null Episode 8: Black and Green Swans
Double Take podcast

Episode 8: Black and Green Swans

00:53:17
Double Take podcast Audio ESG Equity Fixed Income
June 2020
Episode 8: Black and Green Swans

Mellon’s Robin Wehbe and outside expert John Elkington argue why this crisis may present an avenue for a more resilient future and how leadership will need to pave the way.

Rafe Lewis: Hello and welcome to yet another pandemic edition of Double Take, the Mellon podcast. I'm your cohost Rafe Lewis Mellon's director of investigative and investment research.

Jack Encarnacao: And I'm your other investigative researcher and cohost Jack Encarnacao. On today's episode, we discuss ESG investing in the age of COVID-19. Among other things, we'll debate an emerging argument in the investment world. Has the onset of the global coronavirus pandemic constituted to so-called black swan event that will force money managers to consider much more strenuously the sustainability of public companies? To discuss this topic, we have two experts. From inside Mellon, we have Robin Wehbe, a senior portfolio manager for the Global Natural Resources Strategy, which he designed and launched in 2008 and a thought leader at the firm when it comes to sustainability and ESG investments.

Rafe: And from outside Mellon, we will be joined, after Robin, by John Elkington a pioneer of the global sustainability movement, author of 19 books, including his bestseller The Green Consumer Guide which brought mass attention to the environmental impacts of everyday products and brands all the way back in 1988 and his new book, Green Swans: The Coming Boom In Regenerative Capitalism.

Jack: Okay, so let's jump right into it with Robin Wehbe who's joining us from his home office via Skype. Robin, welcome to Double Take.
 

Robin Wehbe:  Thanks guys. Looking forward to the time.
 

Rafe: Well, Robin, let's start just by discussing ESG investing a little bit. I think most investors would agree that thoughtful analysts have examined governance factors, the G in ESG, for a long time now. Then comes environmental factors the E, which I think a lot of people would argue has gotten significantly more weighty as a risk factor in the past five to 10 years as the scope and significance of global climate change and the climate crisis has evolved. But the S in ESG, the social factors, these have been kind of the redheaded stepchild in the ESG factor analysis. Why is that?

Robin: Yeah, no. Nothing like a crisis to focus our attention, right? Unfortunately, sometimes we need these major events to really capture our attention, really reflect the potential severity of a problem. As you pointed out Rafe, in the last five, 10 years, we've had E come into a lot more focus, the environment, because of these mega storms. We've seen temperature changes. We've seen hurricanes with greater frequency. While we've touched on some of the S issues here, you think about some of the recent hurricanes and devastation there, you've seen obviously it impacted across demographics very differently. The poor unfortunately are struggling with those in some areas more than the financially healthy. The pandemic has really laid all of this really bare.

If you look into these employment numbers, it's absolutely been staggering here. It took a major event to really wake us all up to this issue at the same time here. Unfortunately, we're learning two painful differences among these demographics. There was a stark contrast between those who can earn a living on a laptop and those that can't. Not to mention, there's a high correlation of infections between those who are economically disadvantaged because between their working living environments they are far higher risk. Again, it took this massive event to really lay bare, laser focus us on these S disparities across a variety of issues. It's not just the ones we mentioned now, but it's access to finance and healthcare and in technology. We're finding today, obviously, a lot of folks are dealing with work and school from home and it's a challenge.

Access to technology has also come into focus. Employment stability, pay equality, and not to mention the corporate perspectives on employee and labor risks. How do you manage an office full of people, a shop, a factory? Not only that, how do we now contemplate supply and distribution value chains? This pandemic has really opened our eyes to really the social connections and inter-exchanges between all of these stakeholders. Mega storms woke us to climate change. Now, this pandemic hopefully has woke us to humanitarian challenges.

Jack: Robin, in a thought piece you published internally at Mellon recently, you argued that the ongoing pandemic constitutes a "social slap in the face for investors." A true black swan event. It kind of upends the way thoughtful investors will approach public companies. What did you mean by that? And, why do you think that's the case?

Robin: Well again, we need these big events to really catch our attention. So, you throw a word like slap your title to try to get the readership up there and really drive the point home. Right?

Jack: Sure.

Robin: When you think about the framework for black swans, which was elegantly outlined by Nassim Taleb in his book, The Black Swan: The Impact of the Highly Improbable... It's kind of interesting as a side note here, Nassim was recently interviewed by CNBC. In this, he was asked specifically because he talks about in his book, The Black Swan, it was a pandemic of black swan because a black swan is event that exists outside of our normal expectations, has a major lasting impact, and in hindsight, the event could have been expected or potentially prevented.

