You said antimicrobial resistance - our survey said...

Sapna Patel

Principal

In Family Fortunes style, if you asked 100 members of the public to name a sustainability issue that threatens our very existence, I would expect climate change to be a top answer.

This is for good reason – climate change is the most important and significant challenge we face. It is a systemic risk, meaning a risk that can impact the performance of a whole economy, and not just one company, where extreme outcomes are possible but hard to predict.

What is often forgotten is the social aspect of climate change, and other social risks, such as antimicrobial resistance, that could also be systemic in nature.

Impacts of social systemic risks will affect all investors, so the investment world needs to acknowledge, consider and reduce these risks.

Considering social aspects of climate change

In the context of potential total market collapse, the investment world has, for the most part, started to take this risk seriously. Large parts of the market are targeting net zero emissions, including 315 signatories to the Net Zero Asset Managers initiative, comprising $57 trillion in assets under management. There is a lot of work going into reducing emissions.

It is easy to think that if we “achieve transition”, that will be job done. But of course, it is not that simple. For a start, the physical impacts of climate change are already here for many, globally, and yet there is much less focus on them. For more on the importance of physical climate risks, see Jay’s article.

More widely, a successful transition to net zero will not be possible without considering other related issues, for example the interdependence with nature and the huge impact on people. It is this societal lens to net zero, ensuring that the benefits and negative impacts are shared more equally across society and globally, commonly known as “just transition”, that will need to be considered to avoid failure.

At a country-wide level, an example of failure in bringing people along on the transition journey has already been seen in the action of the yellow vests, or “gilet jaunes” protests in France. These were sparked in 2018 by government proposals to further increase tax on fuel. While the French government positioned this as a necessary action in its plan for energy transition, many citizens perceived this as an unfair tax affecting the less well off. In the end, the French government rolled back on this policy.

At a company level, there are many examples in both developed and developing countries of the juxtaposition between the need for renewable infrastructure and the concerns of communities who live in or near those proposed sites, leading to scrapped projects.

Antimicrobial resistance as a systemic risk

But it is important to remember that climate change is not the only systemic risk with a social angle.

Nothing has brought these impacts home more in recent years than the Covid pandemic, and pandemics remain a significant threat in the future. There are other health-related threats, a key risk being antimicrobial resistance (AMR). Bacterial AMR (excluding viral and parasitic AMR) is estimated to have been associated with around 5 million deaths worldwide just in 2019. Projections carried out by the World Bank in 2016 suggested AMR could have an impact as large as the 2008 financial crisis, but worse, as it could be that level of impact annually over a much longer timeframe.

Economic costs of AMR may be as severe as during the 2008 financial crisis

Source: World Bank Group

AMR crosses many sectors and issues, including significant overuse of antimicrobials in the agricultural industry and the environmental effects of antibiotic contamination from our water systems. The World Bank’s projection only models the impact on labour supply and livestock productivity, which is a conservative approach that underestimates the full human and economic costs. If we run out of effective antimicrobials, even the most commonplace treatments and operations that we take for granted suddenly become much more dangerous – cancer treatments, caesarean sections, joint replacements.

There is already an investor collaboration, Investor Action on Antimicrobial Resistance, attempting to tackle this issue by engaging with companies and other organisations that can reduce the impacts. There are also examples of investment in companies that are providing solutions. Nevertheless, it is still rare to hear investment managers discussing this area as a significant (let alone systemic) financial risk.

The poorest people in society, both within countries and between, are likely to be affected most by the future impacts of AMR, and this is true of climate change as well. Inequality is a systemic financial risk in itself, for example it can lead to conflicts – but that’s a whole other article in itself...

Conclusion

Ultimately, impacts of social systemic risks will affect all investors, so the investment world needs to acknowledge, consider and reduce these risks. It still feels like very early days, but there are some investment managers that are engaging with companies, key sectors, policymakers and regulators, and collaborating to tackle these issues.

If your investment managers played this particular round of Family Fortunes, would social systemic issues such as just transition or antimicrobial resistance feature in their answers? If not, you should ask why.

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