Inflation, ESG and tech: challenges and opportunities in a US recovery

BNP Paribas’ Global Markets Americas Conference gathered experts to discuss the challenges and opportunities impacting the US on its road to recovery.

With the world gradually emerging from the Covid-19 crisis, BNP Paribas’ fourth annual Global Markets Americas Conference brought together virtually leading industry experts, including asset managers, policymakers, economists and corporate executives, to provide their unique insights into the opportunities and challenges currently facing the markets. Here is a snapshot of some of the key conclusions from the annual event, which was held in mid-June.

Transitory or permanent inflation?

On 16 June, the US Federal Reserve indicated that it would increase interest rates in 2023 — much sooner than expected — as economic recovery gathers momentum and inflation risk rises. Panellists discussed whether inflation rises are transitory, but added that inflation risk had increased.

A combination of supply chain bottlenecks, pent up consumer demand for used cars and labour shortages are fuelling inflation fears. Nonetheless, the discussion pointed out that the Federal Reserve Bank of Dallas’ Trimmed Mean PCE Inflation Rate, which removes both high and low outliers from its inflation rate calculations, was putting the inflation rate at less than 2%.

In order to determine if inflation will be transitory or permanent, speakers noted that the drivers should be reviewed and analysed. Some drivers behind inflation — principally supply chain bottlenecks — would be transitory, whereas rising housing costs are likely to be permanent due to inadequate housing supply. “To understand if inflation will be transitory, you need to look at the individual components,” said one expert.

ESG in the limelight

In addition to inflationary risk, a growing number of financial institutions are becoming concerned about climate risk as well.

Jean Lemierre, Chairman of BNP Paribas, said the Bank continues to focus on sustainability in the same way that it approaches profitability and risk management. “Banks have a special role to play in supporting the green economy,” he said. In particular, he explained banks should help companies who may be considered “brown” today by providing financing to them so they can “green” their business models. 

Banks have a special role to play in supporting the green economy

Jean Lemierre, Chairman of BNP Paribas

Companies across the board, including those in polluting sectors such as energy, mining and aviation, are increasingly embracing ESG (environment, social, governance). Some of these firms, for instance, are pledging to become net zero carbon emitters, whereas others have adopted the Greenhouse Gas Protocol, a widely-used greenhouse gas accounting standard.

One speaker acknowledged certain industries are still heavily reliant on fossil fuels, but said her firm, an airline, was moving towards a decarbonised future by introducing energy efficiency, supporting the development of sustainable alternatives and offsetting domestic carbon emissions.

Although Europe is widely considered to be a leader in electric vehicle (EV) adoption, the US is rapidly catching up, something which has been facilitated through progressive legislation — especially at the State and city levels. A smart mobility expert said 15 States had now signed a memorandum of understanding pledging to accelerate the development of medium to heavy duty EVs. One panellist highlighted that Virginia in particular had introduced EV-friendly policies: “Cities and states have certainly stepped up recently, and are more supportive of EVs.”

ESG investing can be riddled with complexities that can put publicly listed companies at an unfair disadvantage against privately owned companies, explained an asset manager: “Take an oil company, for example. It is very hard nowadays for an oil company to start an offshore drilling project because so many activist investors are against it. The risk is that private companies who are less concerned about ESG might do that offshore project instead.”

Furthermore, US regulators could potentially demand that publicly traded companies disclose details about their climate change risk. This would not necessarily apply to private companies, which would again create a 2-speed approach at a time when greater commitment to ESG across the board is vital for the planet, and if companies and financial institutions are to thrive moving forward.

Technology as an enabler

In a panel focusing on how the buy-side is adapting to change, speakers said intelligent use of technology will underpin the future success of asset managers. By using well-organised data analytics, active management companies will be able to obtain unique insights that will help improve their decision-making processes.

Asset managers can greatly improve their clients’ experiences thanks to innovations created in recent years by fintechs by allowing asset managers to scale up bespoke services for customers.

Tokenisation, whereby assets are fractionalised into bite-sized digital tokens, could revolutionise investing by making assets that were previously inaccessible to retail investors accessible. As digital tokens are fractionalised, they are much cheaper for ordinary investors to buy. This could make it easier for retail investors to purchase illiquid assets such as real estate, which historically would have been too expensive. The speakers continued to discuss how there is nothing to preclude asset managers, including mutual funds, from offering tokenised versions of their own funds in what would further democratise the investment process.

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