Certainly, all three of these are frankly true today. However, Nassim's argument was, well we could've seen this coming. It was a white swan. Now look, I'm going to call him an expert because he spent a lot of time thinking about this. Obviously, he was focused on it and a few others maybe you've heard or seen. The interview with Bill Gates talking about our exposure to this. But look, there are people out there calling for an alien invasion as well. If aliens lands tomorrow, I'm going to call that a black swan because there are maybe a few that we're expecting. But vast majority, we were not expecting this. If we were, we would not be in the situation we are today with massive unemployment, lock downs across the world, people scared every day out of their mind just to leave the house treating the outside world like its raw chicken.

This 100% in my mind was a black swan because it was outside normal expectations, it's going to have a major lasting impact. We can discuss where and what that is. In hindsight, it could have been expected and avoided probably, but we weren't there. These black swans, they try and teach us lessons. But, the problem with a lot of these things is we have a hard time because immediately you want to go and fix the symptom. We're talking about cures and treatments and hopefully we get to even the vaccine. This is awesome. We absolutely need to do this because of where we are right now. But the problem is when we get through this, we may think we have fixed it, but we may not realize that the real risk wasn't the event itself, but our design of inherently large and fragile systems.

This is what I want to center our conversation around. This is obviously highlighting that the issues we have with our social inequalities and the humanitarian challenges we have out there. But, these large fragile systems that have come to bear were largely because we were hunting constantly for improvements and efficiencies. If you work with efficiencies and you're trying to overcome that, a lot of times you get efficient with scale. When you do scale, you're inherently getting that inefficiency by eliminating redundancies and essentially planning stuff. When you're doing that, you create a large fragile system because there's no redundancy. If that system goes down, that massive scale single sourcing stuff from China for instance, if there is an issue with China because of a trade war or a pandemic, that large fragile system has an issue.

I think that's the issue we need to be thinking about here whether it's a great financial crisis or the Chinese supply chains we've been wrestling with. Thankfully, we were already dealing with that a little bit because had this pandemic hit without a trade war... I don't want to be silver lining this too much, but I don't know how we would have dealt with the outage of these Chinese suppliers. I think it's okay to have Chinese product in a market. But if all the product is Chinese, you have a problem. My concern is with this pandemic. While we're trying to call this a black swan and get people's attention, I don't want us to come to situation where we look back and say, "okay, we cured this pandemic." Then, we just go about our lives without really addressing the systems that were inherently large and fragile in place. Because in my opinion, that is going to be the issue we have to be dealing with on the back end of this.

Rafe: Got it, Robin. You're talking about systemic change and the need for it in the face of what we've seen here. There's obviously been a decades long quest among large corporations, small corporations, you name it to become as efficient as possible. You think about the dreaded middle seat in an airplane, which has of course packed the planes. It's made the air carriers have the ability to drive down ticket prices. But maybe that needs to be sacrificed at the altar of, "we're a packed in a little too close here, folks" when you think about a respiratory ailment. I guess what I'm asking is: have we reached the theoretical limits of this drive toward efficiency? Does it now move backwards a little bit in the name of social sustainability?

Robin: Yeah. It's an interesting question. By the way, you just got me slightly less scared to fly again or a little more excited perhaps with the prospect of not getting jammed in the middle seat, which is sometimes the life of a wall street analyst and investor. I think it's difficult to understand and find the balance of efficiency and redundancy. But, this may very well be the formative question for investors and regulators as we emerge from this pandemic, hopefully a slightly more woke world. But, how do you find this here? Because the large risk, as I said, is it's dealing with the virus, not the fragile systems themselves. At the end of the day, how do we strike that balance?

It's really hard to know. You come out of these things here and maybe you feel a little more conservative at first. But, are these things going to last?. It's interesting because if we look at this we can say, "look, where does it make sense to have more efficiency versus redundancy?". I would think that if you're a company and you were sole sourcing everything out of China, you're now thinking about, "okay, I need to maybe source it from a couple other areas." If you are a place that largely did everything out of a central home office, maybe some decentralization is better. Even the federal government we're seeing right now live as we're all living through this pandemic is pushing a lot of the implementation to more regional and local resources because they know how to manage them better.

A mistake there is not catastrophic for the entirety of the country. Maybe there's something to be said for decentralization and some redundancy. I don't know if we're going to go "backwards" on some of this stuff because I don't necessarily consider it backwards. Because in airplanes, we tolerate multiple levels of redundancy. An airplane, because we're all flying up 20-30,000 feet above the ground, we definitely want and necessarily require there to be a backup and a backup to the backup system. Perhaps some of this needs to start finding its way into parts of the economy. It's a very hard question to noodle in your head. One of my favorite books, in addition Nassim's books, that really shaped my thinking was The New Grand Strategy: Restoring America's Prosperity, Security and Sustainability in the 21st Century.

