Firms’ response to the coronavirus crisis is telling

We started 2020 facing an environmental crisis. That hasn’t gone away: it’s just that now we are facing global healthcare and economic crises too.

As I write this, from my newly formed home office, I am watching in awe as the health services attempt to respond to the coronavirus’s spread; communities ground themselves to protect the most vulnerable; and central banks and governments try to fend off a sustained global recession.

This has clearly had meaningful implications for financial markets and our portfolios. However, the evidence so far suggests that portfolios constructed with sustainability in mind have outperformed the wider market during this extreme period.

We are not surprised by this outcome. History shows a correlation between high environmental, social and governance standards and equity returns. This correlation applies in severe downturns, such as we’ve recently seen, as in other times.

Sustainable companies are proving that stakeholder value is at the forefront of what they do, with moves to protect consumers, suppliers and employees during this turbulent time – by committing to cover child-care costs, for example, so that employees can continue to work while schools close; or designating vulnerable persons’ shopping hours, to ensure the distribution of goods to those who need to limit contact the most. These actions help protect the long term stability of the business by preserving consumer value, protecting supply chains and retaining staff.

These businesses are giving themselves the best chance of a quick recovery and a return to business as usual.

Consideration of environmental, social and governance factors is a crucial part of any investment analysis used to inform our investment decisions. This is the case when we’re acting for all clients, not just those who select a “sustainable” or “ethical” mandate. To us, it’s just us doing our job properly.

As a global investment manager, we recognise that we have an important part to play in shaping the future of all our stakeholders. Investment has a big role to play in solving the world’s shared problems. While that was true at the beginning of the year, it is even more the case now.

Emilie Shaw
Portfolio Director and Sustainable Investment Specialist

A consideration of sustainability might have at one time been a matter of investors' preference. It is no longer. I say this based on what I see happening in markets and the direction of policy-making around the world. Social and environmental change is happening faster than ever. Climate change, shifting demographics and the technology revolution are reshaping our planet. Those companies that can adapt and thrive will be more successful in attracting customers, employees and growing their business.

These changes are taking place, irrespective of our personal views on the many aspects of this complex – and sometimes controversial – topic.

There is an instructive lesson in the impact of technology over the past decades. Investors who were slow to recognise the incredible potential of technological developments, and their implications for a wide range of other industries, have seen their relative performance suffer hugely.
Sustainability could become a theme that will dominate the investment agenda in a similar way in the decades ahead.

Impact on value

Investors cannot deny that issues relating to sustainability have unavoidable long-term investment implications. Climate change, which will require businesses across a range of sectors to operate in very different ways, is perhaps the most obvious example. But there are many other areas where thinking about environmental or social consequences can help us identify businesses which are well positioned for the years ahead – and those which are not.

For instance, in a world where consumers are increasingly aware of how goods are produced, it is incumbent upon us to consider the supply chain risks faced by consumer businesses that we invest in. Such analysis could well have an impact on our assessment of a company’s long-term earnings and risk profile, which are ultimately the key determinants of its value.

What does this mean in practical terms? Quite simply, we want to ensure that environmental and social factors are being considered within all investment decisions. This is equally true of companies in which we invest directly and fund managers we invest with.

Firms’ response to the coronavirus crisis is telling

Impact on value

Counting the cost of carbon

Percentage of earnings at risk from rising carbon costs

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