The impact of the COVID-19 pandemic on sustainable investing
The COVID-19 pandemic and the market sell-down witnessed in the first half of 2020 underscores the risk dynamics that come with a fully realised environmental, social, and governance (ESG) approach.
During the pandemic, for example, there was a multitude of companies seeking capital to shore up their balance sheets.
When analysing potential opportunities, the discipline needed for ESG integration has helped us take a tighter and more demanding view on what capital raisings were genuine opportunities from a risk-return perspective.
This ESG filter has been invaluable for securing placements in only the most desirable issues and leaving the others for less risk-informed investors.
We witnessed a sharp focus on the simple issue of how companies treated their employees under these conditions and watched very closely the cultural and staffing practices of companies in the investment universe.
In today’s fluid environment, we have also been keen to ensure companies are acting in good faith, and not using these pandemic conditions as a ruse for the poor treatment of workers, abuse of the environment, for lax governance, or to perpetuate poor and unsustainable business models.
The recent full-year reporting season saw increased focus on staff and customer safety during the pandemic. A focus of our ESG engagements has been on how companies are managing their workforces during the crisis.
In most cases, companies reported better safety performance during the half. Many companies that had reported significant numbers of fatalities in the past were fatality free in this reporting period. Companies are also looking to the future and considering continuing with flexible working conditions after the pandemic.
By contrast, to date, the crisis does not seem to have had any impact on companies’ previous climate change or other ESG commitments.
DRIVING A MORE SUSTAINABLE APPROACH
Now more than ever, investors are driving the move towards sustainable investing. There is something in all of us that craves a better future, and people are more active in allocating their wealth towards this goal.
Themes like decarbonisation and global warming are driving a growing energy thematic that will eventually tip the scales toward alternative energy. COVID-19 has seen a drive towards renewables as a policy lever, and also as renewable energy costs fall in comparison to fossil fuels. There is a long ramp-up of opportunity here in the long switch to more renewable energy sources for long-term investors.
Associated industries and technologies are also prime for investment in this space.
The need for clean and sustainable food sources, relieving increased urbanisation, and making technology, communications and education accessible to all are themes sustainable investors can believe in and capture.
COVID-19 has also accelerated changes in work-from-home, transport, travel, education and shopping, with significant potential for sustainable investors.
In addition to this, there are a range of themes that are driving the expectations of investors, both institutional and retail, and include:
- Decarbonisation of the economy;
- Human rights and modern slavery in operations and supply chains;
- Corporate governance;
- Data security;
- Culture and diversity;
- Transparency and good corporate governance;
- Environmental citizenship; and
- Trust and fair work behaviour.
We have seen a number of issues in the financials, materials, services and consumer discretionary and staples sectors recently that highlight the critical importance from a brand, trust, operational and financial perspective.
Companies can no longer ignore their socially-implied licence to operate.
IMPROVING INVESTMENT OUTCOMES SUSTAINABLY
We have seen from the results of our sustainable investment portfolio that a sustainable approach reduces the risks in a material way.It also improves outcomes, especially in downside markets where sustainable companies are rewarded for their lower overall risk profiles.
In Ausbil’s view, it is crude to approach sustainable investing from a pure returns focus, because the idea of sustainable investing is about risk-adjusted returns.
That risk adjustment comes from an extensive tail of data and analysis around ESG issues across multiple themes, improving the odds for investors in terms of risk and rewards.
A key focus of our strategy is on company engagement. Engagement means we maintain an ongoing conversation with the companies in our universe, even when they have un-investable ESG scores. We do this for three reasons:
- We believe we can have a more positive impact on companies that are in dialogue with us, than if we actively exclude them as pariahs.
- We want companies to become more sustainable in their journey and increase the universe of where we can invest.
- We need to understand the full distribution of ESG outcomes and behaviours to get a full picture of both ends of the curve, those we would never invest in, and those we believe are exemplary on an ESG basis.
CASE STUDY: HOW SUSTAINABLE COMPANY NEXTDC (ASX: NXT) HAS THRIVED DURING THE PANDEMIC
Ausbil had been following NXT closely, initiating coverage and investment last year as it offered access to a growth thematic in the migration to SaaS and cloud-based approaches to information technology. With the onset of COVID-19, we have seen what we believe is a major step-shift upwards in the population’s usage of e-commerce and cloud-services, with the sudden impact of lockdown measures and the boom in work-from-home arrangements.
Today, NXT offers a high-quality company with exposure to what is now an accelerated technology thematic, with great sustainable attributes: a strong social purpose in the provision of safe data storage services, infrastructure-like future income streams, strong management, lowenvironmental impact, controlled risks, and low carbon impact, all within a sustainable business model.
In addition to the sustainable fundamentals of NXT, from the ESG perspective, the company has a strong profile with a majority independent board, and no structural corporate governance issues. The company also has good sustainability reporting.
We also value the company’s essential place in the technology infrastructure ecosystem which supports the greater diversity and workplace flexibility that has come with technological change, and has accelerated under these extraordinary COVID-19 times. The company also appears to have a strong focus on quality risk management, information security and staff engagement.
Nicholas Condoleon is portfolio manager of the Ausbil Active Sustainable Equity fund and Måns Carlsson is head of ESG research at Ausbil.
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