Investors and Stewardship
Investor stewardship has become the guardian of good corporate governance in this pandemic. Will it remain that way as we find a way to live and work beyond Covid-19? Only time – and the behaviour of business – will tell. However, it is clear, as lockdown starts to ease with caution in part of the United Kingdom, that ESG – the acronym taking in the environmental, societal and governance considerations for any business – has been thrust to the forefront. We will have to wait and see how high it features in the consideration of corporate governance by businesses aiming to serve society better by their actions.
The COVID-19 pandemic – and the global response to it – “is a serious threat not only to global health, but to our communities, our economies and our investments. As long-term stewards of capital, investors can and should act now to help reduce harmful impacts including: the direct effect on public health, the severity of the associated economic slowdown, the deepening of inequality in societies and the resulting impacts of all of the above on mental health” said the Principles of Responsible Investment (PRI) in a statement in late March, when the UK entered lockdown.
It added that it would be working with its signatories to develop investor responses, particularly in the short-term “ensuring responsible ESG approaches remain at the forefront of investor activities.” Companies, said PRI, should be managing for the long-term when assessing how they treat employee, contractors and suppliers, “prioritising these needs over immediate returns to shareholders.”
A couple of months later, it is clear that institutional investors are making their voices heard along those lines.
In a statement in early April on the Harvard Law School Forum on Corporate Governance, Cyrus Taraporevala President and CEO, State Street Global Advisors said there was an “ongoing commitment” to engaging on “a wide range of material ESG issues” but that COVID-19 would “undoubtedly have near-term implications for companies and their boards.”
“We recognise” he said, “that our engagement conversations will shift to more immediate ESG issues such as employee health, serving and protecting customers and ensuring the overall safety of supply chains in the context of the current crisis—the scope and duration of which none of us can predict.”
State Street said it was cognisant of company directors facing a short-term need to focus on financial resiliency with a balancing act on the diverse and sometimes competing needs of employees, customers, shareholders, regulators and the broader community. But “we continue to believe that material ESG issues must be part of the bigger picture” and clearly articulated as part of (a) company’s overall business strategy, said its CEO.
Mr Taraporevala encouraged businesses to “refrain from undertaking undue risks that are beneficial in the short term but harm longer- term financial stability” and the sustainability of business models. Looking back to the last Governance Watch, it looks as if Amazon, a Covid-19 business success story but also a poster child for the gig economy, was listening.
As the International Corporate Governance Network (ICGN), a watchful eye on global governance pointed out back in March, Covid-19 is a systemic risk. ICGN offered a series of questions for investors to better engage with companies.
Institutional investors are acutely aware that they have been given a pandemic opportunity in terms of both their public profile and their influence. In the UK, Legal & General Investment Management (LGIM) is one which looks like it’s doing its best to exploit that opportunity to create the businesses which stakeholders can believe in for post-Pandemic growth.
One of the world’s largest fund managers, LGIM has warned companies it will act if they fail to show good corporate practice during the coronavirus crisis. In alignment with its strong stance on ESG issues including climate action, LGIM said earlier this week that it would oppose the re-election of Darren Woods, chairman of Exxon Mobil, over what it called a lack of ambition on tackling climate change.
As the UK’s largest asset manager with more than £1.1 trillion in assets, LGIM carries a fair amount of clout. It is also in the corporate and media spotlight, having opposed the re-election of 4,000 directors at annual meetings last year. “I worry that the industry could fall short at this juncture” said Sacha Sadan, LGIM’s director of investment stewardship in a recent media report. He added: “Sustainability, good governance, and fair treatment of employees will be the building blocks of a better future. LGIM will continue to support and hold companies to account for their stakeholder responsibilities.”
LGIM is not an outlier when it comes to investors and a commitment to a sustainable economy. Among others, Schroders, the FTSE 100 investment group, prides itself on its commitment to stewardship on climate change and sustainable finance. It has just revealed research that suggests retail investors are looking to ESG funds as well as credit-based investments to counter capital losses during the pandemic.
Investment Week reports Schroder's UK intermediary solutions director Gillian Hepburn as saying that a majority (65%) of advisers believed the crisis would increase the attention they paid to ESG risks associated with investments, ahead of regulatory changes on the issue.
In today’s uncertainty around Covid-19, there is a degree of speculation in even the most “expert” analysis. But research from Schroders this week finds that retail investors are looking to ESG funds and credit-based investments to counter capital losses during this pandemic. There are signs of a changing mind-set as well as the well-documented generational change in attitudes to ESG.
I explored this subject in the context of Asian business for a special report in the Financial Times, out this week and free to read.
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