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Supplements » ESG Report 2020

Social issues: Time to rethink capitalism?

City_viewThe Covid-19 pandemic has changed all our lives. It’s not just that we must stay at home and socially distance. We must protect each other – and to do this, we must act collectively, writes Fiona Rintoul.

The word ‘collective’ already has a slightly socialist ring to it. The Cambridge Dictionary defines collectivisation as “the organisation of all of a country’s production and industry so that it is owned and managed by the government”. We’re probably not going there. But Covid-19 does pose questions about the opposite political pole to that: unfettered free-market capitalism.

“Covid-19 has exposed serious, systems-level problems like inequalities of income and wealth that need to be addressed,” says Thomas Kuh, head of ESG at Truvalue Labs in San Francisco.

For the investment industry, this has a couple of implications. First, the pandemic rubs out any remaining question mark about the value of ESG investing. “For us, ESG has clearly proven that it’s a very valid investment concept, and we will keep pushing ESG,” says Harald Rieger, head of coverage for Germany and Austria at Germany’s largest asset manager, DWS – and DWS is far from alone in this conviction. 

Secondly, the aftermath of the pandemic looks likely to shift the focus away from the ‘E’ in ESG on to other aspects. “The coronavirus has brought a spotlight on several issues in the ‘S’ category of ESG, including social stability, employment, infrastructure, data security and keeping employees and customers safe – whether they are physically interacting or not,” says Maarten Bloemen of Franklin Templeton Investments’ Templeton Global Equity Group. 

Research from Truvalue Labs confirms this. The company used technology to analyse flows of information on Covid-related issues as a percentage of total discussions in the January to April 2020 period. Unsurprisingly, coronavirus-related content had spiked by March 26 at 66% of the total. 

The company then parsed Covid-related content to determine which ESG issues were paramount in the context of the pandemic. Five Sustainability Accounting Standards Board (SASB) categories represented 88% of the volume of information flow by April 20, namely: employee health and safety (31%), labour practices (21%), access and affordability (15%), supply chain management (12%), and product quality and safety (10%). 

“The Covid-19 pandemic has put the social dimension of sustainability irrevocably on the agenda,” says Kuh. “As the virus spread, the data revealed the extent to which social impact and economy have become the most dominant issues for stakeholders of corporations.”

Social sustainability
One of the results of this emphasis on the “S” in ESG is that people in the investment industry are asking questions you might more usually expect to hear from a supporter of Extinction Rebellion. 

“How can it be that many apparel sector workers in the Global South rely on unsustainable consumption levels in the Global North to earn what amounts to a poverty wage?” asks Jon Mowll, responsible investment analyst at EdenTree Investment Management, calling for a radical rethink of capitalism.  “That when such consumption grinds to a halt – a necessity from an ecological perspective – millions in the Global South face unimaginable destitution? That people go without food while crops wilt in the fields? That airlines burn jet fuel to fly empty planes around the world just to keep airport slots?” 

What is going on? Well, one aspect is that stakeholders – be they customers, employees, suppliers or asset owners – have much more power these days to support companies that do things they like and punish those that don’t. Social media platforms give them a voice and a way to organise. This shines a bright light on issues that were once hidden or ignored or that seemed impossible to address. Corporations are no longer in sole control of the narrative about their businesses. 

“These actors now influence what is material for investors and have put sustainability on the agenda. Stakeholders’ capacity to shape perceptions about companies can affect market valuations,” says Kuh, citing the example of the surge of activism around plastics in recent years – as well as concerns about employee health and safety in the context of Covid-19. 

A fixed gaze
Corporate behaviour is under greater scrutiny than perhaps ever before. And the pandemic – which touches people’s lives in all kinds of raw and emotional ways – is a stage on which companies may wow or disappoint an increasingly savvy audience. 

“We believe how companies behave and respond during this time can and will have long-term implications for employee, consumer and community relationships, and will be a key differentiator in the months and even years to come,” says Jonathan Bailey, head of ESG investing at Neuberger Berman. 

Another game-changer introduced by the pandemic is the extent to which governments are, or will be, involved in companies. “The bailouts that are taking place and will continue because of Covid are only just starting, and what it means is that governments – and by extension the people at large who pay for governments’ budgets – can be at the heart of economies like never before,” says Matt Christensen, global head of impact strategy and responsible investment at Axa IM.

This also puts a spotlight on issues such as corporate tax avoidance. In many places, government funding essential to tackling social problems has been starved by this, says Kuh. “It is wrong for companies to engage in stock buybacks and pay exorbitant salaries to executives during a pandemic. Sustainable investors can pressure individual companies and advocate for policies designed to bring the interests of multiple stakeholders into better alignment.”

This means the role that ESG plays is more vital than ever, especially when it comes to voting on companies plans and futures. But it may also mean that we need a new kind of capitalism that takes account of all those multiple stakeholders – and not just shareholders. 

“This is therefore yet further food for thought to move capitalism from a shareholder primacy model to a stakeholder primacy one, where shareholders are a significant actor, but not the sole focus,” says Christensen. 

The inescapable challenge
It is a massive challenge for investment professionals to facilitate this, but you get the sense that they realise it is a challenge they cannot duck. The days when asset managers only wanted to talk about the financial benefits of ESG (which, of course, they still do, and which, of course, still matter) and were almost embarrassed to admit to any ‘do-gooding’ seem to be gone. 

“We believe that by integrating ESG into our investment processes, we are better positioned to serve our clients and the world as a whole during this difficult time,” says Bailey.

The climate crisis first highlighted the importance of doing what is collectively rational rather than what is individually rational, and Covid-19 has underlined it. 

“Whereas climate change put environmental issues front and centre, the pandemic has elevated urgency on social issues,” says Kuh.

As we move beyond the pandemic, the climate crisis will come back on to the agenda – with climate change initiatives unlikely to be derailed, as some have suggested, but rather bolstered. 

“We think governments will largely renew and increase commitments once the current crisis ebbs,” says Franklin Templeton’s Bloemen. “And they may even allocate some coronavirus stimulus funds to ensure a more sustainable economy longer term.”

Then there is the rest. There has, of course, been talk before about resetting capitalism. Instead, after the tech bubble burst in 2000 and after the global financial crisis in 2008, ESG went into abeyance. This time it’s different, says Kuh. “ESG investors and other stakeholders won’t allow the current economic downturn to be used as an excuse for abandoning their objectives – as if addressing employee health and safety, income inequality and climate change are luxuries.”

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