Written evidence submitted by Natixis Investment Managers (PEG0151)
Natixis Investment Managers (Natixis IM) welcomes the opportunity to respond to the Business, Energy and Industrial Strategy Committee’s inquiry into post-pandemic economic growth. As a global investment firm with a hub based in the UK, and with five of our 20+ affiliate asset managers based in London, we have been responsible for managing the assets of institutional and wholesale/retail investors in the UK for more than 20 years, and at end May 2020, our serviced assets here amounted to approximately £20 billion.
As such, we are keen to contribute to policy discussions around economic growth and resilience.
ABOUT NATIXIS INVESTMENT MANAGERS
Natixis Investment Managers is one of the world’s largest asset management firms, serving financial professionals with more insightful ways to construct portfolios. As at March 2020, our global assets under management totalled £732.6 billion, putting us at number 17 globally.[1]
Our worldwide network of offices provides local expertise within key markets in the Americas, Asia Pacific, Middle East and Africa, and Europe. Each serves as a conduit to a diverse range of investment solutions from more than 20 affiliated investment managers around the globe.
Our firm’s history can be traced back to 1967.
We practice Active Thinking® — our insight-driven approach to active management. It balances diverse opinions, deep data, and detailed analysis to uncover new opportunities and deliver unconventional perspectives to help support each client’s strategy.
We believe in the power of independent thinking. Each investment manager at Natixis IM focuses on those investment styles and disciplines where they have proven expertise. The result is a selection of more than 200 investment strategies from some of the world’s most respected names in investment management.
At Natixis IM, we strive to create sustainable value and help investors seek returns that are more meaningful. Corporate social responsibility (CSR) principles have always been a core part of our culture. Our commitment to CSR is demonstrated in many ways. As an active manager, we look ahead and make thoughtful business decisions designed to create outcomes that endure — for our clients, our business, and our communities.
When we think about investing, we think beyond the balance sheet. As a results-oriented active manager focused on the long term, our multi-affiliate model allows for greater manager autonomy. Because we are a truly active firm, we do not rely solely on benchmarking, and can often respond more quickly and nimbly to market events and offer our clients strong diversification. We take a consultative approach focused on building long-term relationships and solving business problems, not simply selling products.
As part of our Active Thinking® approach, we frequently use environmental, social, and governance (ESG) factors to inform our investment strategies — and, globally, more than 91% of our assets are managed by affiliates that are signatories to the United Nations Principles for Responsible Investment (UN PRI).
RESPONSES
We have answered only the questions we feel we have the expertise to answer. Our responses are numbered in the order the questions appear in the terms of reference.
The main source of weakness during this period is a lack of demand. The focus should be on job preservation, in order to protect consumption. Confidence in jobs and incomes will encourage people to return to their spending habits. This means that in the coming months, consumers' income must be secured whether people are employed or not. This is the case across Europe; the French business survey for July shows that weakness in the business cycle is coming from the demand side rather than from the supply side.
Small businesses should also be protected, given their role as key employers and the importance of entrepreneurship to growth. As the risk sits on the demand side, so the lack of demand could give rise to companies going bankrupt. Such a lack of demand, however, is likely temporary and comes from an improbably negative shock, rather than a lack of profitability. The law must, therefore, allow a capacity to rebound in an easy way for people and businesses which go bankrupt.
At present, investors do not appear too worried about debt levels. The priority is to avoid worst-case scenarios of bankruptcies and defaults, and getting people back to work. As a result, alongside action from the Bank of England, borrowing to boost growth should not be an issue; it is simply an appropriate means by which to smooth the impact of the shock over an extended period.
Asset managers can help assess the impact of policies; much of this will be ex-post once policies are implemented and work through the system into asset prices, but asset managers may in some specific cases be able to advise ex-ante on the expected impact on sectors and whether the policies are likely to be effective.