This one was actually interesting because it was spurred by work from the Pentagon. Its authors, Mykleby, Doherty and Makower, they really talk about focusing on sustainability as a path forward because there's a dual outcome of protecting us while also potentially stimulating investment. As we mull over efficiency versus resiliency, you may not want to have duplicative systems. But, you can invest in new infrastructure. You can invest in new power sources and things that are more resilient, more decentralized. Hopefully as we go through this, it's not going to be looked at as a penalty as "going backwards", but an opportunity to invest, an opportunity to get growth in this country again. We've spent literally the last 50-60 years flexing the home owner value by moving mortgage rates up and down.

That has led to essentially a declining growth outlook. What if we go out there and say, "Hey folks, let's focus on resiliency, on being more sustainable whether it's from an environmental perspective or a social perspective. Let's put in new systems, new technologies that allow us to be more resilient in the face of a pandemic or in the face of an environmental disaster." While the actual events are different, the resiliency of systems should not be right. I think that's where we should be focused. Hopefully, we can see corporations use this as an opportunity more so than a, "oh, shucks. Here is kind of our new insurance premium."

Jack: Talking to you in the past Robin about the resiliency of systems, one of the things you said that I thought it was thought provoking is, "we became so impressed with our technology that we lost sight of managing the outside environmental and social and resiliency risks." Technology allows for this hyper efficiency. That just puts us in this position of... I don't know. Am I going too far to suggest that maybe we have this fantasy that technology will create perfect efficiency and the pandemic proves that perfect deficiency is actually quite imperfect?

Robin: Yeah, no. I think that's right. Then also comes the question of: what could have companies done differently here? Obviously, we could have, I don't know, maybe we had everybody who come to work in masks. But, that doesn't seem like a very real solution here. That was obviously very specific to this issue. But if you think about larger issues and disruptive events, black swans as it were, I think there's a few things we need to balance here. I think companies may have thought about this a little differently if they had taken this balance of... Instead of just going for this hyper competitive, let's just incentivize and move for cost efficiencies.

But, what if we actually start to smooth out some of these incentives? What if we start to smooth out some of this stuff? I think there's an opportunity here to really reshape and think about the way we compensate, the way we actually measure corporations. Through this ESG lens is probably the right way to do it. Which is to say, you have every 90 days. You come out with these financial results which are hyper specific about your profitability. But, we're not spending a lot of time talking about these longer term trends which is employee engagement. Are there any statistics we can start pulling on that? We talk about these websites like GlassDoor. They're essentially blogs.

So, how do you actually start to quantify some of this stuff. How do you actually hold management's feet to the fire and say, "look, are your employees more engaged?" Because, there are certain ways you can go about that. You can provide them job security. You can provide them pay flexibility. I talked to some of these companies recently. I was speaking with the CEO of a waste company. He's like, "listen, this is very hard for us because there are some of us in the home office we can go back to our laptops and earn a living. But, the vast majority of our workforce is still on the front lines. It's very hard for me to lead to them and be, 'Hey guys, you got this' when I'm sitting at home and they're on the back of trash trucks picking up people's waste every single day."

Understanding how to manage that is important because that has ramifications for the engagement of that employee workforce. If that management team can have a real engaged workforce, maybe it's because they flex the pay. So, the CEOs aren't taking millions of dollars of paydays. They can keep everybody employed and they feel better about it. Or maybe, everyone takes a pay cut. I don't know how you implement more pay equality and variability. But if you feel like you're on that team, you're all in it together, you're more engaged, you're more likely to put out your best efforts for that company. I apologize for the long winded answer. But if we really think about how we metric and incentivize management teams, it can really influence their behavior.

It's not just, "hey, you got to be nice to guy on the back of the trash truck because it's the right thing to do." There may actually be tangible benefits for having a more engaged employee workforce. That may lead to better productivity, lower turnover. Turnover, by the way, has an expensive cost because you have to train people. So yeah, you want your team to all be in it to win it. I think if you put those incentives in place, there is that dual outcome of where you can achieve both that resiliency, but also that financial benefit. But, it accrues over a longer period of time, which is why, again, this reporting structure of 90 days EPS and zero attention paid to the E and the S performances is an issue we're struggling with.

Rafe: Robin, you know what you're saying makes a lot of sense to me. Investors have always been partial to quantifying risk factors in their models. When you look at corporate sustainability reports, you may see all kinds of data about executive compensation. You'll see data on carbon emissions. But these social factors, the kinds of things you're talking about employee engagement, pay equity, you really don't see a lot of that. So I guess what I'm wondering is: how are Mellon investors dealing with the inherently qualitative nature of these social factors as they try to increasingly incorporate this important factor into their risk analysis?

