The global landscape of business and investment is undergoing a transformative shift, driven by heightened awareness of climate change, social inequality and corporate governance. Over the past two decades, the ESG (environmental, social and governance) framework has not only emerged but thrived as a pivotal instrument, illuminating the remarkable capacity to assess and enhance the sustainability, ethical standards and long-term viability of companies worldwide.

However, as we face the complexities of today’s world, it is essential to not only adapt but also improve this framework to meet evolving challenges. Thus, it is time to expand the ESG framework to include resilience, ushering in the era of ESGR (environmental, social, governance and resilience).

Introducing resilience: The fourth dimension

Recent global events have highlighted the struggles of companies lacking resilience. The Covid-19 pandemic brought unprecedented challenges, from supply chain disruptions to sudden shifts in consumer behaviour. Geopolitical tensions, such as the conflict in Ukraine, have further destabilised markets, particularly impacting industries dependent on the region for raw materials. These crises underscore the need for resilience in the corporate world.

While the traditional ESG framework provides a solid foundation for evaluating corporate responsibility, it falls short in addressing the rapid changes and uncertainties of our modern world.

Environmental criteria assess a company’s role as a custodian of nature; social criteria examine its relationships with stakeholders; and governance criteria scrutinise its leadership and operational transparency. However, this framework lacks a dedicated focus on resilience — a vital component for navigating the volatile, uncertain, complex and ambiguous (VUCA) world we inhabit. Resilience, defined as the capacity to adapt, recover and thrive in the face of adversity, represents the missing link in the ESG framework.

By incorporating resilience as the fourth pillar, we acknowledge the imperative of not merely withstanding shocks but also evolving and emerging stronger. This addition is particularly pertinent in an era defined by unprecedented challenges such as climate change, pandemics and technological disruptions.

Key components of resilience

Resilience in the corporate world hinges on three fundamental components, each serving as pillars upon which enduring success is built.

Compliance with legal changes: The rapid changes in legal requirements across environmental, social and governance domains necessitate that companies develop adaptive strategies to remain compliant and resilient. For instance, China’s aggressive carbon reduction policies forced unprepared factories to shut down or relocate, whereas resilient companies promptly adopted renewable energy practices and reduced carbon emissions. The EU’s GDPR in 2018 required drastic data protection overhauls. While proactive companies successfully navigated the shift, many like Meta and Amazon are facing fines.

Ensuring economic stability: Businesses must maintain strong financial health by diversifying their income streams and being prepared for economic downturns to ensure resilience. Companies unprepared for economic crises often face severe consequences, such as layoffs or closures. During the 2008 global financial crisis, Lehman Brothers collapsed due to its overreliance on high-risk investments, leading to significant job losses and market instability. Similarly, the Covid-19 pandemic forced JCPenney into bankruptcy due to declining sales and debt. In contrast, resilient companies like Amazon, which diversified its business and enhanced its digital infrastructure, thrived.

Maintaining operational continuity: Companies need to establish resilient supply chains and business operations capable of withstanding disruptions from natural disasters, geopolitical tensions or other crises. For instance, during the Covid-19 pandemic, Procter & Gamble’s proactive supply chain management and diversified manufacturing locations enabled it to maintain product availability despite global disruptions. On the other hand, Peloton encountered challenges with its supply chain, resulting in delays in product deliveries and impacting customer satisfaction.

Building resilient foundations with RIC

Risk assessment, innovation and competency (RIC) form the bedrock of resilience, representing the essential elements upon which an organisation’s ability to adapt and thrive in dynamic environments rests.

A study by PwC found that organisations that embrace strategic risk management are five times more likely to deliver stakeholder confidence and two times more likely to expect faster revenue growth. This highlights the critical role of risk assessment in enhancing resilience to the modern world’s challenges. Effective risk assessment involves identifying, analysing and mitigating potential risks that could jeopardise business operations. This process includes not only ensuring daily operations comply with regulations but also anticipating and addressing potential risks that could cause business disruptions. Through comprehensive risk assessment processes, organisations can anticipate potential disruptions, minimise vulnerabilities and enhance their capacity to withstand adverse conditions.

