it's about economics too
As we approach the final quarter of 2020, many investors are understandably worried about the threat of a resurgence in the pandemic and renewed lockdowns hanging over markets. In this uncertain environment, we believe the integration of ESG research principles at the core of any stock selection process is a key weapon for the protection and long-term growth of invested capital. Ironically, at times like this investors might wonder if the path to sustainable returns lies in more traditional investment choices. After all, there have certainly been calls to delay action on climate change, with proponents arguing that this is not a time for building windmills and solar farms, but instead a time to focus on battling the pandemic and boosting economic growth.
While such concerns are understandable, there is no question in our minds that a proactive approach to sustainable investing will improve portfolios as well as helping to deliver better outcomes for society and for our planet. For example, climate-related risks have the potential to be highly material, not merely in terms of their direct impact on corporate assets, property, equipment, staff, suppliers and customers, but also through government and regulatory policy responses. The latter are liable to alter the market dynamics for whole sectors through taxation and specific measures to control emissions. Measures to mitigate and adapt to climate change are likely to impact all companies dependent on fossil fuels for future profits, especially oil and gas companies. The Paris Agreement represents a commitment to the goal of keeping the increase in global average temperatures to well below 2°C by 2050, a target that can only be achieved through a rapid transition to a low-carbon economy. Fossil-fuel companies failing to factor decarbonisation into their pricing assumptions may be using excessively optimistic oil and gas price assumptions in their balance sheets, which ultimately might result in downgraded forecasts for profitability and dividends (witness recent announcements on this very topic from BP and Royal Dutch). Through this lens, climate change is therefore as much an economic concern as it is an environmental one. Furthermore, while the ‘E’ in ESG tends to be front of mind, social and governance factors also generate very real risks for companies. At a time when COVID-19 is putting poor corporate behaviour under the microscope, any company guilty of treating staff, customers or suppliers badly is exposing itself to reputational risks and a regulatory backlash capable of destroying shareholder capital. The same applies to companies with a poor grasp of governance issues such as executive pay, audit, or bribery and corruption.
In summary, by incorporating the additional discipline of ESG analysis into a proactive research process, investors can take steps to insure their portfolios against the risk to shareholder equity posed by a whole range of factors beginning to loom large in the public consciousness. One last thought: ESG has become a hot topic and fund managers have apparently embraced its principles across the board, often from a standing start. So watch out for the greenwashers…
Sarasin & Partners LLP is a London-based asset manager that manages £14.7 billion* on behalf of private clients, charities, institutions and pension funds from the UK and around the world.
We take a global, long-term, thematic approach to investing, with responsible investment at its core. Our commitment to stewardship principles means we embed environmental, social and governance considerations into our investment process, and consider ourselves stewards of our clients’ assets.
*as at 30 June 2020