At a time when the world seems to be going to hell in a hand cart, with stock exchanges plunging and ominous talk of a global depression, many are asking if this is the end of the road for the ESG bandwagon? When companies are rightly focused on survival, should investors abandon their ESG commitments and their related requirements of companies as bull market excess?
What we are seeing is that there is a pause for reflection; fund managers have had to contend with tremendous market gyrations and losses, and with COVID-19 stalking the streets of London and the atomisation of teams to home working, it would be unreasonable to think that everything could continue as before. The main struts of our financial ecosystem are in peril and companies’ response to this will have a lasting effect, both on their continued viability and on how they are perceived. This has led to some counterintuitive political decisions – such as rumours that the Chinese authorities are kick starting their fossil fuel car production in preference to electric vehicles to try and get their economy moving more quickly.
But many of the drivers of ESG have already gone way beyond ‘nice to have’ status into regulatory requirements – such as the meeting of Paris Agreement emissions targets and the commitment to Task Force for Climate Related Financial Disclosures (TCFD). These are happening and companies and investors will need to address them. There is no visible let up and in the wake of Larry Fink’s letter to CEOs in January, BlackRock, the world’s largest investor, has reasserted its requirement for companies to report in line with TCFD this year. Many threw rocks at Larry for his letter, not least because BlackRock had been slower than some in this area, but there is no denying the impact it has had on the market.
Investors are also increasingly using ESG issues as a critical screen in their approach to risk mitigation, indeed ESG is becoming a key determining factor of alpha and strong due diligence: why, after all, invest in a company which is perpetuating unsustainable business practices? Investors want to believe that company management understand all the risks to their business, as well as the opportunities, and that they are addressing and mitigating these as far as it is possible. They are also petrified of being stuck in stranded and illiquid assets.
COVID-19 and the dramatic impact it is having on many businesses, large and small, means that the often overlooked ‘S’ of ESG is coming to the fore. Investors are joining with policymakers and the wider public in decrying poor treatment of workers and asking for restraint. At the end of March, 195 mostly US-based institutional investors managing $4.7trn called for companies to prioritise the welfare of workers and other stakeholders as they decide how to respond to the economic crisis; and major global banks such as Morgan Stanley, Citigroup and HSBC have paused their downsizing programmes due to the virus.
Moreover, markets are scrutinising executive management behaviour, from the contentious furloughing of administrative staff in the Premier League amidst calls for football players to make contributions from their own salaries, to CEOs at more than three dozen of the UK’s largest companies forsaking part of their own remuneration packages to safeguard large numbers of their employees and aid cashflow, to the insistent spotlight targeting those who fail to take such action.
Whatever happens in the coming weeks, it is clear that there has been huge value destruction. This will lead to winners and losers; the winners will need capital which will surely be in shorter supply than at any time in living memory. Investors are highly unlikely to pour money into companies which they feel are behind the curve.
However, it is also clear that there will be some pragmatism on behalf of investors at the forthcoming AGM season. In a recent FT Story Hans-Christoph Hirt of Federated Hermes said that investors are weighing up how to approach voting at companies that are battling for survival. “Do you want to vote against the chair, for example, if the board doesn’t meet independence requirements? Is that the most useful thing to talk about at the moment?”
So, in these unprecedented times there will be agitation on both sides of the debate and although we can expect some flex from investors, the direction of travel seems to be set and for now no U-turns are allowed. In the battle for access to capital companies need to continue to communicate effectively with investors on ESG issues if they are to maximise their chances of getting the capital they will need to rebuild.