Innovation serves as a catalyst for resilience by driving the development of new solutions and approaches to address evolving market dynamics. Fostering a culture of innovation encourages creativity, adaptability and forward-thinking, enabling companies to stay ahead of the curve and respond effectively to changing business landscapes. A McKinsey study found that companies with a high commitment to innovation are 2.4 times more likely to experience revenue growth. However, only 23% of companies prioritise innovation as one of their top two concerns. Innovation does not always mean creating new inventions. It can also involve adopting emerging technologies such as artificial intelligence, blockchain and renewable energy solutions.

Embracing a spectrum of competencies within the boardroom is imperative for guiding companies towards resilience and sustainable expansion. Yet, according to a recent study conducted by Deloitte, merely 36% of board members worldwide possess expertise in technology, underscoring a notable deficiency in diversified skill sets. This disparity underscores the importance of fostering a board environment rich in varied proficiencies. Such diversity not only fosters a holistic evaluation of opportunities and threats but also fosters well-informed strategic decision-making, ultimately fortifying the organisation’s capacity to adeptly navigate multifaceted challenges.

Creating a forward-thinking standard with ESGR

I urge global stakeholders to recognise the pivotal role of resilience in sustainability. By transitioning from ESG to ESGR, we can create a robust, forward-thinking standard that addresses the multifaceted challenges of our time, safeguarding businesses and investments while fostering a more sustainable and resilient global economy. Integrating resilience into the ESG framework is essential for survival and growth in an increasingly volatile world, and this evolution offers an opportunity to shape a future characterised by sustainability, resilience and prosperity.

Source: The edge markets

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BNY Mellon has traditionally been a fairly stable, mostly boring stock. But not this year.

BNY Mellon is not the type of stock that comes to mind when looking to add growth to your portfolio. But that’s what it has delivered over the past year, as it has not only been the best performing bank stock over the past year; it has outgained most of the Magnificent Seven stocks.

It may also represent one of the rare mistakes by Warren Buffett, who owned the stock for 13 years in his Berkshire Hathaway  portfolio until he completely dumped out of it in 2023.

That move came in the first half of last year, when the banking industry was going through a deposit crisis. But BNY Mellon, which stands for Bank of New York Mellon, is not like traditional banks, so it managed the crisis fairly well.

Since then, it has outperformed all of its large bank rivals, returning 82% over the past 12 months and 45% year-to-date. Here’s why this bank stock is quietly crushing the market.

In the room where it happened

BNY Mellon is as old, staid, and blue-chip as it gets on the stock market, as its roots trace back to 1784 when Bank of New York was founded by Alexander Hamilton.

But it is not your traditional bank because it is a custody bank, which means it does not hold deposits and provide loans like other banks. As a custody bank, it holds assets for large corporations, institutions, and asset managers, including ETF and mutual fund assets, for protection and safekeeping.

It also services those assets, providing various functions like accounting, securities lending, clearing, and handling flows. While it does offer wealth management and asset management for investors, most of its revenue, about 75%, comes from its custody business.

So, unlike traditional consumer banks, BNY Mellon makes most of its money on noninterest fee income, because the company charges fees to hold and service the assets. So, that means 75% of its revenue is fee-based. Typically, consumer banks make most of their money on interest from loans.

This is an advantage for BNY Mellon because fee revenue is typically much sturdier, and less prone to macroeconomic swings. Plus, as the largest custodian, with some $52 trillion in assets under custody, the assets are sticky, meaning they are not likely to change hands.

So, in many ways, BNY Mellon is less risky, and more stable, than most of its competitors, and less susceptible to market volatility.

In this particular market, BNY Mellon has outpaced other banks because it is not weighed down as much as its competitors by high deposit costs and provisions for credit losses. Additionally, it has benefitted from the strong stock market, as it makes more money in revenue when asset levels rise.

In the third quarter, BNY Mellon saw its revenue rise 5% to $4.65 billion, buoyed by a 5% increase in fee revenue. Net income rose 16% to $1.1 billion, while earnings per share climbed 22% to $1.50 per share. Both revenue and earnings topped estimates.

Still cheap, still a buy

BNY Mellon is one of those stocks that has produced steady, consistent results over the years, because of its business model and its dominance in this space. There are very few large custody banks, and BNY Mellon is the biggest of the bunch, so it’s just not likely to see much asset flight.

It is just the type of stock Warren Buffett loves, and why he owned it for so long, which is why it is a bit surprising that he sold out of it.

Of course, its long-term returns pale in comparison to the Magnificent Seven and other high flying growth stocks. But this year, many of the overpriced tech stocks have not performed as well, as investors grew concerned about their high multiples.

