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Border to Coast’s Jane Firth: ESG investing in a time of crisis

29 Jul 2020

Jane Firth is head of responsible investment at Border to Coast Pensions Partnership

The Covid-19 pandemic has increased corporate and investor attention on ESG issues with the realisation that it’s not just a nice to have in the good times.  Companies need to focus on surviving the devasting impact of economies in shut down; furloughing staff, moving to remote working where possible; and cancelling dividends and share buybacks to protect balance sheets. But boards need to strike the balance between short-term survival and the long-term sustainability of their business. It’s highlighted the ESG related risks that companies are facing, whilst at the same time opening up opportunities to companies with strong leadership, that are nimble, innovative and resilient, ready to survive the ‘next normal’.

At Border to Coast we are long-term, strategic investors. Our investment horizon is better measured in decades than quarters. No-one can deny the severity of today’s challenge. And yet, looking over the past 30 years, crises seem to come and go with monotonous regularity. The only certainty is that there will be another one in the next few years – and despite our collective wisdom, we won’t quite predict the next challenge.

In this context, simply analysing a firm’s financial performance to date is akin to driving simply using the rear-view mirror, with a black and white filter. Using a wider spectrum of inputs helps create a more vivid picture of an individual firm’s opportunities and challenges. Integrating ESG at the heart of our investment decision making not only gives us a better view out of the windscreen, it ensures we view the world in Technicolour.  

The social aspect has tended to be the ignored middle child of ESG – but its importance and relevance has been brought to life in recent months. Covid-19 has exposed the precariousness of job security and labour exploitation. Companies are under the spotlight on how they are treating their workforce, suppliers, customers and wider society in the current crisis.  Companies that look after and invest in their employees will be better placed when business can resume by having retained a well-trained and dedicated workforce.

There is also the issue of how firms manage their supply chains. Minimal inventory and low-cost supply have been the main principles of supply chains over the past couple of decades. And the increasing length and complexity of supplies chains has effectively enabled firms to externalise social costs.  

But the pandemic has revealed a significant vulnerability in all these areas. Issues such as sub-standard labour conditions and supply chains, perhaps seen as “just a reputational risk” to manage, are now better understood as an operational risk, placing the future of the company at risk.

Covid-19 is also laying bare the inequalities many societies have – such as the Black Lives Matter protests that started in the USA but have spread internationally.  Businesses need a social licence to operate. Put simply, if they are not part of the solution then they are part of the problem. Are they fully diverse and inclusive at all levels? What is their gender pay gap? Do they even understand the challenges their workforce and the society they operate in face?

Which brings us to governance. Running any business is challenging. Boards have huge responsibilities. They need to balance their long-term strategic needs with short-term necessities. And to do this they need the focus, time and thought to make the right decisions.  On focus, there is a clear risk of over boarding, when directors hold multiple directorships. And companies that have embraced diversity in all its forms will have a diverse perspective ensuring they are in a strong position to make the optimal decisions. Despite some progress, more work in this area is needed.

The environmental aspect of ESG has understandably dominated thinking for several years. It remains the single largest long-term risk to us as investors, and as humans. Climate change – like the pandemic – is a systemic risk and focus needs to be maintained on this area. The pandemic has highlighted what happens when short-term considerations are prioritised at the expense of long-term resilience. It has provoked significant behavioural change by corporates and citizens; some of which are likely to remain post-crisis and could help support the transition to a low carbon economy. Even though the economic shutdown has led to greenhouse gas emissions falls and this effect has been dramatic, it will be temporary and reversed if the right policy measures are not put in place. Government stimulus post the crisis could take into account the need to transition to a low carbon economy as part of the support for rebuilding economies.

To deliver sustained investment returns, investors need to understand all the risks a company faces. Life – and investing – is ultimately uncertain and the current crisis has emphasised the importance of integrating ESG into investment decision making. An essential part of this is clear, consistent and commonly accepted standards for company reporting and disclosure, to enable investors to make effective decisions. Investor initiatives, such as the Workforce Disclosure Initiative, are providing frameworks for consistent disclosures from companies, to help investors in this area. Engagement by investors on ESG issues is critical – not just by stewardship specialists but by portfolio managers in everyday dialogue with companies.  

Investors are watching closely how companies are responding to the crisis and this will inform future engagement and voting decisions at the next AGM season.

Bank of America recently said, “ESG is not just a bull market luxury, ESG is a bear market necessity”.  We would go one step further. ESG isn’t just for managing risks. It’s the only way to invest.  

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