Robin: I think that's question one. At Mellon, obviously, we have a large organization of investors. Thankfully, it includes fundamental folks as well as quantitative folks. This fundamental and quantitative perspective has always fascinated me because there are folks out there who try to say one's better than the other when the reality is they both have their place and they both have their efficacies. It also occurs to me that a lot of the quantitative metrics that are in place were based on fundamental practices. We look for EPS growth as a quantitative metric, but that necessarily was gotten to from a fundamental analyst initially. It's interesting how these things get there. It's also interesting to me as we think about ESG, how right now it's in that qualitative state.

It is hard to get a lot of quantitative metrics out there, but that's the job of a fundamental analyst. That's the job that Mellon investors have done ever since I've been with the organization and generations before me. They've always looked at the fundamental perspectives and use that in their analysis. We will use quantitative tools where we have them and there are some things we can use quantitatively. You can look at, for instance, compensation ratios. You can look at some environmental performance like emissions. But a lot of these questions, as you've highlighted Rafe, are very qualitative in nature. That's why, again, I think the fundamental aspect of investing, as a quick advertisement for fundamental investing, is absolutely critical on a go forward basis. It can never go away. Why? Simply said, I've avoided companies in my investing career because I sat across from the table from an individual who made my skin crawl.

He said things to me that I couldn't believe he was saying out loud. There are thousands of companies for me invest in. I didn't invest in that particular one. There was no quantitative model that said, "don't do it." It was a human gut. It was a human intelligence. He was talking about paying fines instead of fixing the problems. Paying fines because of health and safety violations is a major no-no. Lo and behold, he had a major catastrophe that nearly took his company out of business. We weren't invested there because that's a qualitative analysis. We want to get to a point where we can hopefully have quantitative metrics, because if you can measure it, you can incentivize it. That's what we want to get to. But in the meantime, you need folks like the Mellon investors to ask these qualitative questions. I put out in that piece we've been referencing about four different ideas you can, as an investor, put in front of management teams and discuss with them.

For instance, we talked about job security and pay disparity through large corporations. Should executives be taking pay cuts if their wage employee base is taking a hit or losing jobs? That's an interesting question. That kind of one team, one dream. You can endear employees and get that we're all in it to win it mentality. Or, you can just let them lose their jobs while you're still collecting your annual bonus. By the way, if you have a variable pay structure, that variable pay structure may also get you through a difficult time better. Number one, job security and pay disparity. Number two, health and financial service access to disadvantaged.

This is extremely interesting. This could be a risk. It could be an opportunity here. How do you make sure that everyone has access to healthcare and financial services? Because those that don't, it's not fair because they're suffering disproportionately. But at the same time, if you provide them these solutions, they potentially are another additional market opportunity for you. That is a question we should be asking. Another one we put in front of folks is: what is the responsibility of a corporation to take care of its employees, its vendors, its customers, its communities in which it operates? These are all important stakeholders that have impact on the value created at the organization. If you have disgruntled employees or vendors who are tired of dealing with you, customers who no longer want your product or the communities revoke your license to operate there.

These are things that management teams need to balance and fundamental investors should be asking. There's no quantitative metric for that. Lastly, the one we really dove into here: balance of efficiency and redundancy. We're talking, specifically, from a humanitarian perspective. But, this also exists in financial markets, how much debt do you want, and in operational value change. We talked about sole sourcing product from China. You think about this as a fundamental investor. How is this company striking the right balance of efficiency, redundancy from human financial operational exposures? Again, it's all of these things that put together that mosaic for the analyst. As we go in to meet these management teams... And we're doing this. We have been doing this. I've done several of these calls in the last couple of days and weeks as we're moving through the pandemic. Ask them these questions. I don't have a right or wrong answer, but their responses are extremely insightful.

You learn about the quality and integrity of that management team and their decision making process. Right now in the year 2020, when literally every management team seems to have suspended their guidance for 2020, what can you anchor on? You literally have no more guidance to anchor on. Wall street analysts are just throwing numbers up in the air like confetti. We have no idea. What you can anchor on, what we are anchoring on as investors at Mellon, are answers to these questions. Because if you have a good answer to these questions, it probably means you're making good decisions and likely creating equity value that can be sustained through this pandemic.

Jack: Great roadmap there, Robin. Wrapping up, I'd ask you to pull out your crystal ball. When we interview you five years from now and look back on this moment, this pandemic COVID-19, what changes do you most expect to see from C-suites and public companies when it comes to sustainable social practices?

Robin: Wow. That's a great question. It's a very powerful one too because I've woken up admittedly from some big nights of partying promising I would never do that again. But we all know that human beings unfortunately have a safety mechanism to unfortunately allow us to repeat some of these things by our memories fading. Right now, I would like to say that we are taking all the lessons we need and we're going to make all the changes we need specifically to addressing the pandemic and hopefully addressing more resiliency out there. But, I don't know. We talked about airplanes having more redundancy. That is no longer just accepted, it's required. Hopefully, this finds its ways into other areas where maybe it's the redundancies of supply chains for these essential non-essential goods and services, how did toilet paper take us out.

