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Applying an ESG lens to macroeconomic analysis—a starting place (Part 3)

17 August 2021

Frances Donald, Global Chief Economist & Head of Macro Strategy
 

Additional macro topics that should be viewed through an ESG lens

We firmly believe that the ESG lens can and should be applied to most traditional macro factors that flow through to investment decisions. While the impact of choosing to embark on such a path may seem subtle initially, we have no doubt that it will soon become a critical component of the macro outlook. We highlight three areas we’ve been focusing on.

 

Macro factors that should be increasingly viewed through an ESG lens 

Source: Manulife Investment Management, July 1, 2021.

 

1   Strategic shifts in commodities demand and their value as macro signals 

The green transition will likely shift supply/demand functions for a variety of assets, particularly in the commodities space. This transition isn’t only about the opportunities within those asset classes, it’s also about thinking differently about their predictive power and value as macro signals. For example, macro analysts have historically used copper as a cyclical indicator, but the ESG transition is likely to affect the demand/supply dynamic for the commodity in a way that may muddy its predictive abilities. Meanwhile, the price of lithium and cobalt—key to manufacturing batteries for electric vehicles—could become an important macro indicator as consumer adoption of electric cars gathers pace. Put differently, viewing changing market dynamics through an ESG lens encourages analysts to evolve their perspective of a historically accepted view that may alter the value we attach to different commodities. 

2   The upside risk of rising labor force participation rates

Rising government focus on national childcare programs aimed at increasing female labor force participation rates in a post-COVID-19 environment is a component of the S element in ESG that we believe will have clear implications for growth, inflation, and labor costs. Our preliminary work on this topic suggests that national childcare programs can meaningfully support labor supply, boost growth, and reduce pressure on wages. That said, shifting dynamics within the labor force and the nature of work available aren’t restricted to childcare programs and working parents—an increased policy focus on the economic consequences of gig workers is likely to press on the S in ESG in a more meaningful way. In our view, it’s time to start actively considering how diversity, equity, and inclusion policies will inform macroeconomic analysis going forward. 

3   Challenges from rising food inflation and growing inequality

Income inequality is widening globally—it’s an important issue that needs addressing, particularly at a time in which we’re also experiencing rising food price inflation. We see this as a growing risk to the global economic outlook, particularly within the context of a rising global population and sustained deforestation, which could have an adverse impact on food supply. These developments can dent aggregate demand, especially in emerging markets, and lead to political instability, increasing the need for us to add a geopolitical risk premium to our analysis. 

Applying an ESG lens: choice or necessity?

Over the course of the last few years, we’ve come to view the integration of ESG factors into macroeconomic analysis as less of a choice and more of a necessity. We are, after all, in the business of identifying emerging trends and evaluating how they could lead to opportunities or translate into headwinds to growth. In our view, failure to apply an ESG lens to all aspects of macroeconomic analysis would hinder our ability to do our work and do it well. 

 

  • India’s bond index inclusion: Attracting foreign investment; bolstering its regional position

    Indian government bonds would be included in the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) Global index suite starting in June 2024. We examine the short- and long-term implications of this significant decision for the Indian bond market.

    Read more
  • Transitioning to India’s next stage of growth

    India’s growth agenda is well embedding the primary driver of digitisation that supports the formalisation and reinvestment policies underpinning manufacturing expansion. This is starting to show results with visibly improved capital expenditure and industrial order books, as well as a narrowing current-account deficit and a healthier inflationary picture.

    Read more
  • Bank of Japan tweaks its yield curve control policy: market implications

    The Bank of Japan’s recent decision to fine-tune its yield curve control policy may have caught investors off guard; however, the bigger surprise could be that the adjustment was less hawkish than expected.

    Read more
See all

17 August 2021

Frances Donald, Global Chief Economist & Head of Macro Strategy
 

Additional macro topics that should be viewed through an ESG lens

We firmly believe that the ESG lens can and should be applied to most traditional macro factors that flow through to investment decisions. While the impact of choosing to embark on such a path may seem subtle initially, we have no doubt that it will soon become a critical component of the macro outlook. We highlight three areas we’ve been focusing on.

 

Macro factors that should be increasingly viewed through an ESG lens 

Source: Manulife Investment Management, July 1, 2021.

 

1   Strategic shifts in commodities demand and their value as macro signals 

The green transition will likely shift supply/demand functions for a variety of assets, particularly in the commodities space. This transition isn’t only about the opportunities within those asset classes, it’s also about thinking differently about their predictive power and value as macro signals. For example, macro analysts have historically used copper as a cyclical indicator, but the ESG transition is likely to affect the demand/supply dynamic for the commodity in a way that may muddy its predictive abilities. Meanwhile, the price of lithium and cobalt—key to manufacturing batteries for electric vehicles—could become an important macro indicator as consumer adoption of electric cars gathers pace. Put differently, viewing changing market dynamics through an ESG lens encourages analysts to evolve their perspective of a historically accepted view that may alter the value we attach to different commodities. 

2   The upside risk of rising labor force participation rates

Rising government focus on national childcare programs aimed at increasing female labor force participation rates in a post-COVID-19 environment is a component of the S element in ESG that we believe will have clear implications for growth, inflation, and labor costs. Our preliminary work on this topic suggests that national childcare programs can meaningfully support labor supply, boost growth, and reduce pressure on wages. That said, shifting dynamics within the labor force and the nature of work available aren’t restricted to childcare programs and working parents—an increased policy focus on the economic consequences of gig workers is likely to press on the S in ESG in a more meaningful way. In our view, it’s time to start actively considering how diversity, equity, and inclusion policies will inform macroeconomic analysis going forward. 

3   Challenges from rising food inflation and growing inequality

Income inequality is widening globally—it’s an important issue that needs addressing, particularly at a time in which we’re also experiencing rising food price inflation. We see this as a growing risk to the global economic outlook, particularly within the context of a rising global population and sustained deforestation, which could have an adverse impact on food supply. These developments can dent aggregate demand, especially in emerging markets, and lead to political instability, increasing the need for us to add a geopolitical risk premium to our analysis. 

Applying an ESG lens: choice or necessity?

Over the course of the last few years, we’ve come to view the integration of ESG factors into macroeconomic analysis as less of a choice and more of a necessity. We are, after all, in the business of identifying emerging trends and evaluating how they could lead to opportunities or translate into headwinds to growth. In our view, failure to apply an ESG lens to all aspects of macroeconomic analysis would hinder our ability to do our work and do it well. 

 

  • India’s bond index inclusion: Attracting foreign investment; bolstering its regional position

    Indian government bonds would be included in the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) Global index suite starting in June 2024. We examine the short- and long-term implications of this significant decision for the Indian bond market.

    Read more
  • Transitioning to India’s next stage of growth

    India’s growth agenda is well embedding the primary driver of digitisation that supports the formalisation and reinvestment policies underpinning manufacturing expansion. This is starting to show results with visibly improved capital expenditure and industrial order books, as well as a narrowing current-account deficit and a healthier inflationary picture.

    Read more
  • Bank of Japan tweaks its yield curve control policy: market implications

    The Bank of Japan’s recent decision to fine-tune its yield curve control policy may have caught investors off guard; however, the bigger surprise could be that the adjustment was less hawkish than expected.

    Read more
See all
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