As the COVID-19 pandemic upended societies around the globe, more and more people began to predict the end of globalization (or hoped that would be the case). Some of the arguments put forward seemed thoroughly plausible. Shorter supply chain = higher security of supply, so went one of the frequently cited equations. But this is easier said than done. Indeed, the numbers tell a completely different story. Never before have so many goods been shipped around the globe.
Companies kept a firm grip on their global supply chains and even had to contend with backlogs following the COVID-19 shock. A personal and non-representative survey of a dozen Swiss companies revealed, for example, that Chinese suppliers were only replaced in isolated cases. The global division of labor still remains one of the most effective measures to combat poverty in developing and emerging countries, wrote one columnist in the Swiss newspaper NZZ recently.1
Private individuals played their role in this globalization as well. They used the money they would have normally spent on traveling and eating out on buying more physical goods, which gave a further boost to global trade.
Globalization as an opportunity for climate change
A common refrain is that globalization is incompatible with sustainability and compliance with ESG criteria. To date, however, there is no convincing evidence that a localized world is more sustainable than a globalized one. It is unclear and up for debate what impact globalization has on climate change. There is broad consensus, on the other hand, that comprehensive measures are needed to stem the tide of climate change. The re-signing of the Paris Agreement by the US has given additional momentum to the call for action.
The simplest and fastest way to bring globalization and climate change under one roof is to step up CO₂ pricing. Europe – which operates the largest market for CO₂ certificates in the world – is spearheading developments in this area. However, we are still at the very beginning of this process, because to date only electricity producers have been subject to CO₂ pricing. The next step, international approval permitting, is to extend CO₂ pricing to freight by sea, air, or road. The construction and agriculture sectors will likely be the next to follow.
The power of the financial markets
The extent to which industry is rethinking and re-imagining itself can be seen in the energy sector. Leading companies from the industry have used the profits made from the crude oil business to diversify their exploration of renewable energies. The fact that this move away from fossil fuels has been prompted by pressure from investors does not make it any less significant. If the planet were able to pick its patron saint, the financial markets would make the shortlist. They influence companies’ capital costs and thus help set the strategic course for the future. Indeed, the energy sector has listened to the financial markets and protected itself against losing any more significance on the stock exchange than it already has. Let’s remember, 15 years ago the energy sector still constituted around one-third of companies in the S&P 500; last year, its share had shrunk to just 5%.
Another example: Every Opel that leaves the plant is valued by the financial markets at CHF 9,000 on average. In the case of a Tesla, the average valuation is CHF 1 mn. Such a striking difference in market value must set the alarm bells sounding in boardrooms in Detroit, Wolfsburg, Munich, and Stuttgart. At the end of the day, all automotive manufacturers should strive for a valuation of Tesla proportions. Here, too, the power of the financial markets will leave indelible traces on the report cards of the established players.