There are certain areas, hopefully, we can deal with. But again, hopefully, we punch a stupid pandemic in the face soon. But, I really want us to see us deal with these more fragile systems. We'll for sure have more attention and care around communicable diseases. It's about these resiliencies strategies that we'll think about not just that social interaction and those touchpoints, but the human capital from labor pools and then supply chains. Thinking about all of this stuff. Even on the environmental perspective, how can we be more environmentally resilient? I think ESG analysis and frameworks, they help. They'll hopefully provide these metrics. Methods of analysis will allow us to get to these outcomes and influence these behaviors.

They're definitely longer than 90 day intervals, which we're seeing in financial results and potentially could even smooth out equity valuations. If we're waiting every quarter to see about profitability, that's why these numbers swing around. Because, all of a sudden you get inside of profitability. But, the truth of the matter is I've seen things flip in 90 days. What I haven't seen flip in 90 days is the quality integrity of an organization. If we can start getting better incentives in place... I'm hoping this is going to start to pass with the big movement in ESG here. Put these incentives in place, get management teams talking about them in such that when they report on a quarterly basis, they can give us an update as to where they are. My employees are more engaged. My customers are happier. My workforce is safer.

We've had less accidents here. We've improved our energy efficiency. I want to see improvements there because these are slow things that move over time that allow you to reduce your tail risk over time and therefore accrue more equity value. Because, what we've seen in this pandemic is uncertainties. It leads to huge discounts. Huge discounts means very cheap valuation. If you really want us to move forward here and have better growth and better valuation, we should be using sustainability as a priority in policy for growth. We should be using resiliency as a way to making sure we're eliminating some of these tail risks. Then, we can actually accrue that value without realizing these lethal liabilities that seem to be hidden out there.

Rafe: Robin Wehbe, Mellon's man on a mission to make public companies more sustainable. Thank you for joining Double Take.

Robin: Thanks guys. It was a lot of fun. Good luck out there.

Jack: Okay folks, we've heard the clarion call from Robin Wehbe on the need to sacrifice, potentially, some of the financial benefits of efficiency here on this altar of longterm sustainability and resiliency. Now let's dive deeper with a true thought leader on the entire notion of corporate sustainability. He is John Elkington. John, welcome to Double Take.

John Elkington: Thanks very much.

Rafe: John, let's step back a little, just to establish some context for this conversation. You pioneered the notion decades ago that corporations need to focus not just on the proverbial bottom line of profitability, but rather what you call the triple bottom line of profit, people and planet. It feels like that notion, to me anyway, has just really started to take root only recently. Now we're suggesting that the triple bottom line is no longer adequate to confronting the problems before us. I want to hear your explanation of that. Why is the triple bottom line no longer good enough?

John: Well, thank you for the question. The simple answer has to have some context. The context is: Although I was a pioneer of corporate responsibility, there were a fair number of other people moving in the same direction. What was unusual about the triple bottom line, which I simplified the following year, so that was 1994, the triple bottom line came out 1995: people, planet, profit. What was unusual with that was that most people were thinking about human rights, so social issues or environment, they weren't putting all of these things together. At the time, it was found to be a slightly radical idea. In fact, I even fought an internal battle with my then  company's sustainability with one of our directors for about 18 months, because he felt he'd joined an environmental organization, didn't really want to do all of this economic and social stuff.

John: But then the mood shifted, and to your question, why withdraw it, I think it's done perfectly good work. I think there are now thousands of companies doing sustainability or triple bottom line reporting. Thousands of B Corporations have charted and set aside around the concept, but my concern has been that increasingly people see it as a trade off. We'll do some good social work and we'll do some good environmental stuff and maybe that'll dent our financial bottom line or the other way around. I think the key point is you've got to all of this together in an integrated way. So the product recalls through Harvard Business Review was just simply a provocation to say to people, are we really sure this is taking us in the right direction? The overwhelming response was yes, people did think it was, but they appreciated, I think, the provocation.

Jack: Very good. Now let's turn to this notion you've coined, John, of the green swan event. We've of course heard a lot about the black swan events, can you define green swan for our listeners and explain why maybe the COVID-19 pandemic could be a precursor to a green swan?

John: Yeah, I'm immensely impressed by the thinking of decades now, that's Nassim Nicholas Taleb, who came up with the concept of the black swan back just before the financial crash 2007, 2009. As people listening to this interview will know, what he meant by a black swan was something that came out of the blue, completely unexpected. Secondly, it had an off the scale impact, typically a pretty unwelcome impact. Then thirdly, afterwards, we thought we'd understood what had happened to us, but very typically we misunderstood and therefore set ourselves up to fail again.

