Many believed that there was a lot of froth surrounding ESG. Last year, an asset manager in India commented in private that it was just a fad that needed to run its course. That encapsulates how it is viewed by many – a vague, distant, feel-good, nice-sounding goal. What many failed to realize is that adhering to ESG principles is what strengthens the resilience of companies.
Unexpectedly, the virus has turned out to be an ESG stress test. What was being done more for appearances or a label is getting constructively rationalized and intensely scrutinized.
Take Britain’s fast-fashion Boohoo brand. A media report on the dire working conditions in an English factory had a detrimental impact on the brand, and its share price. A workers’ rights group alleged that factories supplying its clothing were putting workers at risk of COVID-19 with little to no social distancing or PPE, and some that tested positive were told to continue working.
Amazon, ASOS, Next, and Zalando were some retailers that dropped Boohoo's brands from their websites, as they wait for the company to conduct its investigation. The company launched an independent review of its supply chain and cut its relationship with two suppliers.
There has been an acceleration in investor interest with respect to ESG, an acronym for Environmental, Social, Governance factors. The COVID-19 crisis has shoved ESG into mainstream, but more importantly brought the “s” into prominence. Environmental issues have always hogged the limelight, and the value of good governance was also upheld. But the pandemic magnified increased inequality.
John Goldstein, head of the sustainable finance group at Goldman Sachs, has been vocal about this in the media. “It is not that the ‘e’ is now in the backseat. The ‘s’ has climbed into the front seat,” is how he explained it to Mining Weekly.
While the S factor can be comparatively more difficult to measure, it is just as important. This has particularly come to the fore in recent months as the Black Lives Matter movement has gained more traction. Investors are starting to realise the role that investing has to play in ending systemic racism, as well as helping to promote equal pay, better treatment of employees and social equality.
(In Why diversity should matter to investors, you will find more examples of company goof-ups and learnings).
Annalisa Esposito, data journalist at Morningstar.co.uk, spoke to some asset managers on this subject.
Veronique Chapplow, investment Specialist on the M&G Positive Impact Fund
By bringing about measures, such as the flexibility of working from home, that improve an employee's mental wellbeing, a company will likely perform better over the long-term, Attention to the S in ESG can lead to financial returns.
While doing the right thing may have short-term costs, it is a winning strategy over the long-term. Customers, employees and society notices if a company treats them well.
If it wasn’t for Covid-19, the Boohoo situation might not have become visible. Having a situation like the Covid-19 crisis highlights any flaws in a business. There is nowhere to hide, it’s a good ESG test.
ESG can be used as a framework to help ensure that the investments in your portfolio are sound.
Kenyan telecoms services firm Safaricom lifted certain charges, giving better internet for free at a time when more people were using its services. What this means for the future is better profits from being kind - it's a very powerful combination.
Ama Seery, ESG analyst at Janus Henderson
Seery invests in companies which are working on solutions to the problems created by the coronavirus pandemic. She likes firms such as Teledoc, a virtual GP service.
During the lockdown, people couldn’t go to the doctor in the normal way and they had to take online appointments. Teledoc has revolutionised the way we are going to interact with doctors in the future.
One company which stands out when talking about solving issues working from home is Microsoft. Many people are using its Teams service or Microsoft cloud computing. Everything we do from home is about Excel and Word, and this is only possible thanks to Microsoft.
After months of home-working, many companies are talking about scaling back their office space. Giving people that level of flexibility that would make a huge difference in terms of work-life balance.
Katherine Davidson, asset manager of Schroders Global Sustainable Growth
This crisis has raised public awareness of corporate responsibility, and the resilience of ESG stocks and funds so far suggests the market is also paying attention.
European food firm Danone has demonstrated that corporate social responsibility is at heart of its operations. One stand-out measure was that Danone accelerated its payments to suppliers to just 26 days, providing much-needed liquidity to businesses at a time of global crisis.
Among other things, Danone made no employee lay-offs, increased wages for furloughed staff, issued €1000 bonus for manufacturing staff in France, adapted factories for social distancing and provided PPE.
The company also provided financial support of €300 million, financed by Danone's cash flow, to the 15,000 small businesses in their global ecosystem (farmers, suppliers, service providers), to the entrepreneurs of Danone Manifesto Ventures’ portfolio, and to the communities of Danone Ecosystem.
Danone North America donated its products liberally to vulnerable consumer groups, along with cash donations.
Companies that care about their customers, employees, suppliers, society, and the environment are what make them great. They are the ones with durability and stability.
