Sustainability: six ways the corporate world will have to change
We focus on six key areas that point to a changing role of the corporate sector in society in the face of “inescapable truths”.
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It is clear that the effects of the Covid-19 pandemic will reverberate long after the outbreak has passed.
Our “inescapable truths” are the economic and disruptive forces identified by Schroders before Covid-19 as shaping the medium-term outlook for economies and markets.
Even then, they predicted a slowing economy and unprecedented disruption, and implied active stock selection and risk management would be critical.
We explain how sustainability will be fundamental to progress, focusing on six key areas that point to a changing role of the corporate sector in society.
1. Re-writing social contracts: responsible “saint” companies will outperform the “sinners”
The current consumer attention on companies’ roles in society and the gap between “saints” and “sinners” is likely to accelerate.
We believe companies with a long-term outlook are more likely to behave responsibly towards their employees, to redirect capacity to social challenges to support relief efforts.
We also believe these "saint" companies have a better chance of being the ones still standing - or even outperforming - once the crisis has passed.
2. Companies must be better prepared for “black swan” events
It has been debated whether Covid-19's outbreak was a surprise "black swan" event or not.
Events such as terrorist attacks, political disruptions, natural disasters and other climate risks are coming thicker and faster, making so-called “black swan” events more frequent.
Exposure to pandemic threats, physical climate risk, water stresses, and socio-political risks need to be assessed.
3. Political reprioritisation: governments will come under pressure to tackle societal problems
The crisis is placing growing pressure on governments to tackle growing inequalities within societies.
We expect health, education, employment and other welfare policies to attract more focus in the future.
By tracking trends in regulation across topics and sectors, we can help identify companies facing bigger risks.
As investors, we can then analyse and question companies directly on their exposure and readiness.
4. Employee protection: supporting vulnerable workers
Covid-19 has highlighted gaps in employee protection. An increasing number of workers are in casual or “gig” economy roles without benefits such as paid sick leave, healthcare or retirement provision.
Our analysis suggests that corporates’ focus on basic benefits such as sick pay and health insurance will be increasingly critical to their licenses to operate.
Our proprietary ESG tools include a range of measures to assess companies’ readiness to adapt to the growing importance and influence of employees.
5. Globalisation under pressure: long-term structural shifts in global supply chains
Companies need to have both visibility and agility in overseeing their supply chains, as well sufficient investment in technology systems to help manage their performance.
Supply chains have localised during the Covid-19 outbreak and we expect long-term structural shifts.
On a company level, we can analyse the threat to supply chain disruption of some of our key holdings.
Our assessment of supplier payment lead times show which are among the slowest to pay their suppliers.
6. Technology adoption: driving workplace changes and new sales channels (but there are risks)
Digital life has been fast-tracked. The crisis has forced many corporate leaders to reprioritise remote working and to strengthen digital tools.
Whether these new habits will last depends in a large part on security. Technology platform launches have been rushed out, causing potential shortcuts in data security protocols.
Assessing the risk management picture of companies in affected industries allows for comparisons across peer groups.
Companies that have invested in good data security technology and leadership will be the least exposed to fines and poor customer experiences.
Conclusion: Sustainability will be fundamental to progress
The Covid-19 crisis has been a structural whirlwind, with the potential to fundamentally transform how companies interact with their stakeholders for the better over the long term.
It has highlighted the importance of ESG (environmental, social and governance) analysis, measurement, and engagement.
Through our proprietary analysis tools, we have the ability to draw upon global trend data and company data to assess which sectors and companies are more robust.
And as an active investor, we actively question those we believe are falling short of stakeholders' expectations.
Please find our full research paper as a PDF below.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.
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