BNY Mellon is not typically a high-flier, but it does produce reliable results through various market cycles. It also has a solid dividend that has increased for 14 straight years.

BNY Mellon stock remains a solid buy, even with its great YTD returns, as its valuation is relatively low. Its forward P/E is just 11 and its five-year P/E-to-growth (PEG) ratio is just 0.75, which puts it in value stock territory. 

Source: FXSTREET

The German government’s recent decision to reintroduce border controls with its neighbors Poland, the Czech Republic, Austria and Switzerland marks a significant departure from the Schengen principles. This populist measure comes after substantial electoral losses for Germany’s governing coalition and aims to restrict access for both asylum seekers and illegal, undocumented immigrants.

This action is particularly concerning as it undermines the integrity of the Schengen Agreement, which facilitates free movement among European Union countries, as well as Iceland, Liechtenstein, Norway and Switzerland. The Schengen system is designed to eliminate internal border checks, create economic efficiency and greatly reinforce the perception of unity and cooperation among European nations.

The migration crisis has been haunting Europe for years. Brussels and some individual member states introduced misguided rules, practices and immigration quotas under the guise of “solidarity” among the whole EU. This created tensions, not only with Central European countries that refused to go along with the new measures, and as a result have been inappropriately labeled as mean-spirited and unhelpful. 

Reaching for migration solutions

Earlier this spring, the EU announced a pact aimed at managing the migration issue in a controlled manner. However, this pact appears to be more of a technocratic response than a genuine political solution, failing to address the ongoing migratory pressures. For instance, in just the first half of this year, approximately 19,000 people from Western Africa, primarily Mauritania, landed by boat on Spain’s Canary Islands. 

This decision reflects a measure of desperation rather than a comprehensive strategy.

When Italy’s government agreed with Albania to establish processing centers for migrants undergoing lengthy asylum procedures, it sparked disapproval across Europe. In early October, Poland canceled the use of the EU asylum procedures in response to Belarus weaponizing migration to destabilize Europe by simply refusing people entrance. Minsk, supported by Moscow, has orchestrated a system to entice migrants from distant countries and push them across Poland’s eastern border.

Last week, EU leaders convened to address the ongoing migration crisis. The concept of “outplacing” migrants, proposed by Italy (and previously in Europe by the United Kingdom), has at long last gained acceptance and is being hailed by some as an innovative solution. However, the idea reflects desperation rather than a comprehensive strategy. The first challenge emerged already, as a court in Rome stopped the outplacement.

The problem is not solved, but instead kicked like a can further down the road. European governments consistently struggle to reach meaningful consensus, yet enhancing the protection of the EU’s external borders has become increasingly necessary. Additionally, the implications for welfare systems across member states cannot be overlooked.

Migrants should learn that reaching Europe will not necessarily mean receiving welfare benefits. Milton Friedman, a Nobel laureate in economics, famously stated, “You cannot simultaneously have free immigration and a welfare state.” Furthermore, immigrants who commit crimes need to be deported immediately without lengthy appeal processes.

The dead end

Economic development in countries of origin is crucial to solving the migration crisis. However, aside from significant waste in development aid, Europe’s engagement in Africa has achieved little by way of supporting local businesses, attracting investment and facilitating trade. European protectionism, often disguised as “consumer protection,” makes it difficult for African enterprises to access the EU market.

The introduction of the EU’s supply chain legislation has been particularly onerous. While its measures may offer European progressives a sense of moral satisfaction, albeit somewhat hypocritically, the law imposes standards and controls so stringent that it becomes practically impossible for European businesses to trade with, operate in, or invest in African and other developing countries. But this is what these countries need.

As there appears to be no real solution at the Union level, member states may start to chart their own paths. The mishandling of the migration issue could initiate an unfortunate dynamic that jeopardizes EU cohesion, posing a genuine threat to the very essence of European integration.

Source: GIS

What to watch in the coming week

Worldwide manufacturing PMI releases

Americas: US Q3 GDP, labour market report, ISM manufacturing PMI, core PCE, JOLTs job openings, personal income and spending data

EMEA: Eurozone GDP, inflation, Germany GfK Consumer Confidence, UK mortgage lending, nationwide housing prices

APAC: BOJ meeting, China PMI, Australia CPI, Japan unemployment, industrial production, consumer confidence, Taiwan, Hong Kong SAR GDP