John: The green swan, by contrast, sort of rips off Telab's idea of course, but it says if black swans take us exponentially to places we really don't want to go, what trajectories might take us in the reverse direction, towards places we really want to go and need to go increasingly? So we're talking about positive exponentials with green swans.

Rafe: When you say positive exponentials, can you give us some examples that you're thinking of?

John: Well, one of the things about black swans is they tend to happen accidentally. No one sets out to clog the world ocean with plastics, no one set out to blow a hole in the stratospheric ozone layer. What's different about green swans is that they tend to be more intentional. You have to work towards them, which is one of the reasons why green swans tend to follow black swans. We tend to see the positive exponentials following very strong evidence that things are not working with the system as it is. So when I think about examples of green swans, they're examples from the economic domain and the social and environmental, political and so on. So in the social domain, an example might be mass vaccination, much talk recently about herd immunity with the COVID-19 pandemic, but it's very easy to forget what life was like before we had mass vaccination. I know there are pushbacks on all of that, but I suspect a number of those were blown away in the wind once people start to see that there is an effective, hopefully, vaccine for COVID-19.

Rafe: Understood. So a green swan is really the equal and opposite reaction to the very negative catalyst that proceeded it, in a sense. Maybe you can divine something positive from innovation that leads us to a more sustainable future, if and when the green swan comes. 

John: If I take an example from the economic world, then for me, a green swan would be a reevaluation of how economics puts value on things. Particularly things that are not properly priced at the moment. So carbon for example, is something that we have not put a proper price on. Species diversity is another thing that we have not put a proper price on. What we're finding now with the COVID-19 crisis is that there are many aspects of our societies that we, again, haven't properly valued or prioritized. It's really interesting to see and pretty frightful to see developed country healthcare systems coming apart at the seams because we haven't properly valued health, for example. So I think economics is one of those target disciplines, the master discipline of capitalism, if you like, which you're going to have to change profoundly through the 2020s. There are already some very good examples of economists who are starting to think very differently, "By God we need that work."

Jack: Speaking of that broader discipline of capitalism, our prior guest Robin Wehbe from Mellon argues that the pandemic has laid bare the need for corporations to do more, to establish redundancies. Be they in capital reserves, locations, supply chains, to make companies more resilient in the face of natural catastrophes, pandemics whatever's around the bend. Our question to you, John: Can corporations realistically be expected to be the ones to move meaningfully in the direction of necessary redundancy?

John: Well, it's difficult to answer that question in simple terms, let me give it a try. But again, before I do, just a tiny bit of context, somebody whose work I admire immensely is Roger Martin, who has been a business school academic for quite some time. He published in, I think again, the Harvard Business Review some years back, a critique of efficiency. Basically saying the almost myopic blind pursuit of efficiency was squeezing redundancy, squeezing resilience out of the systems that we depend upon. So this isn't a new idea, people have been raising the red flags for a while. I've completely forgotten what the question was about, I apologize.

Jack: Oh, not at all. It's perfectly fine. Can we look to corporations to be the ones to implement the necessary redundancies and what they would see as inefficiencies?

John: Well, I think corporations are designed really to squeeze out efficiencies. Once you get to a certain degree of maturity in the market. In the early days of innovation and so on, with people creating something radically new, then efficiency isn't the priority. Just getting the new thing to stand up on its own feet and walk about a bit is the critical priority. So I think it's very dangerous if we think we can simply turn to business and say, "Squeeze down your efforts on squeezing out inefficiencies and build redundancy into your activities." That's simply not in their DNA. Now, there are some examples where people do the right thing because they have an instinctive feeling for what's going to contribute to the longterm survival of the business and that's particularly true, for example, in the family owned business world.

John: But I think in the end, governments have to, if not dictate, they've got to put in place the incentives, which drive a more considered approach by business. We saw this recently with, for example, you've got Marc Benioff from Salesforce saying, "Capitalism is broken." You have the Financial Times saying, "It's time for a reset of capitalism," but then you had Warren Buffett saying, "Fine, but companies can't do this on their own. They have to have governments come in behind and shape market expectations and market rules." So I do think we need business to expand their understanding of efficiency, but I don't think they can do it on their own.

Rafe: That's a really interesting segue to what I was going to be asking you about, which is, we saw the price of oil plummet and in fact go negative briefly, crude oil that is. It made me wonder in a devil's advocacy role here, I mean, if you take a strictly laissez faire view of the markets, you could see that the march towards sustainability was happening simply through supply and demand there a little bit, right? I mean, is it possible that there is an inherently self-correcting aspect to these markets and we don't need corporations, boards, governments, to step in and lead that way?

