As COVID-19 radically reshapes our lives, this article considers how the virus might impact the investment considerations of responsible investors like Tasplan.
Like the rest of my Tasplan colleagues, I’m currently working remotely and adjusting to new ways of working. The unusual circumstances gives rise to thoughts of how dramatically our lives have changed in the past few weeks. Despite isolation, I don’t believe I’m Robinson Crusoe in thinking 2020 has been a shocker. Her Majesty Queen Elizabeth II famously coined the term ‘annus horribilis’ in 1992 when commemorating her 40th year on the throne and reflecting on a painful personal period beset by a series of royal marriage splits and a major fire in Windsor Castle. Looking at how 2020 is unfolding for her and her subjects, one suspects the queen too won’t be overly upset to wave it goodbye.
Many Australians entered 2020 contending with the worst bushfires in living memory and warnings from emergency services to ‘leave early’ or risk catastrophe. No sooner had the inferno eased than attention turned to another looming crisis, a sinister viral enemy that was rapidly emerging as a major threat to human health and economic prosperity. The message morphed to ‘stay home’ or risk spreading the virus and copping a hefty fine.
COVID-19’s rapid spread caught governments and health authorities off guard and required a wartime footing response. If there’s a global league table capturing corona conquest, then Australia looks to be top quartile. History may show that the lucky country’s natural geographic isolation combined with the government’s swift containment policy action were crucial factors in defeating the virus. Regardless, our economy remains in lockdown and has taken a massive hit from the forced collapse of economic activity which the government has paired with a colossal economic rescue package. That package, including measures such as early access to super, aims to cushion the blow for vulnerable Australians and sow the seeds for a robust economic recovery when authorities determine the pandemic has been defeated.
As authorities begin to shift from containment towards a lockdown exit, it’s clear the shadow of the virus will hover over Australia impacting on our economic prospects and influencing how we behave and interact. While government policy is justifiable, the debt burden will encumber future generations. How we mix socially, work, communicate, participate in and appreciate our sporting activities, will also be framed by the virus response.
COVID-19 preys on the weak
The virus has inflicted a lottery of fortunes on the corporate landscape with varying degrees of economic hardship in the case of hotel operators, for example, versus major grocery retailers. Nevertheless, COVID-19 has tested the resilience and sustainability of business operations and strategy like no other event - even considering the GFC. ‘Black swan’ events such as this tend to favour the survival prospects of higher quality business with greater resilience, longer-term planning and sustainable strategies. The first to declare insolvency are often those with poor competitive strategies, weak capital management and high-debt burdens. Combating this virus and minimising the risk of future pandemics will impact on the business operating environment for years to come. As an ESG investor, Tasplan strives to invest in companies with superior risk management frameworks and high quality operational practices that aim to ensure the enduring sustainability of those businesses and thereby deliver improved shareholder return.
This pandemic presents an opportunity to assess how the companies we invest in have responded to the challenge through the prism of ESG by analysing how they’ve treated their employees, the community and shareholders. More broadly it gives cause to reflect on how the nature of ESG investment might be shaped by this crisis.
Flexible working gains prominence
The disruptive effects of COVID-19 will bring greater focus on business strategy around disaster recovery and preparedness, continuity planning and workforce deployment. Many companies may have been previously resistant to offer flexible work practices and promote working from home policies. The speed at which businesses of all sizes were compelled to adopt extreme business continuity measures and adjust to decentralised workforces demonstrated there are alternatives to the traditional office model. Embracing new technologies and protocols for remote workforces suggests greater remote access may be an enduring feature of work practice. This is a win for those seeking greater workplace flexibility and favourable to adopting practices more encouraging to promoting work/life balance.
Board intelligence tested
There will also be increased scrutiny on how boards and management have engaged with their workforces during the disruption. Have actions in standing down workforces been handled with appropriate fairness and sensitivity? Were staff offered appropriate use of leave entitlements? Boards need to exercise judgement. It would not pass the pub test to be handing out excessive bonuses and executive pay hikes while dictating broader recruitment and salary freezes. Companies with progressive employee relations are likely to be better placed on the other side in maintaining motivated existing labour supply and attracting renewed talent.
