in difficult times. 

As we read all the news regarding COVID′s devastating consequences, it is not unusual to come across several articles about pollution reduction in several cities. Satellite pictures around Asia and Europe have shown substantial reduction of smog when compared to previous months when economic activity was in full growth mode. Take India for instance, where after more than 30 years, one could clearly see the Himalayas with unprecedented obstruction from air pollution.

 Is that a good thing? It certainly serves as a learning wake-up call to the hard-core idealistic environmentalist and “greenwashers”. The COVID 19 situation has put substantial pressure on the economic system around the world, and the less wealthy may suffer the most from this situation. Poorer countries may face significant economic downturn, not to mention the social hardship resulting from strained health infrastructure.

We need to think and work in “Sustainable” fashion, where all stakeholders are taken into consideration. People, the economy and the environment are closely interlinked, and all solutions have to be evaluated from a systemic lens. Industrialization and technology have lifted billions out of poverty and have created a global educated middle class with awareness on key environmental, social and governance matters.  In fact, as the following graph suggests, countries have become increasingly more efficient in managing CO2 emission, as their economies grow:

Let’s be clear, we are definitely putting progressively more pressure on our environment, and we have too much to do still. Despite the vast universe of deniers, scientific consensus is overwhelming: The planet is getting warmer, and humans have been leading this trend, as a result of our apathetic consumption habits that fuel our unsustainable economic activity and contribute to the generation of ever-increasing quantities of waste.

However, reducing poverty and focusing on well-being of the general population are key considerations, and we need economic activity to further support them. ‘Wicked’ is the term often used to describe the intricate challenges of our time. Human health, climate change, biodiversity loss, persisting poverty, the advancing obesity epidemic, and food insecurity are all examples of such wicked problems. We need to be pragmatic and understand that solutions are tangled and involve social and governance matters.  

Why I am optimistic

We are going through a dire economic shock, which is consequence of an unexpected health menace (the so called “Black Swan’). Life after the virus will be very different. Production and consumer habits very likely will change. Some sectors will emerge successful, while others will be challenged. 

Looking at history, major shocks (economically or politically) tend to reshape expectations and motivations. After World War II, Europe was rebuilt following introduction of the Marshall plan, which was implemented in the best interest of the western world, and during such process, nations  shifted their views to oppose actions deemed morally bankrupt as fascism. After the Oil crisis in 1973, the United States took greater interest in renewable energy, nuclear power and domestic fossil fuels as way to diversify energy supply risk.

As much as I am disappointed and concerned about the fact that populists and unqualified politicians (most times they personified in one) may be misjudging the severity of this current situation, I am optimistic about the aftermath. We are going through, what Ray Dalio calls, a “Stress Test”. This is a defining moment, where society is waking up and becoming more aware about key environmental, social and governance (“ESG”) factors in a holistic societal manner:

Environmental:  In its 15th Global Risks Report published in January 2020, the World Economic Forum (WEF) found that, for the first time in the report’s history, all of the “top long-term risks by likelihood” are environmental, and climate change was rated the biggest global threat”. Such risk has become more tangible in this current situation.

The whole world (including myself) was addicted to cheap products produced by China. We are all, now, realizing the risks:  While the source of COVID-19 is still unknown, it has been so far attributed to the now well publicized wildlife wet markets. Other pandemics in the past including the "SARS" have been deemed to have originated in such markets. In other words, we are now grasping that China required stronger disease prevention systems and environmental hygiene in public places across farmers’ markets and corresponding cities.

After this COVID 19 experience, I expect that we will need to individually and collectively redefine our priorities, which involves reevaluating our relationship with environment. We are realizing that the cost of pollution and climate change far outweighs short-term decisions, and we need to tackle them as it is essential for our lives as society and specie.

Very likely, companies and countries will seek to diversify production and supply chains. In addition to that, consumers will demand tangible quality in their products. This will benefit the world as whole, as efficiency and environmental awareness will spread throughout the globe. We are likely to see an accelerating shift towards recycling, resource efficiency, and renewable sources in general.

At business level, corporations will seek to optimize business value by taking in consideration the environmental factor. This will be both defensive: as way to reduce business risk, and offensive: in order to attract customers and motivate employees and other stakeholders. Management will redefine corporate strategy by creating new ways of differentiation, reimagining business models for sustainability and reshaping business ecosystems to support these initiatives.

