Beyond the volatility: COVID-19 and ESG

 

THE spread of COVID-19 is exacting a great humanitarian and economic toll across the globe.

At times of heightened uncertainty there is an even greater need for patient, active and transparent investment management to help clients navigate this challenging situation.

A key component of this investment process is stewardship, in particular engagement with investee companies.

An active engagement program is an important way to identify investment opportunities as well as manage risks.

Fundamental to this is a long-term focus – beyond the rapid velocity of market moves such as those now occurring in response to COVID-19.

At this time we want to continue holding companies to account while preserving value in a manner that is constructive and focused on the most material issues.

Often these include environmental, social or governance (ESG) matters.

Last year Pendal fully-acquired specialist ESG research, engagement and advisory team Regnan, to enhance our responsible investment and stewardship practices.

The wide-ranging social and financial challenges associated with COVID-19 highlight a number of important ESG topics which will continue to form part of our investment and stewardship practices in the coming weeks.

 

Here, Regnan experts share their view on how this crisis is impacting existing and emerging ESG issues:

What we’re looking out for

The COVID-19 crisis is unique because its implications are truly economy and society-wide.

Government, business and not-for-profits all experienced financial stress during the Global Financial Crises — but the current COVID-19 risks are more widespread.

This outbreak brings multiple challenges such as business continuity planning, workforce planning and supply chain disruption.

These are all aspects we are researching and raising with companies where we have concerns.

The current crisis is stress-testing these policies, procedures and overall governance, including with respect to ESG.

Here are some of the key areas to watch during the COVID-19 crisis:

Board function

Right now company directors need capacity – particularly in maintaining critical business services such as delivery of health care and medical supplies and non-discretionary consumer goods.

The economy-wide implications of the COVID-19 crisis elevate risks for most sectors, posing unique challenges for corporate leadership.

This will test individual directors to respond in ways that address immediate business challenges and longer-term strategy.

These are the types of circumstances Regnan has long considered a risk for companies with over-committed boards.

It may give further weight to the case for companies to mandate fewer board roles.

Management decision-making

How quickly and appropriately companies respond to the crisis will provide insight into company decision-making processes.

We watch for the companies that get on the front foot and mitigate business risks and those that fail to act quickly with necessary actions. This includes the less obvious interdependency risks.

Brand protection

Customer-centric strategies may come under strain as companies face competing pressures.

It is not clear how much any brand value created by a company’s response will translate into future loyalty.

But it is likely any major mishandlings will create reputational risk.

For example, the extent to which banks relax loan repayments for stressed businesses may have longer-term consequences for future business relationships, particularly in the Small and Medium Enterprise segment.

Unsurprisingly this is an area where we have already seen an industry-wide response, given the reputational strains already faced.

Supply chain

The temporary shutdown of supply routes, significant illness among employees, or pressures placed by panic buying will stretch supply chain management for a range of businesses.

Without careful business continuity planning this can elevate ESG risks.

For example, businesses may need to switch to lesser-known suppliers or sub-contractors that have not been through the adequate screening processes.

This raises the risk of lower-quality goods or failure to meet modern slavery or environmental performance standards.

Together with the recent Australian bushfires, the COVID-19 crisis provides lessons for longer-term issues we know are likely to bring supply chain disruption, such as physical disruption from extreme climate change events, either locally or offshore.

Will this make us do things differently?

There has been some discussion on whether the changed behaviours we are seeing with air travel and videoconferencing will lead to a change in practices once the situation passes.

Most of our meetings with company directors have been easily moved to the virtual world for example.

This will partly depend on how long the situation continues and the experience of users during this time.

In the meantime, it will be interesting to see how smoothly large corporates can continue with business-as-usual.

What’s next

Regnan will continue to factor these and other developments into our analysis during this unique time.

We will incorporate these into our company engagement program where material and we will continue to provide further updates on our observations and activities.

As history shows, crises are often associated with new regulation and technological responses along with changes in business and consumer behaviour.

Some of these changes are temporary (eg implementing working-from-home policies or re-tooling production lines to manufacture respirators and masks) while others may be more relevant to ongoing business practices (eg team-orientated communication tools or infrastructure solutions that provide care for elderly members of society – especially in countries with older demographics).

The combination of wide-ranging and rapid change with high uncertainty creates significant challenges – but also investment opportunities.

A disciplined, long-term investment approach focused on anticipating change is key to identifying these investment opportunities and delivering strong risk-adjusted performance.

Pendal’s investment teams have deep experience and insights formed over many market cycles.

Together with Regnan’s ESG analytical capabilities and engagement expertise, we feel confident in continuing to meet client needs despite these uncertain times.

We look forward to providing updates to our clients as this situation progresses.

In the meantime, please do not hesitate to get in touch with your Pendal account manager or learn more about Regnan here.

This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at March 24, 2020. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

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