Covid-19 shows why ESG matters; Barclays’ big climate vote; UK impact investors’ legal hurdle; your questions… – Financial Times

Covid-19 shows why ESG matters; Barclays’ big climate vote; UK impact investors’ legal hurdle; your questions…  Financial Times

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We’ve rolled out this refreshed design across all our newsletters (check here at https://www.ft.com/newsletters to see whether there are any you’ve been missing). We’re grateful to all of our readers, including the many new ones who have signed up in recent months, and we hope you like the changes. As always, we welcome your feedback. Do email us at moralmoneyreply@ft.com.

Today we have:

  • Big investors at a CFA event explain why ESG cannot be an afterthought in the coronavirus crisis

  • A potential legal hurdle for Richard Curtis’s Make My Money Matter campaign

  • Moral Money takes your questions

  • Danone chief’s call to action for an “inclusive, green and resilient recovery”

  • Barclays shareholders cast their votes on climate policy

Investors remain optimistic for ESG’s post-Covid-19 future

Has Covid-19 turned ESG into a luxury good that no one can afford anymore? That was the snazzy title of a presentation made by Linda-Eling Lee, head of ESG research at MSCI, at a video conference hosted by the Washington DC CFA society this week. 

Unsurprisingly, the consensus of participants was “no”. Turkeys don’t vote for Christmas — and anyone working in environmental, social and governance investing now is keen to justify their jobs. Yet Ms Lee and representatives from BlackRock, Amundi and elsewhere had several reasons to back their optimism.

Firstly, the Covid-19 crisis has put a renewed spotlight on the “S”, or social issues: investors will increasingly watch how companies handle these. Secondly, this systemic health risk is likely to spark more public concern about other systemic risks, such as the environment.

Third, data from MSCI show that corporate bonds and equities with high ESG ratings have markedly outperformed the index recently (backing up a slew of other data we have publicised in recent newsletters).

It might seem tempting to attribute this to the exclusion of fossil fuels at a time of tumbling oil prices, but several ESG players argue the real issue is the “G” in ESG: better governance. Most notably, thinking about “externalities” and stakeholders breeds a broader vision in the C-suite, and makes companies prepared for shocks such as Covid-19.

“The outperformance of our four ESG indexes in global markets during the crisis was attributable mainly to equity-style tilts,” Ms Lee said. “ESG was the strongest contributor.”

Of course, it remains to be seen if this will last. But in the meantime Hiro Mizuno, the former chief investment officer of Japan’s mighty Government Pension Investment Fund, draws another lesson: in the aftermath of Covid-19, business schools (and training bodies such as the CFA) need to do a better job of incorporating these stakeholder principles into their training. “There are not enough modules ,” he complained. 

Mr Mizuno says he will be working post-GPIF with business schools such as Oxford’s Saïd school to embed more ESG into its teaching. He is also joining Tesla’s board, and will advise the Japanese government in developing green strategies. (Gillian Tett)

From May 12-14, the Financial Times is hosting The Global Boardroom, a three-day event featuring online conversations with senior global decision makers and leading minds across the policy, business, tech and finance sectors.

They will be analysing the impact of the Covid-19 pandemic across global economies, industries and markets. Registration is free, and you can sign up and find out more here.

Richard Curtis’s UK impact investing push faces big legal hurdle

© Getty Images

The UK’s “Make My Money Matter” campaign, led by film-maker Richard Curtis, is an ambitious drive to get pension-holders to rally together and call for their retirement savings to be invested in ways that help society. But one legal expert warns that the whole initiative could be derailed if the plan is not executed in a very precise manner.

With the way that pension laws in the UK are set up, trustees have to base their investment decisions on potential financial returns, said Hywel Robinson, from law firm Clifford Chance. Legally speaking, considering anything else when picking an investment would be a breach of their fiduciary duty.

This could present a major problem.

This is not to say that responsible or impact investing (where positive social or environmental outcomes are a priority) are impermissible in any way. In fact, with the recent performance of ESG funds, the case is easier to make now than ever before.

