Sus­tain­able in­vest­ing comes to fore in tough times

The Daily Telegraph - Business - - Business Comment - TOM STEVEN­SON Tom Steven­son is an in­vest­ment di­rec­tor at Fidelity In­ter­na­tional. The views are his own. He tweets at @tom­steven­son63

The world-weary view of the recent up­surge of in­ter­est in sus­tain­able in­vest­ing says that wor­ry­ing about en­vi­ron­men­tal, so­cial and gov­er­nance fac­tors is a bull mar­ket lux­ury. In harsher con­di­tions, you might think, at­ten­tion will re­vert to harder-nosed is­sues like prof­its and cap­i­tal preser­va­tion. You’d be for­given for think­ing that, but you’d be wrong.

Be­fore the pan­demic struck, ESG in­vest­ing was a hot topic, with the main fo­cus be­ing on the “E” for en­vi­ron­ment and, in par­tic­u­lar, cli­mate change. It has be­come hot­ter still as Covid-19 has brought the “S” for so­cial to the fore. And it is prob­a­bly not co­in­ci­den­tal that the “G” for gov­er­nance is firmly on in­vestors’ radars as well. Bull mar­kets can hide a mul­ti­tude of sins that then emerge dur­ing the tougher times that fol­low.

It is not hard to see why so­cial is­sues should have be­come more press­ing in the time of corona. The safety of work­ers and the pro­vi­sion, or ab­sence, of pro­tec­tive equip­ment is front of mind and an illustrati­on of why busi­nesses and in­vestors have rightly moved on from the dis­cred­ited idea that “cheap­est is best”. A purely financial, share­holder-pri­macy per­spec­tive might favour a su­per­mar­ket chain that obliges its work­ers to put in longer hours with­out PPE equip­ment over one that fo­cuses on customer and em­ployee safety with so­cial-dis­tanc­ing and ap­pro­pri­ate kit. It’s pretty ob­vi­ous to­day this would be a dumb in­vest­ment ap­proach.

An­other rea­son for so­cial fac­tors to have been pushed up the in­vest­ment agenda is the way in which the pan­demic has high­lighted glar­ing in­equal­i­ties. The death of George Floyd may not have re­ceived the at­ten­tion it did were it not for the con­text of a dis­ease that dis­pro­por­tion­ately af­fects mi­nor­ity eth­nic groups liv­ing on the eco­nomic mar­gins in pub­lic trans­port, care homes and the like. Boohoo’s sup­ply chain is not a new story, but Le­ices­ter’s lock­down has cast a harsh light on the ex­ploita­tion of poorly ed­u­cated im­mi­grant com­mu­ni­ties with no bet­ter op­tions than sweat­shop em­ploy­ment for a pit­tance.

The mas­sive in­ter­ven­tions by gov­ern­ment in sup­port of busi­nesses and their work­ers has fo­cused cus­tomers’ at­ten­tion on ac­tions as well as words from com­pa­nies. The role com­pa­nies play in their com­mu­ni­ties, and with re­spect to their em­ploy­ees and sup­pli­ers, has shot up the agenda in the board­room. This is nat­u­rally even more the case where gov­ern­ments have taken stakes in com­pa­nies, or handed them a life­line through grants, loans, tax relief or em­ploy­ment sup­port schemes.

Un­til just a few years ago, in­vestors viewed en­vi­ron­men­tal, so­cial and gov­er­nance fac­tors as “nice to have” in their anal­y­sis of a com­pany’s prospects. That has changed more re­cently as the be­lief has taken hold that sus­tain­abil­ity fac­tors might have a ma­te­rial im­pact on a busi­ness’s long-term prof­itabil­ity and, as a re­sult, in­vestors’ re­turns. But it has taken the pan­demic to pro­vide the first real ev­i­dence that a com­pany’s sus­tain­abil­ity char­ac­ter­is­tics could be a proxy for the over­all qual­ity of the busi­ness and its de­sir­abil­ity within an in­vest­ment port­fo­lio.

In just over a month be­tween mid-Fe­bru­ary and late-March, the S&P 500 index fell by 25pc. The fifth of com­pa­nies rated most highly on en­vi­ron­men­tal, so­cial and gov­er­nance fac­tors by an­a­lysts at Fidelity fell dur­ing that pe­riod by 23.1pc while the worst-rated on those cri­te­ria fell by 34.3pc. Each rat­ing level from A to E was worth 2.8 per­cent­age points of per­for­mance on av­er­age. The cor­re­la­tion be­tween ESG rat­ing and stock mar­ket per­for­mance was a straight line.

The high-pro­file col­lapse of Wire­card, the Ger­man-listed card-pro­cess­ing group at the cen­tre of an ap­par­ently mas­sive fraud, pro­vided fur­ther ev­i­dence of how analysing sus­tain­abil­ity can help in­vestors achieve bet­ter re­turns. Wire­card was rated E months be­fore the scan­dal broke. It was clear that it had a prob­lem­atic cor­po­rate cul­ture, its man­age­ment of eth­i­cal risks was in­ad­e­quate and its board­room gov­er­nance sub­stan­dard.

Once a month since the pan­demic be­gan, we have asked our an­a­lysts what they are hear­ing from the com­pa­nies they fol­low. Part of that sur­vey fo­cuses on sus­tain­abil­ity is­sues and, again, the find­ings have chal­lenged the cyn­i­cal view that in a time of cri­sis com­pa­nies will re­vert to think­ing ex­clu­sively about the bot­tom line.

Ac­tu­ally, more than half of the com­pa­nies ques­tioned said they in­tended to step up their fo­cus on work­ers, con­sumers and their im­pact on so­ci­ety in re­sponse to Covid-19. Again, it is not a lux­ury that only the more af­flu­ent de­vel­oped world be­lieves it can af­ford. Emerg­ing mar­kets in Europe, Africa and Latin Amer­ica and in Asia, out­side China and Japan, saw the big­gest swing to­wards a so­cial fo­cus in the latest sur­vey. Many of the changes look likely to re­main in place. Two thirds of com­pa­nies said new mea­sures they are tak­ing will be per­ma­nent.

In­vestors have a key role to play in this process. There is ob­vi­ously an el­e­ment of self-in­ter­est here. Dur­ing the early stages of the pan­demic, when mar­kets were fall­ing, there were sig­nif­i­cant net out­flows from in­vest­ment funds but those with a fo­cus on sus­tain­abil­ity bucked this trend, continuing to see steady in­flows through the volatil­ity. End in­vestor de­mand is a key driver.

But there is more to it than this. Big in­sti­tu­tional in­vestors un­der­stand that ac­tive en­gage­ment with the com­pa­nies they in­vest in is both part of their so­cial pur­pose and a way to help their clients achieve bet­ter financial re­turns in the long run. They can do this by on­go­ing di­a­logue with man­age­ment, or by us­ing their votes to ef­fect pos­i­tive change.

Ul­ti­mately, this is al­most cer­tainly a bet­ter so­lu­tion than sim­ply tak­ing cap­i­tal away from busi­nesses that don’t “get it”.

Cap­i­tal­ism is the least-worst way of man­ag­ing the global econ­omy, but it has to adapt if it is to re­main the sys­tem of choice. The pan­demic will change the world in many ways. It would be great if one of its achieve­ments was to turn sus­tain­able in­vest­ing into plain sim­ple In­vest­ing.

It is not hard to see why so­cial is­sues should have be­come more press­ing in the time of coron­avirus

Le­ices­ter has seen a se­cond lock­down and a fo­cus on sweat­shop con­di­tions

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