The GFC highlighted numerous examples of boards acting recklessly in their treatment of shareholders in enabling investment banks to give preferential treatment to certain clients in equity raisings at the expense of long-term institutional shareholders such as Tasplan. With many company balance sheets requiring capital injections, capital raising exercises will be a common feature in the Australian share market in coming months. Tasplan will be monitoring such opportunities and working in conjunction with our superannuation peers to ensure the fairness of those arrangements enable participation where warranted for the long-term interests of our members.
Lending a hand
Severe events like COVID-19 can test corporate social responsibility policies and serve to illustrate rhetoric from reality. There have been some positive examples of companies looking to respond to community needs with sensitivity and generosity. Actions to assist community health and safety efforts by manufacturing ventilators or offering up hotels for isolation patients. The major banks too appear to have listened to community concerns and the findings of the Hayne Royal Commission with a more responsive approach sensitive to community needs and pending hardship. Efforts to pass on the Reserve Bank of Australia's interest rate cuts in full and providing home loan and small business assistance support packages are evidence of improved corporate conduct. That said, this group has much more goodwill to extend before restoring community confidence.
A win for the environment … maybe?
Managing climate change risk through our investments is a key consideration for Tasplan. One silver lining from COVID-19 is the short-term boost for the environment. Many citizens of cities like Beijing and Delhi are enjoying blue skies and breathing clean air for the first time. The pause in manufacturing, parking of aeroplanes and reduced vehicle travel have greatly reduced carbon emissions. There may also be some unintended prolonged positive consequences with companies making greater use of teleconferencing and staff travelling less for interstate and offshore meetings which will improve a company's carbon footprint.
Ideally these conditions might transcend the virus with long term changes in behaviour; the likelihood, rather, is a resumption of rising greenhouse gas emissions upon restoration of economic activity. Many economies have been making positive strides in moving away from traditional fossil fuels in favour of cleaner energy fuels. One risk in the collapsing oil price is in companies reverting to higher emitting options. COVID-19 has also triggered the postponement of the United Nations’ COP26 Climate Change conference. While this is understandable given the immediacy of the health crisis, it’s potentially damaging to the momentum required to deliver on the Paris Agreement climate commitments. Nevertheless, Tasplan remains committed to monitoring climate risk and seeking to ensure our investments support the move towards a carbon constrained world including net zero emissions by 2050.
A rise in short-termism
There is also the risk that the economic disaster gives business a short-term licence to abandon sustainable practices in favour of less robust, harmful or cheaper policies and behaviours. This would be disappointing. While there may be some initial tolerance for companies regarding the extent of their ESG reporting, Tasplan will continue to push for heightened ESG disclosure from our investors through our engagement meetings, ESG monitoring surveys and active ownership.
COVID-19 floors investors
Market indices have been uncomfortable viewing since investors began processing the virus impact on future shareholder returns with resulting rise in volatility and periodic bouts of widespread selling. While a turbulent time for all investment styles, ESG investors can take some resolve from relatively improved performance compared to mainstream and benchmark performance. Undoubtedly, ESG investors have been cushioned by the sell-off in energy stocks, a sector where investors are generally underweight and from over exposure to favoured sustainability sectors such as healthcare. More broadly ESG is often viewed as a proxy for ‘quality’ and in this regard can be viewed as offering more defensive characteristics than say a ‘momentum’ style investing approach.
Investors will be dealing with the ramifications of COVID-19 and government efforts to minimise the risk of future pandemics for years to come. Tasplan will continue to monitor the impact of the coronavirus through our interactions with our investment managers and in framing our investment decisions. ESG remains an advanced investment approach for dealing with investment risks such as the current health pandemic and other sustainability challenges including climate change risk. We’re a committed responsible investment practitioner and believe ESG will serve our members well in navigating a path through this current crisis towards a recovering economic phase.