During times of crisis, conventional wisdom suggests investors retreat into tried and trusted 'safe havens', such as gold or long-dated government bonds. This mindset views sustainable investing as a green trend, or something of a luxury during serious times. I have even heard the argument that clients have too much on their minds right now to consider the benefits of sustainable investing.
This thinking belongs in the past. Funds focused on quality companies with strong environmental, social and governance (ESG) policies have fared better during the current crisis, most of them outperforming conventional benchmarks.
But as the collective response to this crisis evolves, it's becoming undeniable that from an investment perspective, backing those companies demonstrating a strong commitment to a clear set of values is logically the only place to be. To paraphrase economist Alex Edmans, the only way a company can 'Grow the Pie' in a sustainable manner, is to treat all stakeholders equally and fairly, and by doing this creating more future value and profit, effectively creating revenue for all stakeholders.
Behaviour will make or break brands
The greatest global health crisis for a century is creating a major change in corporate behaviour. Companies have been forced to re-assess their relationships with their customers, employees, suppliers and the wider community, instead of just addressing the short-term needs of shareholders. Recent research by BofAML shows that companies that have performed well during the height of the COVID crisis have demonstrated superior product, health and safety scores, as well as better workforce policy scores.
Spread between companies in top vs bottom group ranking (19/02/2020-20/03/2020)
Social factors in grey, governance factors in blue
Source: Refinitiv, Sustainalytics, IBES, BofA US Equity & Quant Strategy. *quintiles for Workforce Score, Product Responsibility Score, CSR Strategy Score, Human Rights Score, Community Score, Shareholders Score and Management Score; above- vs. below-median for all other attributes due to attribute distribution. Back tested performance is hypothetical in nature and reflects application of the screen and is not intended to be indicative of future performance.
Firms that truly value their stakeholder relationships should be best placed to emerge from this crisis. Loyalty and compassion shown to employees; fair treatment of suppliers; transforming production lines to provide critical care equipment; business owners making personal sacrifices or direct donations, these are all crucial factors which may see some firms reap the benefits of customer loyalty and brand equity when supply chains start to recover. Companies revealed to be lacking in these departments are more likely to fall out of favour.
"Companies that have performed well during the height of the COVID crisis have demonstrated superior product, health and safety scores, as well as better workforce policy scores."
The green imperative remains
Some market participants have suggested that environmental-related targets and the EU Green Deal may be suspended indefinitely. For example, the 'Farm to Fork' initiative was delayed after farmers cited coronavirus disruptions. Food sustainability is one of the central tenets of the European Green Deal, and while COVID-19 is creating disruption, it's unlikely that delays will be indefinite. In addition, while the Cop26 climate talks have been postponed until 2021, the EU Council has requested that post-COVID-19, economic stimulus should include and accelerate green spending. This is a long-term movement that may be interrupted but will not be derailed.
Within the energy industry, despite the economic slump, renewable energy companies remain competitive in general. Meanwhile, all major oil companies in Europe have announced capital expenditure cuts of around 20%. It's increasingly likely that in an environment where cutting dividends is both financially prudent and 'the right thing to do', we could see more companies use this cash to build out more solar and wind plants, or pay for highly profitable electronic charging points, instead of feeling compelled to maintain investment in legacy businesses that offer lower profitability due to falling oil prices. Forward-thinking firms now have the opportunity to capitalise on their prime positions.
An end to short-term thinking?
Short-termism has been a major obstacle to sustainability needs for decades now. But with dividend cuts anticipated across most market sectors, companies that focused only on keeping shareholders happy have lost the critical buffer that kept them ahead during volatile market conditions. While it would be naïve to expect shareholder considerations to take a back seat indefinitely, with the world facing 'great depression' territory, companies find themselves on a much more level playing field. This makes many more likely to keep dividend pay-outs low and C-Suite remuneration packages conservative in the medium term at least.
A chance for investors to look to the future
For investors, there's a clear imperative to consider sustainable investment funds. Such portfolios already feature forward-thinking companies that have demonstrated their embrace of ESG principles, their commitment to all stakeholders, and their focus on achieving long-term goals. These are the investments capable of delivering robust returns in a post-COVID environment.
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