Critical Resource recently met with its Senior Advisory Panel (click here), made up of eminent industry figures and opinion formers, to discuss risks and trends to watch in 2021 and beyond. Key themes include global uncertainty as the pandemic continues to unfold, the ability of the international system to step up to the challenge of climate change, and geopolitical tensions.
This is an anonymised summary of key points from the discussion and an abridged version of a longer note sent to Critical Resource’s clients.
Fallout and lessons from the pandemic
The fact that few experts were anticipating at the start of 2020 that the pandemic would be so globally disruptive shows that we are misguided to think we know how the world works. Increasing global uncertainty is adding importance to building greater resilience.
- The pandemic is not over. The second wave has had punishing impacts in countries like Brazil and India. Throughout the pandemic we have continually been forced to reassess our performance and the outlook, and India teaches us that that could happen in a lot of other countries, which previously we considered to have fared surprisingly well. The key indicators to watch are global vaccine production and distribution and the potential emergence of vaccine-resistant mutations.
- The experience with Covid-19 has shown that our previous assumption that we know how the world works was misguided. We live in a world of great complexity and uncertainty which we will not be able to understand anytime soon, yet we need to be prepared for unknown unknowns. As such, companies need to focus on resilience and adaptability rather than prioritising maximum efficiency (for example in just-in-time supply chains).
We are in an environment of an almost unprecedented lack of international cooperation, posing major challenges for companies.
- Over the past years there has been an almost unprecedented lack of international cooperation, as illustrated recently by the European Commission’s failure to pick up and run with President Biden’s corporate tax initiative, which seemed tailor-made for it. It has passed the issue over to the OECD given disunity among member states, but an eventual compromise seems likely. While the US is no longer on its own against everyone, the relationship with China and geopolitics more broadly are developing in a negative and hostile way. There is a risk for companies, especially in the tech sector, of being taken hostage and used as leverage.
- The pandemic has also fostered inequality and fragility in Africa and Latin America, and many experts are very worried about political and economic developments. A lot of unexplored natural resources are in fragile states, and the economic disaster many developing countries are experiencing due to the pandemic will almost inevitably cause an increase in resource nationalism. There is a danger of the politics of ‘backlash’. This will be difficult to navigate for extractive companies.
Global climate change policy
There is renewed momentum from governments, including notably the US, on climate change. The coming years will see intense arguments on the role of gas in the energy transition, especially in different geographies within Africa.
- The new US climate targets announced by President Biden are very ambitious. However, rather than relying on ‘green’ arguments he has astutely focused on job creation. As a career politician his ability to push through bipartisan measures more effectively than his predecessors should not be underestimated. At the state level, Massachusetts provides an example of how quickly things are moving with an ambitious net-zero law recently signed by the Republican governor.
- There are intense arguments about the role gas will play in the energy transition. The debate is too often framed in ‘yes’ or ‘no’ terms, which is too simplistic. Individual countries’ infrastructure, speed of project development, assistance from the developed world and political decisions all matter. The gas lobby is very powerful and better organised than the renewables lobby and if the regulatory environment is not adapted in favour of renewables, in the short term people will go with gas. However, perceptions of gas are shifting and in the longer term, the risk is rising that it could be lumped in with coal.
The dangers of inflation are currently understated. Separately, the valuation gap between many mining companies with strong fundamentals and companies, for example in tech, trading at high multiples is likely to narrow.
- In the advanced economies, the dangers of inflation are currently understated. This is a cause for concern, though investors seem to be relaxed about the prospect of higher taxes. More data indicating inflationary pressures are emerging, particularly in the United States, with possible knock-on effects for dollar interest rates affecting anyone worldwide who has borrowed in dollars.
- Many mining companies now have very strong balance sheets and are trading at low multiples relative to their true valuations. At the other end of the spectrum, numerous SPACs and tech companies are trading at exorbitant multiples with poor fundamentals. This big valuation gap is likely to narrow, perhaps aided by higher taxes and increased regulatory oversight in the tech sector.
Challenges for the ESG agenda
Significant challenges remain for companies to implement and demonstrate good ESG practices, including the poor quality of data and the trade-offs involved in balancing the interests of different stakeholder groups.
- There is a huge need for increased standardisation and sophistication of data so as to create a level playing field for judging companies’ ESG performance. Despite numerous promises and advances this is still a long way off. There remains too much reliance on poor-quality data and box-ticking.
- Particularly in the extractive sector, there is much more that companies can do to get onto the front foot in maximising their developmental story rather than always being on the back foot, for example by means of an ‘ESG balance sheet’. Finding ways to demonstrate the good things they are doing will give companies more confidence to engage with challenging issues and improve their standing among investors and other stakeholders.
- More broadly, a lot of work still needs to be done to make stakeholder capitalism practicable. For boards, there are very complex trade-offs involved in attempting to reconcile the competing interests of different stakeholder groups.
- There is a lot of pressure on boards and investors to quickly master extremely complex risks and practices around ESG. Various groups are trying to plug that gap but there is a need for much greater training and capacity building so that boards and investors can properly hold companies to account.