Ray Dalio, the founder of Bridgewater Associates, which manages the world’s largest hedge fund, has been kicking himself lately. With his flagship fund, at one point, down 20 percent since the start of the year, it’s certainly understandable.
“We’re disappointed because we should have made money rather than lost money in this move, the way we did in 2008,” Dalio lamented to the Financial Times.
Still, we think he’s being a bit hard on himself. Most of the financial sector was blindsided both by the 2008 crisis and the coronavirus pandemic. He at least got one of them right.
As the first tentative steps are being taken to ease lockdowns around the world, attention is turning to what kind of shock economies will endure (another Great Depression, according to the latest from the IMF) and how to revive them. A crucial element of that recovery is how sustainable it will be.
Right now, the world is seeing the kind of drop in carbon dioxide emissions those fighting climate change could only have hoped for in their wildest dreams. The problem is that drop is happening for all the wrong reasons, on the back of huge suffering and in an unsustainable way.
“What we’ve tended to see is that global economic crises do have an impact, and global emissions do go down,” BlackRock’s Anne Valentine Andrews told us in the first of a series of Global Summit On-Demand webcasts. “But then, for example in the GFC [global financial crisis], they bounce back up again, so any savings are wiped out. So, while governments are stimulating their economies, it is a watershed moment to make sure they don’t do that in a carbon-intensive way.”
We couldn’t agree more. However, even if some governments do decide to go down that rickety path, infrastructure investors cannot afford to follow them. In fact, we’d go further and say that the only infrastructure that’s acceptable post covid-19 is sustainable infrastructure.
Does that mean everyone has to drop whatever else they’re doing and focus exclusively on building wind farms and batteries? Of course not. Different types of infrastructure will always be needed, pandemic or no pandemic. What is not needed – and should no longer be acceptable to investors – are infrastructure portfolios that are not adequately prepared to deal with the effects of climate change, much less those that are making climate change worse.
As Schroders’ Charles Dupont pointed out in our webcast, covid-19 is giving all of us first-hand knowledge of what it’s like to be affected by a catastrophic natural event that directly (and brutally) impacts the real economy. Also, as Bill Gates, who’s been warning about the dangers of pandemics for years, has highlighted, we now know what it’s like to pay “many trillions of dollars more than we might have had to if we’d been properly ready”.
So, while Bridgewater’s LPs might forgive Dalio for not being ready for a global pandemic, no such forgiveness should be forthcoming for those found to be lax with the costs and implications of climate change.
This is doubly important for infrastructure, an asset class sold to investors on the back of its long-term credentials. Meridiam’s Thierry Déau stated in our recent Deep Dive about fund structures that “if you churn [assets] every five to 10 years, they’re not long-term and they’re not stable”. That’s probably debatable. Assets and portfolios that are billed as long term but do not adhere to the highest sustainability standards should not be up for discussion, though.
Infrastructure proved its mettle in the GFC, emerging as a strong performer, capable of delivering stable, reliable cashflows. It’s now got an unprecedented opportunity, certainly among alternatives, to become a beacon of sustainability in the post covid-19 world – a truly resilient asset class, providing essential services and generating returns that stand the test of time.
Some good work is already being done in this direction. It’s time to punch the hyperdrive and jump into light speed.
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