John: Well, it's interesting, isn't it? Most self-declared capitalists love competition until they get into a hole. We have the frackers calling for state aid, we see a very well known long haired, blonde haired airline entrepreneur, who very specifically told the world that it should not bail out failing airlines, now calling for state aid. So I think these corrections in markets, what Schumpeter the economist called creative destruction moments, are absolutely blazingly painful when they happen and anyone in their right mind wouldn't choose to go there.

John: So I'm not critiquing people running large companies, this is the reality. But I think we've got to be much better at trying to see where the economy is going longer term and having both business leaders and governments work much more closely in trying to shape the outcomes. I look for example at the moment, with what's happening in the European Union, for which my own country is trying to extract itself, mistakenly I believe, but you've got this Green Deal proposition with a price tag on it of something like 1 trillion euros. Now we can be skeptical about those sorts of round numbers, but the message is clear. The European Union sees its longterm recovery as contingent, absolutely critically dependent, on dealing with the green agenda, the sustainability agenda and all of its different dimensions. I think that's the level of integration and vision, which we've all got to get to. Where in the heat of the moment, most capitalists are simply trying to cling onto what they've already built, rather than thinking, "Okay. If not that, then what?"

Jack: When you raised, John, the idea of government's role here, you've been arguing that the key to embracing a new regenerative capitalism is a larger role for not just government, but what you've coined intelligent government or what you refer to as intelligent government. Can you walk us through what you mean by intelligent there?

John: Well, I think one of my favorite social enterprises, which is based in my own city of London, is called apolitical. It's a platform which shares best practice in civil service around the world. I think in a way periodically, business has had to reinvent itself around notions of, for example, total quality management, the information revolution, or whatever. Governments have often lagged at that evolutionary curve and I think the spotlight is coming on public policy makers and regulators and so on in the new way. I think that their roles are going to become much more important, at least for a time, but they're really going to have to step up and, and shape up and improve the way that they deliver their services to society. So I think it's not going to be an easy ride for politicians, governments, or policy makers, but I think it's something that we all critically depend on them getting right.

Rafe: John, you referred a little bit to Brexit and that brings to mind the rise of nationalism and populism that we've seen in your country, here in the United States, some other nations in Europe, Brazil, and I don't think it's a stretch to say that some of this is a reaction to fears and some of the destabilizing effects of globalism and multi-lateralism, which obviously has many positives, but some people clearly view some negatives. To bring the benefits of the industrial and the technological revolutions to underdeveloped nations, developed nations and hegemons, they need to share their wealth and dilute their power. I guess what I wonder is, are you worried at all that the rise of this regenerative capitalism that you're calling for will spark a further backlash to the liberal world order and draw people closer to these populist/nationalistic ideologies and move us closer and not further away from chaos?

John: Yeah, it's a good point. I think we're at a very dangerous moment in a collective enterprise in the sense that every so often an old geopolitical and macroeconomic order unravels. I think a lot of people are assuming that we can go back to the status quo in relatively short order. I really don't believe that, in fact, for about three years now, I've been using a diagram and it's in my new book. It's the first diagram which shows a U-bend. It's a period where technology trends, macroeconomic trends, and so on, see an old order or drive an old order into decay. That I think is happening, I think it's happening at an accelerating rate and I think it's absolutely essential that it does because the old order was not up to the task, which the 21st century is going to impose on us all.

John: So we need a new system. The problem, these transitional periods don't happen in a period of months or years, they'll often take 12 to 15 years to crank through and they critically depend on leadership, leadership that is out of the ordinary. I look at our current crop of leaders and that includes populace, but also the mainstream ones as well and I don't think that they're properly up to the task. Therefore I think this period of, as you say, chaos and so on, will create a new generation of leaders who at the moment we've not heard very much about at all.

John Elkington: There was another part to your question, which again, I'm afraid I missed in racing around the hedges. Oh, I know what it was. So you ask whether the focus on resilience and regeneration, which is certainly two of the themes which I'm trying to accentuate here will aggravate de-globalization. Of course it's a risk and I often think back to Adolf Hitler, for example, he was a politician who introduced Europe's first ever hedgerow conservation legislation and he was a vegetarian to boot. So people will use some of this greenery as a camouflage to wrap around the populist or nativist or ethnically-biased ideologies. That's bound to happen and I think we've got to be very alert to ensure that if, and when it does start to happen, we call it out and tackle it early enough to stop it.

Jack: Following up on that line of thought, one reaction we saw among nations facing the coronavirus invasion was to close borders, distinguish between nationals and foreigners and of course, a general rise in xenophobia. We saw xenophobia towards the Chinese, for instance. Yet you seem John, to be arguing that this pandemic will be a catalyst to greater collaboration and cooperation as the best means to fight transnational global threats. It all sounds almost paradoxical. Can you maybe help us navigate how you think about what seems like a contradiction here between protectionism and collaboration, as far as what's likely to happen now and what's needed?

