Hope you are doing well and staying safe. Welcome back to our brief thoughts on ESG. This week I’d like to comment on whether investors with a long-term mandate (and particularly those with ESG commitments) could have a positive impact on the ripple effect of the COVID-19 pandemic.
Portfolio managers are by definition stewards of capital. Because of this, they have direct and indirect impacts on what companies do over time. Through their investment decisions they can pressure companies to do or stop doing things. In a crisis, the way investors react may dig a deeper hole for some companies, which may force them to do things they wouldn’t have done otherwise (think of a company firing employees in the midst of an economic crisis because its cost of equity and cash liquidity dramatically changed as investors worried about the short-term stock performance of a given industry).
Is there a way to make investors keep their eyes on the long-term trends and not react to potential short-term price disruptions? Because this would allow companies to act as long-term ongoing concerns and treat their employees, suppliers, and communities in a way that doesn’t create additional pressure points to the ones that will be unavoidable (the ones that will come from changes in our lives that are possibly not going away once the pandemic is more under control). This idea aligns well with the concept of Socially Responsible Investing.
Johanna Kyrklund, CIO and Global Head of Multi-Asset Investment for Schroders, recently wrote a piece on how investors should act in a crisis. In a nutshell, she advises to act calmly and rationally. Focus on a long-term investment strategy and stick with it. I agree with this conceptually. While it’s only natural that investors look for alpha trying to outperform the market in every situation (their economic incentives most of the time aligns them to do this), it’s also true that if long-term investors only react to true in-depth structural changes, the pain for a lot of stakeholders would be less. The UN PRI is actively working with its signatories to develop thinking on what responsible investors should do in this pandemic. We think their recommendation (posted here below) are worth reading:
“Immediate investor actions
Action 1: Engage companies that are failing in their crisis management
Action 2: Engage where other harm is being hidden behind, or worsened by, the crisis
Action 3: Deprioritise engagement on other topics
Action 4: Publicly support an economy-wide response
Action 5: Participate in virtual AGMs
Action 6: Be receptive to requests for financial support
Action 7: Maintain a long-term focus in investment decision making”
Larry Fink, also expressed similar thoughts in a recent letter (which you can read here):
“I have always believed in a long-term view. I have advocated for it in letter after letter. And I believe long-term thinking has never been more critical than it is today. Companies and investors with a strong sense of purpose and a long-term approach will be better able to navigate this crisis and its aftermath.
At BlackRock, we take a long-term view of markets, and we take a long-term view in the way we run our company. The world will get through this crisis. The economy will recover. And for those investors who keep their eyes not on the shaky ground at our feet, but on the horizon ahead, there are tremendous opportunities to be had in today’s markets.
BlackRock’s biggest responsibility – now more than ever – is to help our clients navigate this market environment and stay focused on long-term returns.”
Not only is the CEO of the world’s largest asset manager talking about focusing on the long term, but also he is talking about purpose and the responsibility that comes with managing other people’s money. As more leaders in the investment world discuss these concepts, it’s likely more funds will follow suit and behave more rationally.
As for companies, William Upshur from the Palladium Group published a study where it showed that during the 2007-2009 recession, “companies that put sustainability at the core of their operations actually weathered the recession better than those that did not.” What this means is that companies that truly behave in way that optimizes the benefit for all the stakeholders will outperform over time (i.e. companies that treat their employees and suppliers well over the crisis, and not focus only on keeping investors looking for guarantees on returns happy). And, again, we think investors can help kick-start this positive cycle.
Hope this was of use. As usual, if there is anything we can help you with, please reach out. Also, don’t forget to recommend any ESG subject matter that you would like us to research and put in a forthcoming weekly
Partner, Miranda ESG
This week’s recommended reading
- ESG Stock Resilience Is Paving the Way for a Surge in Popularity
- Keeping a Close Eye on ESG Issues to Minimize Risk during the COVID-19 Pandemic
- Capitalism rewired: why we must rethink how performance is measured
- The power of collective investor action
- RI Survey: Pandemic could be tipping point for ESG
- Are ESG and sustainability the new alpha mantra?
- Coronavirus Pandemic Could Elevate ESG Factors
Contacts at Miranda Partners