But when trustees make sustainable investments, they must do it because they believe those investments will outperform — not because they prioritise sustainability. This may seem like a trivial point, but it is very important if the Make My Money Matter campaign is going to achieve its goals — and if pension trustees are going to avoid litigation.

The key will be pushing trustees to hire investment managers who believe in what they are doing.

“ need to agree with the view that we aren’t doing anything controversial going with the unethical company is not the better investment decision,” said Mr Robinson.

But finding those managers could be more difficult than one might expect.

In recent years, the impact investment industry has “sharpened its focus on returns”, which has helped open the door to new assets from pension funds, according to a new report from Cerulli Associates, an investment research company. Still, though, managers offering large-scale impact funds are few and far between.

There are signs this is changing, and some big-name companies such as KKR, Bain, Carlyle and Blackstone are getting into the market, but there is only so much capacity for new impact money.

“The dearth of managers means that fiduciaries keen to invest in impact cannot achieve scale or put large cheques to work. Instead they face the prospect of investing with hundreds of small managers and higher transaction costs,” said Justina Deveikyte, associate director, European institutional research at Cerulli.

For a campaign trying to move trillions of pounds, this needs to be addressed. (Billy Nauman)

Call for inclusion comes with a warning for business

It was August last year and a different world when Danone’s CEO, Emmanuel Faber, brought dozens of multinationals together on the sidelines of the G7’s Biarritz summit to form the Business for Inclusive Growth coalition, or B4IG for short. 

The idea of the OECD-sponsored initiative was both to get companies from Goldman Sachs to Mars to pledge to make their own workplaces more inclusive and to engage business in the wider battle against economic inequality. 

Getting companies to focus on anything other than their own survival might sound optimistic right now, but today B4IG has come out with a call to action, urging businesses and governments to work together for “an inclusive, green and resilient recovery”. 

Its aim is to push “a people-centred response to the crisis”, B4IG says, ranging from Danone’s €250m support for struggling smaller business partners to Accenture’s initiative to connect newly unemployed people with companies that are hiring. 

“The idea is to create international solidarity amongst companies, to scale up best practices and to have an inclusive recovery,” Mathias Vicherat, Danone’s general secretary, told Moral Money: “We believe that tackling inequality is a matter of ethics but also a matter of business.”

Hammering that point home, Gabriela Ramos, the OECD’s chief of staff, warned that this crisis was leading to social fragmentation and political radicalisation, neither of which would be good for business. 

B4IG had already seen interest from governments that were trying to develop their own impact investment funds and seeking “blended finance” partnerships, Ms Ramos said, adding that she saw no other way but public-private co-ordination to get through this moment.

“We already knew the growth model we were pursuing was not sustainable because it was leaving too many people behind and not protecting the environment,” she added. “This crisis is telling us that we all need to come together to fix this model.” (Andrew Edgecliffe-Johnson)

You asked, we answered

We held our first reader Q&A on FT.com yesterday, with Gillian Tett, Andrew Hill and Billy Nauman answering your questions on the theme of “Can companies still afford to care about sustainability?” 

Thank you to all of you who participated. The calibre of the questions was a reminder that Moral Money’s audience is a constant source of ideas and inspiration. If you missed the discussion you can catch up here.

And it seemed telling that the most popular question came from a reader, Rentropy, who asked:

“Why shouldn’t the question be: how can companies afford not to focus on social and environmental sustainability, even after coronavirus? Disasters like the coronavirus pandemic and those related to a changing climate that have such an outsized impact happen precisely because companies (and societies) are so unsustainable.”

Demographics bring governance consequences home for boards

The Covid-19 crisis is a test of companies’ governance in many ways, but it could also affect how boards work in the long run, according to Brian Stafford, CEO of Diligent, which provides board management software to half of the Fortune 1000.

It is a grim fact that boards are having to refresh their succession plans given the threat to the older age group that dominates most boardrooms, he says, but they are also looking to diversify by adding skills they hadn’t thought of prioritising before. Crisis management expertise comes at a premium, he notes, saying: “I’d be surprised if people don’t have a healthcare expert on many boards going forward.” 

