As soon as the coronavirus crisis hit our society and financial markets, we received many questions on how this relates to sustainable investing and ESG. Will sustainable investing become more important? Or will it become less important? Are sustainable funds doing better than regular strategies? Will the coronavirus be added as a topic to sustainability research?
Of course, links can be made to long-term trends such as a growing and aging population and the loss of biodiversity (through which people could get exposed to unknown viruses1). However, those long-term trends are still exactly the same as they were before this crisis. Nothing new under the sun. If anything, this crisis reinforces the fact that sustainable development is the only way forward. And it is our response to this crisis that is most important now.
The current situation, with less air travel and less production, shows us what the world can look like. Clear waters, blue skies. With respect to the S in ESG, we find that solidarity is important, and that companies can have a social face. We see companies that are changing production lines to make hand sanitizer or ventilators for hospitals, and some are even giving away input for these products for free, as it is small in light of their business, but can make a huge difference to the hospitals that receive it.
Becoming accidentally sustainable
We also see that companies are quick to adapt to taking measures that they were reluctant to take in the past, such as the ability for their workers to work from home, have flexible hours, and have meetings via conference calls rather than taking trips. This is accidently all good for equality, diversity and the environment.
A blessing in disguise? No. First and foremost of course because of the tragic human consequences of the deadly viral outbreak, but also because this crisis and the lockdowns have led to a complete economic standstill and substantial market declines. The long-term effects of this standstill will only be known afterwards. However, the longer it takes, the more profound the effects will be.
It will, at a minimum, hit companies’ abilities to generate long-term value, not only for shareholders, but more importantly for all stakeholders, including their employees and the communities in which they operate. In the Investor Statement on Coronavirus Response2 signed by 195 investors around the globe, including Robeco, we ask companies to provide paid leave if necessary, prioritize health and safety, maintain employment, suppliers and customer relationships, and exhibit financial prudence.
Capital management and remuneration
The two most important issues from an ESG perspective when it comes to financial prudence are capital management and remuneration. Again, these are not new topics for sustainable investors. However, in this situation we will be assessing on a case by case basis the prudence of companies when it comes to dividend payouts and share buybacks.
We will also be critical of remuneration proposals for board members. As our proxy advisor Glass Lewis puts it3: “Companies with strong pay structures will be challenged to abide by them, and firms with less robust programs will be forced to choose between lying in the bed they’ve made, or changing arrangements and all but guaranteeing shareholder ire.” We have already come across the first companies that are floating the idea of topping up pay packages to keep executives incentivized this year. We will be very critical of this kind of behavior, especially where employees face hardship, or where shareholders expect far lower returns.
When it comes to employees, we expect company responses to the coronavirus to be a proxy for their broader approach to human capital management. In the Investor Statement on Coronavirus Response, we noted that the board of directors is accountable for the long-term human capital management strategy of their companies. Companies with good human capital management have invested in their employees and will be well served by having retained a well-trained and committed workforce when business operations are able to resume, we believe.
The statement on the Purpose of a Corporation signed in August 2019 by 181 CEOs in the US will be put to the test. In this statement, the CEOs commit to leading their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders. Now is the time to show that they mean what they say.
Keeping economies afloat
Looking at the financial markets and the broader economy, we see that governments and central banks are doing everything they can to keep their economies afloat as much as possible. Their monetary and fiscal responses are both unprecedented in size. They are aimed at mitigating the standstill. The USD 2 trillion coronavirus relief bill in the US, for example, includes one-time payments to individuals, strengthened unemployment insurance, additional health care funding and loans and grants to businesses to deter layoffs.
Longer term, however, more stimulus is probably needed to aid economic recovery. This represents an opportunity for governments to combine economic stimulus with social and environmental development. This is especially needed now, as the low oil price will potentially hurt investments in renewable energy. Although it’s already cheaper in some parts of the world to generate energy from the wind and sun, falling oil prices might make people more inclined to use coal, oil and gas. This would have a negative impact on the further development and consumption of green energy.
In the US, experts on climate and social policy in academia and civil society drafted a menu for green stimulus to rebuild the economy4. It combines social and environmental development. Some of the ideas presented are helping to create green jobs in clean energy expansion, building retrofits and sustainable homebuilding. Others are aimed at creating local food economies, or assisting with public transit maintenance and operations, electric appliance and vehicle manufacturing. Their ideas also promote green infrastructure construction and management, local and sustainable textiles and apparel, and partnering with existing pre-approved apprenticeship programs to bring more low-income workers into good unionized jobs.
In Europe, stimulus to make green investments might help to adhere to the carbon targets that European countries have committed to. Going a step further, public and private sectors could work together to contribute to achieving the Sustainable Development Goals. Issuing green and social bonds might provide an opportunity to finance these investments. Green bonds currently comprise less than 0.1% of total sovereign debt, according to S&P Global. So there is plenty of room to finance social and environmental stimuli!
We live in extraordinary times. I hope everyone stays safe, and when we get out of the crisis, I hope our response to this crisis will help create true sustainable societies and economies.
Masja Zandbergen, Head of Sustainability Integration Robeco