Social: we all need to be eternally grateful to all health professionals around the world. They are leaving their own families behind, to help other people, risking their lives and those of their own beloved ones. It has been inspiring to hear about all the hard work and dedication of such great people. However, we should also remember and highlight the relevance of those behind-the-scene actors who make sure that hospital infrastructure is running properly, that work at supermarkets making sure we have the food we need, that deliver our goods, that make sure that we have electricity and water. We all need to be mindful and thankful for all those people. More than ever, we need to realize that we are all interlinked economically and societally.

I am inspired by the solidarity of humankind. Wealthy individuals and corporations around the world are pledging substantial amount of resources to solve the current challenge and help the people that need the most (https://www.weforum.org/agenda/2020/03/how-are-companies-responding-to-the-coronavirus-crisis-d15bed6137/). Governments are creating programs to support people that have lost their jobs, but in parallel, the private sector has been funding projects that seek to find a solution to the current health problem. Private institutions have also been implementing creative programs to support the less wealthy portion of the population. 

We are all realizing how fragile we are, and we need to preserve our wellness uniformly. Nations are fighting hand-in-hand against the virus. This will hasten a transition  to better health infrastructure and new innovation revolution such as prevention/cure from recurring viral episodes. More funding for the scientific community would help enhance our likelihood to find a cure to a wide array of other diseases that shall arise in the future.  Healthcare and biotech are set to see the fastest growth in decades. 

At a business level, the pandemic has demonstrated on a large scale the importance of the employee factor. This includes crisis preparedness, continuity planning and employee treatment. Companies should expect stakeholder to ask questions about resilience and social matters as relevant factors  to long-term performance. This may include broader discussions around remote working and how that could contribute to reduction in carbon footprint and increase employee motivation.

Corporate decisions that affect employees, customers and suppliers will have long lasting implications. This includes i) reputational risks, customers and suppliers will appreciate strong commitment to best practices and reward companies in the long term, i) corporate culture, that involves employee motivations, which can be long term differentiator, ii) productivity, excessive workforce reductions may drive less efficiency and higher turnover in the long term

Governance: populist governments that has gained ground around the world in recent years are now facing real and crucial decisions to keep their constituencies safe. Society demands true leaders that can provide transparent and serious information. We have all noticed the weaknesses of those officials who cannot keep up with real world experience, and we all demand more committed action and less empty words. This is good in that it solidifies our political systems. 

As politicians approve huge bailouts, stakeholders will continue to put pressure on how those large amounts of money will be used. Executives should expect their own pay to face unforgiving scrutiny. Taking US airlines as an example: such industry has declared bankruptcy 66 times during the last 20 years, according to Professor Scott Galloway. However, boards/CEOs of the six largest airlines have spent 96% of their cash on share buybacks, bolstering management compensation.  As government supports the airlines during this phase (or any other industry for that matter), society is requiring that this time, such help comes with caveats. This will benefit us all, and not only shareholders and management of such supported companies. 

Most governments’ actions have targeted employment protection. In this sense, governance should become more central. Stakeholders should inquire about dividends and executive pay in the face of the crisis. Corporate directors will have to show that they can really strive in this environment.

 It is at this juncture, board and senior management  need to be prepared to answer key questions. Are you adequately considering and mitigating risks? If questions like these are not proactively asked, individuals may open themselves up to claims and shareholder may face substantial loss of value. 

This, in turn, means that companies must be responsible for implementing many of key reporting measures. Stakeholders and board members will demand proactive policies and process from companies to reduce environmental and social risks. 

Conditional Optimism

I truly believe we will rise to the challenge, but it is  important to understand the features of my optimism.  In this respect, I reference the economist Paul Romer’s well-known metaphor: blind optimism is a child expecting his parents to build him a treehouse; conditional optimism is a child confident he can build a treehouse if given the tools.  

My conditional optimism is based on the fact that I am fan of human ingenuity. There are attainable ways to prevent the harms and means to continuously learn more. We can solve the problems. However, this does not mean that they will solve themselves.  It means that we can solve them if we all contribute and sustain the forces of modernity that have allowed us to solve problems to date, including societal prosperity, governance attentiveness, and investments in science and technology.

Crises always occur and nobody was prepared for this one. The wonderful news is that they always end. Do not fall into the catastrophic tone of the media, where they seem to enjoy the statistics of lives taken away. Number of new cases in several countries are dropping and glimmers of hope are starting to emerge in the likes of cure and vaccines. As we all fight to bring this crisis to an end, let’s commit even more to embrace sustainable capitalist economy, where all stakeholders benefit. 

Even the farmer from my parable was buying a horse because he was conditionally optimistic. Quoting our friend Yoda: “Do or Do not, There is no Try”