08 Jun 2020
If the trend towards sustainability was already in motion, then the Covid-19 crisis has sped it up. Global CIO Andrew McCaffery and our Global Macro Team discuss this dynamic and why companies will increasingly place social purpose above short-term profits as a means of ensuring their long-term sustainability.
In the summer of 2019, the influential Business Roundtable of top US executives rejected the decades-old notion of shareholder primacy and instead advocated embracing wider stakeholder interests. So far, this has proven to be largely a statement of intent, but we think that will change. Global corporations cannot hope to continue business as usual amid growing public scrutiny of their operations (and profits) while the wider economy looks increasingly moribund.
We expect not only investors, but society in general, will require firms to consider the welfare of their employees, communities and suppliers - ahead of short-term profits - as part of ensuring the long-term sustainability and resilience of their businesses.
The outperformance of more sustainable companies in market falls in the first quarter of the year is renewing appreciation for these businesses. In recent research, we found that companies at the highest Fidelity ESG rating collectively outperformed the index by 3.8% during the depth of the crisis, while those with the lowest rating underperformed by 7.8%. This pattern was repeated at the sector level.
On average, among the 2,689 companies rated, each ESG rating level was worth an additional 2.8% of stock performance versus the index. The findings in fixed income are similar to those in equity. The securities at the highest ESG rating level fell 9.2% from the start of the year up to 23 March, while the lowest rated group fell 20% on average. This relationship remains even when adjusting for a potential bias towards high quality credit in the ESG ratings.
The study suggests that what initially looked like an indiscriminate and panicked sell-off did in fact discriminate between companies based on their attention to sustainability matters. It supports the view that a management team that focuses on sustainability is more likely to be a high-quality one and has a better chance of building a business that is resilient in a downturn. The idea of sustainability as a luxury, employed in bull markets but discarded in bear markets, continues to lose credibility.
The crisis has also brought into sharp focus the juncture between public health, migration and climate change. Climate change-induced migration will have far reaching effects for disease control, and public and private entities will need to co-operate to understand and manage these dynamics.
A development that could pave the way for further public-private collaboration around sustainability is the EU’s Green New Deal. The EU has committed to rolling out its €1tn plan over the next decade, and to becoming carbon-neutral by 2050. The EU intends to fund the programme by drawing on the European Investment Bank and a combination of public and private sector co-investments.
While there is broad consensus among member states on the overall deal, agreeing how to apportion funds will require compromise. Regions that will be hardest hit - economically and socially - by the need to tackle climate change are expected to receive a higher proportion of funding. For instance, coal-reliant countries in Eastern Europe will require more funds to transition to a green economy and re-train workers. Where investment will end up will be nuanced, but certain sectors are more likely to emerge as winners.
Renewable energy, technologies to de-carbonise energy intensive industries such as steel, chemicals and cement, and companies in the electric vehicle supply chain are likely to receive investment. Sustainable food production could also benefit as the EU seeks to ensure food security and incentivise new farming and fishing techniques while reducing reliance on pesticides, fertilizers and antibiotics in animal and plant production.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in small and emerging markets can also be more volatile than other more developed markets. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.