Investing in sustainability: the power of ESG

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The COVID-19 pandemic has been a worrying time for companies and investors globally, but has also put a spotlight on the importance of ESG needs and responsible investing. With ESG¹ getting more attention now than ever before, Newton’s Andrew Parry discusses how companies’ reputations can be affected by how seriously they take this form of investing.

The world has arguably changed more in the past two months than it has throughout the last half- century. From economies around the world hitting new lows to some of the world’s biggest companies (that many would have previously deemed as almost impregnable), losing serious amounts of money and having to make mass redundancies.

It’s evident that very few companies have benefited from this global crisis, but how companies react to it and their outlook for the future can enhance or detract from their previously positive reputations. But how? This is where ESG factors come into play. Although ESG has been a hot topic within investing for some time, now more than ever, we are seeing that how companies deal with environmental, social and governance factors through a pandemic can help gauge which ones are more likely to stay afloat and which might sink.

ESG factors often play a material role in determining risk and return, but they are also driven by investors wanting greater transparency on how and where their money is being invested.² During uncertain times like these, how openly companies deal with their projections for the future, the treatment of their employees and their actions on how to sustain themselves will seriously affect how consumers view their ethics and morals as a company or brand.

The crisis has highlighted that ESG is not a convenient label to sell financial products, but is a set of real issues that must be considered when assessing the merits of an investment decision. How a company – and individuals for that matter – respond in a crisis tells you a lot about their motivation and if they have a moral compass that guides their purpose,” says Andrew Parry, head of sustainable investment.

What the COVID-19 crisis has done is place attention firmly on the social dimension of ESG, as first and foremost, this is a human crisis. Thus far, the majority of companies have behaved well and responded with a high level of empathy and compassion; those that haven’t have been quickly on the receiving end of public opprobrium through the press and social media, potentially permanently impairing their reputations,” he continues.

Some companies will have no choice but to cut costs and therefore lay off employees during this time, but those who have a benefits or payout programme for their employees will most likely not face as harsh a criticism as those who look at their former employees as a burden or liability. With regard to salary cuts, CEOs and management teams who are taking salary cuts alongside the wider workforce are likely to fare better in the reputational stakes, especially among their own employees.³

COVID-19 has also made hundreds of thousands of global companies change their normal working regimes, encouraging staff to work from home for the foreseeable future. Like any new experiment made without extensive preparation, alternative working arrangements bring pros and cons. On the positive side, remote technology and tele-conference applications can be a godsend for companies who are heavily involved in group communication efforts and collaborations. The downside is that companies must find a way to work with any unexpected technological issues, and for many companies, work can be done more efficiently when dealing directly with individuals in the office instead of waiting to hear back from them via technology.

Businesses are social enterprises and we thrive on social interaction,” says Parry. “What this ongoing experiment has shown, is that flexible working arrangements can work for many businesses and can play an important part in providing a good work-life balance for many.

It has also illustrated that permanent, physical absence from the workplace has its limitations and leaves an important social gap in life. Reflecting on the lessons learned, companies will recognise that more flexible working patterns that are considerate of the home life needs of many of their staff will be a great way to retain and motivate people.

Integrating ESG factors within investing or looking at a company’s potential ESG benefits has often been looked at as a ‘would be nice to incorporate’ but not a ‘need to have’ for many global investors, until now. While ESG has generated a lot of interest globally in recent years, this crisis has shown how responsible investing should now be considered an essential approach to serving clients in the 21st century.

Change was and still is a challenge for companies – through technology, demographics, global trade and the climate – and COVID-19 is a dramatic new manifestation of the uncertainties of today’s world.

Instead of arguing why environmental, social and governance considerations should be used when investing, it is now the case of asking why would you not think about these issues? Not to seriously integrate ESG into the analysis of a company is to have an incomplete picture of the opportunities and risks for the enterprise. That is why ESG is not a label: it is finance 101,” concludes Parry.

¹Environmental, Social and Corporate Governance. A set of standards for a company’s operations that socially conscious investors use to screen potential investments.
²CFA Society United Kingdom: ‘Certificate in ESG investing official training manual, edition one’. 4 May 2020
³Newton Investment Management ‘Being an engaged investor in the time of COVID-19’. 4 May 2020

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