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Supplements » ESG Report Spring 2020

ESG roundtable: One shot at refinancing a fit-for-purpose economy

Funds Europe – What would render companies uninvestable over the long-term and what are you looking to change where engagement is possible?

Arkko – We require all our investees to follow international norms, and there is a service provider that does screen companies if there are any violations of these norms. A company being out of our investment universe would require harmful treatment of international norms e.g. labour rights, unless we are able to engage with the company. The companies that really do pay attention to their workforce will be the ones who will be able to recruit the best talent and whose workers will come back when we are past the present situation with Covid-19. At the moment, we haven’t seen companies falling into our uninvestable universe due to Covid-19.

Nummela – On resilience and Patrick’s point around stakeholder/shareholder primacy – moving towards stakeholder thinking, that is a really important strategic driver and must go into the thinking around increased governance budgets on ESG, so how asset owners think about these things and their meaning and how the message is then filtered down the chain. 

It is ultimately about economic resilience, and many of the ESG questions become answered, whether it is the zero-hour contracts, tax issues, the gig economy, living wage, inequality and remuneration – those become really focused through clear understanding of the stakeholder/shareholder primacy question.

O’Hara – The trade-off between efficiency and resilience is another interesting issue highlighted by the coronavirus that is very relevant for the transition to a lower-carbon economy and the physical impacts of climate change.

Next year’s AGMs will be interesting because that’s when we really get to judge how management have navigated this very difficult time. At the moment, everybody has been caught like a rabbit in the headlights by this, and that’s understandable to some extent – companies are having to deal with government responses, and who’s to say that governments have got it right? At the moment it’s difficult to judge companies, but at next year’s AGMs, that is something we will be factoring into conversations: remuneration and how workers have been treated and whether they were put in a situation that compromised their health and safety – and the trade unions will have a say in the interim period. 

This pandemic has flagged companies that already had challenged business models in terms of sustainability, it has flagged companies with governance weaknesses and CEOs who are unpredictable and perhaps unchallenged within their organisation. The aggressive tax practices of businesses that are now asking for government support are being questioned again. This crisis has flagged some things about corporate behaviour that we already questioned and hopefully these practices will continue to be challenged in the future. 

At the moment it is hard to say who has become uninvestable as a result of this beyond the economics, which is in some respects clearer, but in terms of corporate behaviour and ESG, that will emerge later on. Non-compliance with global norms, corporate malfeasance, fraud, bribery and corruption concerns will probably emerge, but at the moment, investors will look at companies in the round in terms of their whole ESG profile, rather than a specific coronavirus list of companies that have made themselves uninvestable. 

Pedersen – I’m not sure I would entirely agree as it depends on the types of products you’re looking at. If we’re at the level of the screening and the ESG integrity of large portfolios or of standard products, then I would agree. But on those types of products on the list we market as more at the sharper edge of the ESG curve, we do an internal rating of every single company where these types of things would come into that rating, and if a company showed themselves to be taking some really bad decisions in this environment right now from an ESG point of view relating to the coronavirus, then that would potentially trigger a re-rating of that company and they would fall out of the investment universe for our top-of-the-line ESG funds. 

O’Hara – We would conduct a similar analysis, but it would be the fund manager or analyst who would be looking at the financial implications of what the company has done and said, and what the risks are going forward. It’ll be inherent in the fundamental analysis that’s undertaken but beyond how the ESG ratings change generally, it would be looked at in the next round rather than as a separate issue at this point in time. From our perspective, I’m not sure at this point that anybody, based just on ESG analysis, has made themselves uninvestable and would go on a list of exclusions because of Covid-19.