The UK government should endeavour to clarify its post-Brexit intentions in certain key areas that have not been addressed to date – such as the sustainable finance agenda. It would be reassuring for market participants to know whether the UK is committed to implement key legislation in that space (such as the Taxonomy and the Disclosure Regulations, or future EU non-financial reporting standards) in a way that is aligned – or at least consistent – with EU rules. For the investment management community, the development of a standardised impact assessment methodology would allow asset managers to set a target in terms of alignment with certain government priorities, such as the Net Zero objective, and make investments decisions based on this methodology to reach this target.
Asset managers can also help bring private capital (both equity and debt) to support funding of government-led initiatives and programmes, but this will likely require more than green bonds, i.e. private investors may be looking for government guarantees or subsidies or other de-risking mechanisms (what is generally called “blended finance” today) if the investments do not meet their risk/return requirements. Generally, however, there is ample liquidity available to invest in private sector-led infrastructure initiatives that can drive forward priorities such as “levelling up” and Net Zero.
The key role that government can play here is to do what only it can do, such as passing legislation, implementing regulation, generating procurement pipelines that would prompt corporates to establish local manufacturing and development businesses, planning, and so on.
Outside the EU, government can assist significantly through the activities of UK Export Finance. Generally, export credit agencies have evolved little in recent years, although UK Export Finance’s intervention criteria are already very flexible as long as there is a minimum of UK content at stake. Outside the UK there are significant opportunities for export-led growth that UK Export Finance could support. Export credit guarantees are a very efficient way of levering-in private sector capital, including long-dated, inexpensive institutional money. UK Export Finance could also consider an ESG weighting factor in the charges it levies to incentivise the pursuit of “greener” projects and other initiatives with a positive ESG impact or that meet other UK government objectives.
Lastly, the creation of a new state-backed national investment bank with a sustainability mandate, which the government is currently looking to launch, would be a welcome development. This institution could deploy a range of well-tested mechanisms to reduce risk and the cost of capital for projects that do not yet meet market risk: return expectations. The bank would finance projects in new and innovative sectors that the private sector is not yet familiar with (hydrogen, marine techs, etc.) and sectors that have a social return greater than financial return (social housing) to achieve a just transition. It could take on/guarantee risks that private investors are usually reluctant to take (construction risks, equity tranche, etc.). It could mobilise institutional investors’ money by aggregating projects and portfolios and use those to create innovative financial structures (securitisation, collateralised loan type obligations etc). it should endeavour to maximise the value it adds by seeking to act as a lever to attract private sector debt and equity to projects rather than to compete with the private sector and “crowd out” investors looking for ESG-compatible assets.
For climate, the main uncertainty for investors comes from the lack of visibility on what policy governments will come up with – because of the Paris climate agreement (this is generally referred to now as “Paris”) – there are question marks over whether governments will do what is necessary to achieve the Paris goals. Business would benefit from further understand what tools will be used to achieve the climate goals, whether there be a global price on carbon (generally something that economists and asset managers would advocate as it would provide this clarity and would likely be effective), whether coal will be banned immediately or will there be a transition out of coal, and what the role of nuclear energy will be, etc.
For this reason, asset managers have started applying scenario analysis tools to these questions – identifying possible scenarios, determining how likely they are, and trying to understand what asset prices would do in the different scenarios. The government should provide more clarity on how likely these different scenarios are, which would mean less uncertainty, and therefore a better pricing-in of climate considerations.
The resilience of supply chains in major projects financed by our parent company Natixis Bank around the world has been tested by the pandemic, particularly during its early days when the lockdown in China led to delays in manufacturing and despatching key items. As a major procurer of significant capital equipment and infrastructure, the UK government could seek comfort from bidders about the resilience of their supply chain and the availability of alternative sources of components and equipment that could be sourced in the event of a future pandemic or other event causing significant delays in delivery.
