By Harlin Singh, Global Head of Sustainable Investing
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We believe that the pandemic could further sharpen the focus upon sustainable investing, benefiting society and driving shareholder returns.
Amid the worst pandemic in over a century and the unprecedented economic shutdowns, people everywhere are longing for a return to normality. At the same time, though, there is also a growing sense that we should aspire to more than simply putting things back as they were before COVID-19. The health crisis has highlighted the need for significant change across many areas of life. Likewise, our individual and collective responses to the pandemic have helped to demonstrate some of what we might achieve. Our goal as a society should therefore be to “build back better” after COVID-19.
Citi Private Bank believes that global investors could play a key part in helping to build back better. In recent years, there has been rapidly growing recognition of the power of private sector capital to effect positive societal change. More than $35 trillion is now held in sustainable assets worldwide, ten times the amount invested in 2004. We call the simultaneous pursuit of financial returns and societal benefits “Investing with Purpose” (IwP). The positive societal change that IwP seeks to achieve falls into three categories: environmental, social, and governance (ESG). Here, we explore just a few of the ways the pandemic might sharpen the focus upon these categories going forward.
Defeating COVID-19 is naturally the world’s main priority for now. Beyond the pandemic, however, we expect renewed urgency around climate change and environmental standards. The economic shutdown has dramatically reduced fossil-fuel burning activities, with noticeable benefits. In parts of the US, nitrogen dioxide levels in the air have dropped 30%. In some districts of Northern India, residents report seeing the distant Himalayas for the first time in thirty years. Such tangible reminders of the benefits of emission-reduction will likely add impetus to the transition away from fossil fuels. Governments worldwide are actively contemplating ‘green new deals’ – major investment in renewable energy technology and infrastructure – as a way of restarting their economies.
The pandemic has also put the spotlight on corporate social conduct. With many employees required to continue performing public-facing duties – especially in healthcare, retail, and delivery – there is intense media scrutiny of their working conditions. Large and profitable companies that fail to shield their staff and customers from infection may suffer lasting reputational damage. By contrast, we believe that consumers and ESG investors will increasinglyfavor companies that have provided employees with proper safety equipment, paid sick leave, and contingency arrangements to mitigate the impact of layoffs and furloughs. The same applies to companies who have diverted their production to manufacture much needed sanitizer, masks, and ventilators.
Governance issues – the way companies are run – have also become even more relevant amid COVID-19. The quality of corporate crisis planning is an obvious example. Forthcoming financial reports will shed further light on how well prepared companies were going into the pandemic. We also expect much more attention to shareholder return policies. In the US and Europe, the authorities are placing restrictions on future share buyback and dividend activity for companies that receive state support during the pandemic. Likewise, executive remuneration will be closely monitored, with the risk of highly negative publicity for companies that reward leaders, while shedding other employees.
While the current pandemic will pass, its wider effects may well prove enduring. The Great Depression of the 1930s permanently influenced the social attitudes and consumer behavior of many of those who lived through it. Similarly, we believe that the experience of COVID-19 could further sharpen focus upon the importance of sustainable business practices and collective action. Investors may increasingly seek to allocate capital to companies whose approach emphasizes stakeholders including employees, suppliers, and local communities, rather than just their shareholders. However, we do not believe that this means sacrificing returns. Instead, building back better may result in better portfolios. In the next article in this series, we will therefore explore some actionable possibilities.