Given their typical demographics, again, Stafford thinks many board members will be reluctant to resume in-person meetings until a vaccine has been found, which means virtual board meetings may become the norm for a while. But the old model of two- or three-day meetings with spouses and dinners will be hard to replicate, he predicts. “Two-and-a-half days in front of your laptop, it’s a different environment.” (Andrew Edgecliffe-Johnson)

Engagement round-up — Barclays shareholders make their choice

The saga of Barclays’ contentious competing climate resolutions came to a close this week, with shareholders at its annual general meeting rejecting a shareholder proposal and endorsing a competing resolution from company management that will set the course for the bank’s response to climate change.

Some climate activists were not pleased with the outcome — Extinction Rebellion sprayed the company’s Canary Wharf HQ with “biodegradable vegan oil”, according to Reuters. And others accused the company of greenwashing.

“Barclays’ shareholders and stakeholders would be better served, and the bank more likely to survive the coming slump, by investing in industries of the future — alternatives to today’s polluting energy, transport and land use systems,” said economist Ann Pettifor.

But some climate-conscious shareholders are glad to have achieved a partial victory. As we noted last week, the groups pushing for Barclays to change its climate policy supported the management proposal (in addition to their own) and called it a “significant step forward” even though it fell short of what they wanted to see.

On top of that, the fact that the shareholder resolution got 24 per cent of the vote and 10 per cent of voters abstaining, is encouraging for their future efforts. “For a special resolution in the UK that did not have board backing, this level of dissent is quite huge,” said a ShareAction spokesperson.

Chart of the day

Line chart of Number of news articles about MSCI ACWI companies that mention human capital issues showing Pandemic highlights the importance of 'S' in ESG

As we noted above, ESG investors are putting a lot more emphasis on the social (or “S”) part of their analysis. But it’s not just ESG investors, as this chart from Linda-Eling Lee, head of ESG research at MSCI, shows. So-called human capital stories have been exploding across the media. The bottom line seems clear: people care about how companies are treating their workers and are judging how they perform in this crisis.

Grit in the oyster

Many companies and investors say they try to “do well by doing good”. As a reminder that many still fall short, here’s a little grit in the ESG oyster.

ESG practitioners may think their jobs are more important than ever, but a new survey from BCG shows that investors may not agree. More than half of investors indicated they were willing to “give companies a green light, or a lot of leeway, in terms of not following through on ESG commitments”, if it meant those companies could rebound faster from the coronavirus crisis, said Hady Farag, partner and associate director at BCG. (FT)

Smart reads

“Inclusion and sustainability are interdependent, and both require global systemic change,” writes Alison Maitland, a former FT colleague and chair of the Cass Global Women’s Leadership Programme executive board, in a new book with co-author Rebekah Steele. In INdivisible, they ask why hundreds of CEOs have signed diversity and inclusion pledges and yet workplaces still exclude too many voices. There has been concern that the Covid-19 crisis will derail other priorities, but the authors make the case for why inclusion should not be one of them. “Combining inclusion and sustainability . . . would bring fresh perspectives that increase the likelihood of finding breakthrough solutions to our most pressing challenges,” they write.

Further reading

  • Can we tackle both climate change and Covid-19 recovery? (FT)

  • Coronavirus crisis is a moment the investment industry should seize (FTfm)

  • Paris and The Hague say EU must toughen enforcement of green trade (FT)

  • My pity package of Chinese face masks sends a bigger message (FT)

  • RWDC Industries, a Singapore-based biotech start-up that plans to replace single-use plastic through developing biopolymer material, has raised $133m in a Series B round (Financial Times’ Tech Scroll Asia)

  • Covid-19 Is Shaping the Proxy Season. Expect More Vocal Shareholders (Barron’s)

  • Corporate sustainability and COVID-19: Three signs of hope for a brighter future (ImpactAlpha)

  • Coronavirus could do long-term environmental harm by reducing green investments (Axios)

  • Lawmakers Press Airlines to Protect Workers, Travellers (WSJ)

Letter in response to this newsletter:

Sustainable investment is possible under the rules / From Tony Burdon, Sarah Gordon and Catherine Howarth

Source: ft.com

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