Responsible investing and ESG – environmental, social and governance – feel like the buzz phrases right now. It seems everyone in asset management is talking about them. And rightly so. With the outbreak of the coronavirus, we are now living through one of the biggest socio-economic challenges of our lifetimes. Its ramifications could reverberate for years to come. Justifiably, how companies are behaving during the pandemic and their ESG credentials are under even greater scrutiny.
But this is not a new ‘fad’ for us. At Aberdeen Standard Investments, we have long recognised that companies that behave responsibly and look after the ESG aspects of their operations are more likely to deliver sustainable investment returns and better outcomes for all. Indeed, ESG considerations have been the bedrock of our investment process for almost 30 years.
Our approach has never just been about using screening tools, or categorising companies as ‘good’ or ‘bad’ operators. It goes much deeper and wider than that. Alongside other fundamental research, we can garner a great deal of information about the underlying health of a company and its future prospects from its approach to ESG. So we look at everything from a company’s energy consumption and how it disposes of its waste, to the transparency of its supply chain. We also consider the diversity of its board, how it treats its employees and its internal governance framework. And then we engage with the company’s board to help them, or where necessary to pressure them, to make positive changes to increase the sustainability of their business model.
Right now, amid the pandemic, company fundamentals matter more than ever. Markets are volatile and corporate distress is high. Many UK companies have suspended, cut or cancelled their dividends in a bid to preserve cash for an uncertain future. Others are reliant on government support as lockdown measures have halted their operations. However, our long-term focus is helping us navigate these unchartered waters, and this fits hand-in-glove with our ESG approach. We seek out dependable and sustainable companies with solid balance sheets, strong management and robust ESG credentials. This helps us manage investment risk more rigorously. It also ensures we hold companies that are not just likely to survive the current crisis but that can prosper in the years ahead.
Creating a virtuous circle
We are active owners of all the companies in which we invest and we engage with them to encourage positive behaviour and ensure their long-term sustainability. We want to help today’s resilient companies be better prepared for tomorrow. We also put a great deal of thought into how we exercise our voting rights on the issues that matter.
And our robust investment approach extends beyond just the companies we hold in our funds. We have full UK equity market research coverage, incorporating the FTSE 350 Index and small-cap companies. This provides us with oversight of our entire investment universe. It also means that, at the point when we make our first investment in a business, we are building on an already strong fundamental knowledge of it. Importantly, it allows us to assist those companies that have not yet made the ESG grade, but that want to be better.
As investment managers, we are in a prime position to encourage, push and influence companies to behave better. If a company has an ESG issue, we don’t necessarily avoid it and leave the problem to others to deal with. That is a very passive approach. Instead, we will consider if we can help its management address the problem. There is a strong argument for not avoiding problematic industries, like tobacco or gambling. If investment managers who care about ESG shun companies within that sector, we have no influence or oversight to effect positive change. We believe that in many instances it is better to engage and offer constructive insight if we can. For example, we can encourage gambling companies to go above and beyond their legal obligations in addressing problem gambling and to use responsible marketing.
Many UK businesses that want to ‘do the right thing’ often welcome our help. They may have an issue with labour management in their supply chain, for example. We can use our experience and engagement across industries to share best practice and provide practical guidance.
As responsible investors, we see this collaboration as part of our duty of care, which in turn creates a virtuous circle. Companies that can improve their ESG credentials can improve their profitability, their reputations, their sustainability, and become more positive contributors to society. This helps our clients in terms of better investment opportunities but also in shaping a better future for us all.
Companies that can improve their ESG credentials can improve their profitability, their reputations, and become more positive contributors to society.
Earning a social licence
The pandemic has amplified the growing need for companies to not just have the legal ability to go about their business, but also to earn their social licence to operate. By that we mean companies gaining broad approval for their actions from all stakeholders, not just a narrow band of shareholders. These stakeholders can include a company’s workforce, its customers and the communities and societies in which it operates. Prioritising shareholder value and short-term profits over long-term sustainability was already becoming deeply problematic pre-Covid 19. We expect this trend to gather more steam from here as some companies welcome the opportunity to change for the better.
In the UK, there has been lots of very positive action during the pandemic. These include major initiatives like the provision of high-speed broadband to the Nightingale Hospital and manufacturers stepping in to produce PPE. Not to mention the huge amount of work going on to find a vaccine and treatments for Covid-19. Other companies have donated to charities or offered discounts and enhanced services for NHS staff and other essential workers. Furthermore, we have seen many management teams prioritise the welfare of their staff and customers over near-term profit.
We expect those businesses that acted decently and responsibly during the pandemic to be rewarded with enhanced reputations and greater customer loyalty. What’s more, these companies are likely to be in the vanguard as we ‘build back better’ and begin to shape a fairer and more sustainable future after the dark days of the pandemic. Another virtuous circle.