A nationwide ESG COVID Recovery Bond program can raise the odds of a sustainable recovery
Right now, as a country, America is not just failing a historic test of leadership, it is failing a test of imagination.
The first stimulus act of $2 trillion was an important, if incomplete step, and the new $310 billion in additional funding was clearly warranted. Sadly, even these vast sums may prove insufficient, in part due to bureaucratic inefficiency, in part because the money comes with no additional support. Part of pulling off a nationwide recovery effort will require coordinated action, or at least complementary investment, by both the government and private sector and that in turn rests on a more streamlined and distributed approach to funding.
The challenge with the current approach
Let’s take government first. Relative to some of its European counterparts, America’s investment strategy contrasts significantly with other economies. In Denmark, the government has agreed to compensate Danish employers for up to 90% of their workers’ salaries. In the Netherlands, companies facing a loss of at least 20% of their revenue can apply for relief up to 90% of their payroll. In the UK, leadership have announced that they would pay up to 80% of the wages for those SMBs that needed the help with no cap on the total amount of public spending while in Germany, the assistance extends to include part-time workers. With health officials and more enlightened governors already warning of worse illness, layoffs and bankruptcies to come, we need to be more ambitious. That suggests the establishment of a rolling facility for graduated forgiveness of the major outlays impacting vulnerable populations including rent payments, mortgage payments, and student loans.
To accomplish intervention at this scale, we cannot afford to rely on the efforts of already overtaxed system administrators, loan officers or federal technologies. To save SMBs from ruin, the SBA will need to dole out over five times their normal volume in half the time, making the sheer volume of loan processing an issue. Then consider that only 14% of all banks, nonbank lenders and credit unions have made SBA loans in the past 12 months. Already we are reading of significant delays being experienced by SMBs attempting to apply for emergency relief funding under the new Paychek Protection Program. In one instance reported by the NYT, a banking lobbyist reported that it took 72 minutes on Sunday night to enter one loan application and the E-Tran system crashed 13 times during the process.
Some of these issues such as the glitches in the E-Tran will eventually get fixed. In addition, additional emergency measures are already reportedly on the table including the government making outright purchases after lending institutions have extended those loans or providing funding directly to the banks to help them lend. Additional federal liquidity in any form is warranted. The question is not whether to fund, but rather how to fund in order to yield the most sustainable economic recovery in our local communities.
The benefit of ESG funding.
With the government and Big Banks focused on individuals Americans, other members with the expertise and a better track record in the SMB sector must be encouraged to step up to help the nation’s small businesses. And for that, we need to look to our Credit Unions and Community Banks because with higher trust AND higher record of fiscal probity and community focus, they are simply better positioned to act as enablers of a more sustainable recovery among the nation’s small business community.
But how to achieve this without incurring huge losses and inefficiency? How to ensure that when the bonds come due, the SMBs are in a more resilient and sustainable place in critical areas like distribution partners, worker safety, supply chain and sustainability?
One answer our team is actively exploring is an algorithmically assured COVID Recovery Bond for ESG investors. Why ESG? Because we need our small businesses to emerge in a more resilient state than before COVID. As Mark Carney, former Governor of the Bank of England recently put it: in a post-COVID world “local resilience will be prized over global efficiency.” That means taking a more data-driven approach to community recovery that can drive better connectedness between small businesses, their suppliers and the neighborhoods they serve. If we can somehow use recovery funds to stimulate more connectedness and information sharing at the local level, we will be much better off.
ESG, which stands for Environmental, Social and Governance, is currently one of the fastest growing segments of fixed income investing, but to date it has focused more on inputs than impacts. George Serafeim of Harvard has already made strong arguments for why this imbalance must be corrected. The other challenge with ESG is that its measurements remain less frequent and approximate than anyone would wish.
In order for this critical investment sector to grow further, we need better secondary market liquidity and tighter spreads, which in turn requires better visibility to the status of each underlying business funded by ESG bonds. With an instrument such as a COVID Recovery Bond, we have the opportunity to take another step toward that goal by baking in a more continuous algorithmic assurance feature to the bonds and the loans they would support and then sharing insights derived from that data with the bond’s investors, participating lenders and the small business owners themselves.
Rather than relying on annual government audits to shed light on how small business recovery is responding to the PPP, we can take advantage of the data a Recovery Bond could generate. By rolling up a combination of virus data, labor market data, payment data, supply data, and social network analysis, we can help local communities help themselves while lowering the risk of default for lenders.
The path forward
What follows is not so much a sequence as a necessary set of ingredients, all of which are available right now and could be implemented to coincide with the Summer reopening.
1. Ingest existing SMB member data to roll up all borrowing entities and their most recent status, supplemented by voluntary polling data submitted by members
2. Use micro segmentation analytics to pinpoint demand and supply cohorts available in the local market
3. Map business participation in either demand or supply. Who has resources, and who needs them?
4. Conduct algorithmic analysis on the resulting data aggregate to identify new opportunities for the value of collaboration (e.g. matching customer poor, staff rich Restauranteurs with customer rich, staff poor Retailers)
5. Create a marketplace for exchange of goods to encourage ESG-backed investments in a pool of those value opportunities
6. Motivate transparency and trust in the end to end solution using direct and inferred measurement
No matter what comes after COVID, it’s safe to assume that it won’t be business as usual. For example, companies will almost certainly be held to much clearer account on issues of worker safety, work arrangements (65-floor tower-block, anyone?) and community contribution. As Nishan Degnarain recently wrote in Forbes: “In a large survey conducted in the UK last week, only 9% wanted life to return back to pre-crisis ‘normal’.” I have to think that view is widely shared.
Establishing this type of private investment facility now opens the door to the introduction of more specific operating parameters and assurance later. As we get better at sensing, more data flows to inform better decisions that lead to more sustainable recovery. For example, use of proceeds attached to loans made against this facility could also be used by Unions and investors to drive strategies to become more energy efficient, conserve more water, reduce waste and increase recycling associated with business’ operations.
Running a small business is hard and constant work. In this crisis, it is breaking owners. By leveraging their trusted position within the community, Credit Unions and Banks have an opportunity to extend their impact by becoming as much of a data union as a credit union. They are uniquely placed to aggregate member data, hold it in trust, and analyze it for insights that advance the ability of the community to care for itself and build resiliency in the form of traceable growth in social, human and financial capital.
Using existing platform technology, we can create a closed loop facility in which small business owners could find new suppliers or new markets, stay abreast of commercial real estate developments as those come back online, and help existing companies find ways to monetize their resources in a more efficient manner. Working together using a community data platform, ESG investors, Unions and their members can build local ecosystems that benefit the local economy more effectively.
Because of the depth of analysis provided by network centric solution, bond proceeds can also support vulnerable population groups at a micro-zip code level including women, children under 5 years of age, and people temporarily displaced due to loss of employment and residence
To keep the economy going, we need cash in people’s hands. At a time when central authority is struggling to rise even part-way to the occasion, it’s time to think local. The more investment that can flow directly to networkable pools of small business owners, the more likely we are to experience a rebound in both our economy and our local communities.
A COVID Recovery Bond is one solution to redress current over-reliance on government funding. With the right set of actors, it can be tested over the third quarter of this year, and then taken to scale. We have all the ingredients to hand. We are one syndicate leader away from moving ahead.