Another important point is that in the past the UK business cycle was conditioned by the US cycle. The US recovery was faster than ours. The US impulse was then important to understand the UK business cycle. In 2010, the source of impetus was China. The lesson of the current situation is that impulse from the rest of the world will not shape the UK business cycle. That is the reason for the importance of the European plan that was signed in July; it creates more autonomy in the European growth process.
Finally, healthcare is a strategic industry and the UK should be less reliant on overseas providers. More supply chain regionalisation should also be pursued. It seems rational to limit the dependency on the rest of the world for some strategic sectors, healthcare being one of them. That said, the next crisis may not be health related and will likely be as unpredictable as the current crisis. Government will have to consider which sectors might need to be bolstered to ensure effective resource allocation.
Throughout the debate on the UK’s membership of the EU, many in the UK felt leaving the bloc would provide a huge opportunity to boost exports to the rest of the world and therefore boost growth, whilst others felt the ‘gravity theory’ would apply (trade is mainly done with neighbours).
Not belonging to the EU presents new opportunities to trade with the rest of the world, notably in Asia. Prior to the pandemic, momentum of world trade was quite strong, but this is no longer the case and external conditions for the UK will deteriorate, as there will be no agreement with the EU. The UK must therefore reinforce its own capacity to grow and to improve productivity. In other words, the UK must reverse recent trends. This will be a long process, but will allow the UK to become more competitive and exports will improve.
There are significant opportunities for export growth in both goods and services post Brexit. Natixis Bank is involved in advising on and financing infrastructure across the globe, and the UK office, together with our offices around the world, will work with our UK clients to support their bids for projects in the sectors in which we are active such as renewable energy, telecommunications and digital infrastructure, transportation, water and waste, social infrastructure and energy-related infrastructure. Outside major jurisdictions, the role to be played by UK Export Finance increases considerably (see our answer to question 4 above).
One area in which international standards and protocols (and thus the involvement of the UK government) will be essential is FinTech. This is one of the biggest potential export industries of the 21st century and London has an edge. It is important that a rival centre does not catch up and, to achieve this, London has to be a viable hub from which FinTechs can operate across Europe.
The government should play a minor role, allowing business to remain independent even with government financial support. Unprecedented circumstances led to more government intervention, but it should not remain more involved after the crisis. We believe governments are not efficient shareholders and should remain as a procurer, regulator and user of business. This avoids potential conflicts of interest and ensures that management remains focused on its core function – performance – rather than governance and politics.
That being said, we are aware that early initiatives in newer sectors can benefit from government providing genuine risk capital through equity investments. In this way, a market is stimulated and precedents established. If a government does pursue equity investments our preference would be for this activity to be pursued and managed on an ongoing basis through an arms-length, independent entity in a similar manner to the rescue of banks during the 2008 financial crisis.
Governments do have a major role in the coming months and years. One consequence of the pandemic is people and companies are saving more and spending less. If consumers and companies go this way for an extended period, the business cycle will collapse with lack of demand and lack of innovation. The government’s role is to reduce uncertainty and to boost investment through public investment. Austerity should not be a consideration until growth is sustainable.
There are two principle ways for reducing uncertainty. The first is to have credible scenarios on what will happen in the future to allow people to properly plan. If people and companies perceive that the government economic horizon does not go further than theirs, it reinforces the perception of risks, so the government has to have credible projections on the future. The second point is on labour protection, as mentioned in the first question.
A third, related point, is to boost public investment. This creates an impulse on economic activity and incentives for companies to invest more. In the past, public investment has been essential for innovation, and this is still the case. Reducing uncertainty will boost demand and public investment will create conditions for tomorrow's growth.
The above being said, Natixis Bank – our parent company – has had experience of working in many jurisdictions with governments taking shareholdings in projects provided by the private sector.
August 2020
[1] Cerulli Quantitative Update: Global Markets 2019 ranked Natixis Investment Managers as the 17th largest asset manager in the world based on assets under management as of December 31, 2018