ESG principles don’t equal short-term success but they are essential to thrive

Harry Merrison, Investment Manager – Kingswood Group

The only constant is change. Evolution is about adaptation. Effectively managing future risks and opportunities empowers companies, offering downside protection and creating future stakeholder value.

We often fool ourselves in the euphoria of a bull market that the good times are here to stay, only for reality to set in when the tide invariably turns. The Covid-19 pandemic has recalibrated our personal and commercial focus to day-to-day considerations rather than decade-to-decade. In this piece we will scan the time horizon from past through to future, filleting the major investment themes and identifying how Environmental, Social and Governance (ESG) principles don’t necessarily equate to short-term success but are nonetheless essential to thriving longer term.

Over the last few years significant consideration has been given to the ‘environmental’ aspect of ESG. Understandably, it is the simplest of the three pillars for companies to identify, quantify and act upon accordingly. As a society, we have become acutely aware of the adverse effect we are having on the planet. Before the implementation of travel bans as a means of managing the COVID-19 pandemic, some of the dirtiest industries employed carbon offsetting as a means of balancing their environmental books. Airlines, for example, one of the hardest hit industries, planted forests to offset their environmental impact and stay in business. Now that the pandemic has resulted in factory shutdowns and travel bans it is hard to escape the truth of radical improvements in the air quality of once highly-polluted cities. Carbon dioxide levels across the EU are estimated to have fallen by up to 60% according to a recent Financial Times report.1

Postponing the UN Climate Change conference (COP 26), an event that sets out ambitious actions on climate change, will be detrimental to future climate commitments in the short term. And with downward revisions in global GDP, the subordinate to the greater societal goal of reducing Coronavirus infection, some carbon producing industries will likely renew production at elevated levels to make up for lost time. But their time is still limited. Countless old economy industries are cognisant that change is inevitable and have introduced net-zero carbon targets. Going forward there will be a rejuvenated focus on climate change as an investment theme, regardless of the need to stimulate these industries in the wake of COVID-19.

‘Environmental’ is just one pillar, however, and the pandemic has brought to the fore the complexity of ESG as a whole. As a society we are deliberating more than ever about other urgent issues such as employee healthcare, social inequality and remotely managing employee wellbeing. After all, what is a company without its employees and what is an economy without its labouring taxpayers?

Looking forward, governments and corporate’s alike will adopt a renewed focus on healthcare with increased emphasis on medical technology investment. The government, with its ballooning infrastructure budget, could use its procurement power to change corporate behaviour and reward proactivity. Those with an eye on the best interest of their workforce, and the greater good of society, should benefit accordingly.

Our remote workforce is yet another catalyst for the investment thesis of technology driven structural change. The fourth industrial revolution represents an abrupt and fundamental change in the way we live, work and relate to others. The proliferation of virtual coffees and lunches over Zoom creates a sense of togetherness in the absence of a physical proximity, although this all still seems rather one dimensional.

Until recently, big tech had been berated for everything from tax practises to privacy, now the same businesses are being lauded for their solutions and invited even deeper into our lockdown work practices and private lives as a mechanism for corporate continuity… how times have changed. Those firms who identified and invested in technology will be best placed to survive the current economic downturn, and those that failed to will have to quickly get up to speed. Like I said, the only constant is change and evolution is about adaptation.

Strategic ESG principles may well be playing second fiddle to corporate necessity and the need to keep commercial cogs turning but, if nothing else, this pandemic has highlighted the strength and longevity of those businesses with the greatest flexibility and redundancy. In the coming decades we will look back at these surreal times and remember the firms whose resilience defined them. Those whose prudent identification of risks and opportunities, tactically and strategically, allowed them to quickly embrace change as an opportunity for continuous renewal and growth. That being said, when the dust settles, we can be sure that the temporary stay of execution for those businesses that ignored ESG principles will not last forever.

1 https://www.ft.com/content/4c59fd16-6020-4798-b8f1-5df686bbd97a