How the pandemic could help pave the way to a more sustainable future.
- The pandemic is no mere economic recession, it is also a societal and health emergency that will leave deep scars that could linger for a generation or more.
- As the global economy starts to emerge from the crisis, opportunities will abound for companies across all sectors to recommit to rigorous environmental and social programs and sustainable practices.
- We believe it is time to retire the term ‘ESG’ as we believe sustainable and responsible practices should be enshrined within companies’ business strategy.
During the global financial crisis of 2008, Warren Buffett famously said: “You only find out who is swimming naked when the tide goes out”. So it has been with the Covid-19 pandemic in relation to the rigor with which companies have engaged with ESG (environmental, social and governance) concerns.
Whether it takes the form of companies working with bad actors across supply chains, poor crisis and contingency preparedness, workforce layoffs, or even brand reputation management, the virus has indeed dragged the tide out, exposing businesses and sectors where the ESG emperor is wearing no clothes. The good news: as the global economy starts to emerge from this worldwide crisis, opportunities will abound for companies across all sectors to recommit to rigorous environmental and social programs and sustainable practices.
Societal and Health Emergency
What we are witnessing is no mere economic recession. At its heart, the pandemic is a societal and health emergency that will leave deep scars that linger for a generation or more. During the current crisis, investors, as well as our broader society, need to be vigilant against the potential outcome that would see existing, entrenched interests reinforced, rather than reversed, which would run counter to the hopes of society. We are currently seeing the best of many individuals and companies in the battle against the disease, but with trillions of dollars flooding the global system, the potential for misappropriation of the recovery by vested self-interests runs high.
If optimism exists, it is because prior to the pandemic’s arrival, the conversation in boardrooms had increasingly turned to ‘corporate purpose’ and the end of the primacy of shareholder value in favor of a multi-stakeholder approach to business. Indeed, last August, US senior management publication Business Roundtable (BRT) wrote a letter trumpeting the new world order of multi-stakeholder capitalism. Little did the signatories know how quickly that hypothesis would be tested! Now is the time for companies to turn those words into tangible action and for shareholders to hold them to account if the rhetoric is to be more than empty words.
Companies as Social Enterprises
Every company, by definition, is a social enterprise that has an implicit social contract with its workers, the communities it serves, and the environment in which it operates – something explicitly recognized in the BRT statement. So far, the leadership and management teams of many companies have demonstrated empathy, compassion, and ingenuity to go beyond profits to help communities in crisis. (Manufacturers making ventilators, retailers producing protective garments, and certain liquor companies shifting production to hand sanitizer are all good examples.) For others, however, mercenary behaviors have been laid bare and rightly exposed to public opprobrium. That’s where active engagement by shareholders provides an opportunity to have real dialogue about salient issues that go beyond traditional financial metrics. And, when dialogue refuses to yield results, executives and boards can ultimately be held to account through the power of proxy voting, a central part of securities ownership.
In our view, now is the time for companies to rebalance expectations away from maximizing short-term returns – the use of excessive debt and extended supply chains to reduce labor costs – towards the quality of those returns. In short, we have an opportunity to re-examine notions of efficiency in favor of resiliency. A stirring example of this kind of thinking is the city of Amsterdam, which has officially embraced a sustainable development model as a way of emerging with purpose from the Covid-19 crisis to balance needs without harming the environment.
The US Securities and Exchange Commission’s (SEC) announcement that it has asked companies to release “robust, forward-looking disclosures” about the impact of Covid-19 on their businesses is another landmark moment. Extrapolating this further, it may mark a watershed opportunity to disclose broader sustainability information concerning long-term risks to which companies are exposed. On climate change, for example, the new disclosures should allow US companies to provide scenario-planning information recommended by the United Nations-supported Task Force on Climate-related Financial Disclosures (TCFD), which many thought was prohibited up until now. Fuller, more transparent disclosure of the material risks that companies face is needed for investors to better understand the strategy for delivering resilience in the face of future uncertainty.
Never before has there been so much interest in corporate sustainability. Despite the current crisis, ESG and sustainable-labelled equity funds set inflow records in Q1 2020. The growing demand for such products provides an opportunity for companies to demonstrate that ESG is not a handy marketing acronym for asset managers, but an integral part of how a company takes its corporate purpose seriously to generate value for all stakeholders.
Greenwashing is an accusation directed at companies, not just asset managers keen to virtue signal. ESG should never be just about what a company is disclosing, but what it is actually doing. Created in buoyant economic times, the BRT corporate purpose statement now provides a ready-made template for companies to navigate their way out of crisis, and it recognizes potential contribution towards delivering a vibrant and healthy world for all.
Our Covid-19 moment presents us with the opportunity to retire the ESG label in favor of recognizing that what we’re really talking about is ‘finance 101’: the management of issues that are self-evident and influence good long-term corporate financial outcomes. Companies with poor ESG records may ultimately deflate shareholder value – and are likely to be held accountable if their behavior falls short as the trauma engulfing the economy unfolds. I won’t be the last to say that our present time has been challenging, unprecedented, and even surreal. If corporations and investors alike remain vigilant, when the coronavirus tide finally recedes, it just might unearth a better, more purposeful world.
Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. Compared to more established economies, the value of investments in emerging markets may be subject to greater volatility owing to differences in generally accepted accounting principles or from economic, political instability or less developed market practices.
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. ‘Newton’ and/or ‘Newton Investment Management’ brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.