John: Well, I think life has always been paradoxical, at least in my experience. I think these crises, the Chinese themselves have that age old saying, which is, "Hidden within every crisis is an opportunity." This is a challenge to all of our societies, which I think is going push all sorts of bad things, you can guarantee that. We're human beings and we're not flawless, we're not angelic. That's why I keep coming back to leadership because it's only with the right sort of leadership and some of that can come from business, I think it's really important that it does, and by that I don't simply mean CEOs, I mean, everyone in business. And critically, the rising generation of younger people whose values are really rather different from those people who sit in boards and C-suites these days.

John: But it's got to involve people in financial markets, it's got to involve people in government and a range of other institutions in our societies, including educational institutions, like universities and business schools. So I think there is a paradox here, and it's only with really extraordinary leadership that we'll get out of this trap in better order. But before this crisis hit, I think our chances of getting out of the trap or the hole into which we'd collectively dug ourselves around, the climate emergency and species loss and all of these different things, would have been very low indeed. It's now significantly higher, but we depend critically on some of the institutions in the world or whatever it might replace them, that some of the populists are going at the hammer and tongs, really wanting to disband and dismantle.

Rafe: Another tragedy that's come out of this pandemic, probably, is that a lot of small businesses are not going to survive this. They're having a lot of trouble in many nations accessing the kind of capital they need to maintain their payrolls and stay afloat for when and if all these closures stop. One of the things Jack and I were bandying about was this idea that you're going to have probably have a lot of big firms that have cash and that have liquidity, surviving here and possibly even gobbling up some of their smaller competitors or just stepping into the void as those smaller competitors die. What we wondered I guess is: What does that mean for innovation around resiliency and can we honestly expect these goliaths to lead the way adequately?

John: I don't think we can expect them to lead the way out of a hole which we're in, just because of their better natures. I think what we are seeing is exactly what you described, which is bigger, deeper pocketed companies increasing the position to buy up some other smaller entrepreneurial, innovative businesses, at least the ones that don't go out of business in short order. I think that's both inevitable, but I also think it's, to say it bluntly, an appalling outcome because economies, like our society is critically depend on diversity and small scale enterprise. The people who can try new stuff with much less of a fear factor about what happens to our brand, or a hundred thousand employees or whatever it might be, that's where the future comes from. The people at that leading or bleeding edge are going to be the ones really suffering in coming times.

John: But if you look back at the historical record, what's very likely to happen is you get this consolidation, big companies get bigger, powerful companies get more powerful, which isn't to say that quite a number of them will go bankrupt, of course they will, even if they try for bailouts. But what that then leads to is trust busting and I think within the next three to five years we're going to see an immense pushback against some of these leviathans these tech and other type of companies that just have too much power in the world and who by the very nature of human beings will use and abuse it.

Jack: Finally, John, coming out of a crisis like this, we know to expect radical wealth accumulation. That is what has happened every time there's a disruption like this in the economy. My question to you then, as we part ways here: What is the problem with that, with there being radical wealth accumulation? Is it incumbent on anyone in particular to do something about it?

John: I think it is incumbent on governments to act before it's too late. In some ways I think it almost already is too late in the sense that those radical accumulations of wealth are not simply an accumulation of wealth, they're an accumulation of power. We've seen pushback from the tech companies and others against sensible government regulation of their sectors and so on. Now that isn't to under value what people like Bill Gates, or Jeff Skoll or Pierre Omidyar have done. Some of these billionaires and multimillionaires have done incredibly good work in the wider world, but these concentrations of wealth take us off course as societies. They also take us off course as economies, which is exactly why in the United States the trust busting enterprise became so critically important and that's not easy. I mean, people like them, the Rockefellers and the Carnegies, and so on that fought tooth and nail to protect their wealth, we're going to have to go through that again.

John: Personally, I'm not Scandinavian and I don't believe everyone should earn the same or whatever else, but if you get to the point where some people are as rich as Croesus and others are in shocking abject poverty, that simply is not culturally or politically sustainable. So I think we're going to be forced into a correction and I doubt that the super wealthy are going to vote for that, so I think it's going to have to be imposed on them.

Rafe: Well, it's always darkest before the dawn, but hopefully your green swan concept is that dawn and there are brighter days ahead. Once again, this is John Elkington pioneer of the global sustainability movement, author of Green Swans: The coming boom in regenerative capitalism, recently published. Why don't you go out and find that at your local independent bookshop or a large online dealer, depending. John, thank you so much for joining Double Take.

John: It's been a great pleasure and thanks for the opportunity.
 

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