This crisis represents a seminal moment for responsible investing. To this juncture, I believe many portfolio managers have understandably struggled to incorporate environmental, social, and governance (ESG) into their investing frameworks. ESG can feel steps removed from buy/sell decisions and seem arbitrary, as though conclusions are reached by applying personal values.
I see this changing right now. Starting with Wellington’s recent virtual Consumer Conference, and continuing over the past couple of weeks, we have had hundreds of touch points with company management teams. Those conversations have broached topics affecting a wide range of stakeholders:
- Is management working from home?
- Who is coming into your offices/stores/warehouses/factories?
- How are you dealing with employees?
- How are you accommodating customers?
- Are you building supply-chain resilience?
- What’s happening in your local communities?
These discussions have felt natural, because they are very relevant to long-term shareholder value. Stakeholders are likely to remember companies’ actions during this crisis for a long time. I believe the ability to hire, rehire, and retain talent will be shaped by reputations developed now. Brand loyalty may be gained, strengthened, or lost based on how customers are treated. And so on. If an investor is asking questions like these today and considering the inputs when making investment decisions, then ESG is part of their framework.
For better and for worse, the media is becoming more focused on corporate behavior. The Financial Times has added a “Saints and Sinners” section to its Moral Money newsletter, this week lauding a few producers of emergency health care supplies and criticizing a few online retailers, pharmaceuticals, and even professional sports teams.
Our colleague John Averill asked in Morning Meeting yesterday about best practices for treating employees during this crisis. I have learned that the answers are very case-specific. Some companies that have financial flexibility and benefit from strong current business trends can go a long way to help. Technology companies and grocery chains are two that come to mind. Some companies may want to do the right thing but are less flexible, hamstrung by the size of their workforce and the realities of the current environment. Hotel chains or food service companies are recent examples. Even companies that seem best-positioned to weather this storm may have to grapple with important employee welfare issues, including childcare, heightened stress levels, and, of course, illness.
In his recent book, Skin in the Game, author Nassim Taleb talks about via negative; essentially, we know what is wrong with more clarity than we know what is right. I find this to be especially true about company actions today, and about ESG in general.
In sum, there is no one “right” approach for companies to take. Each must consider a matrix of options and stakeholders, including employees, customers, and shareholders. And their choices are constrained by their specific financial reality. Investors need to apply judgment, just as with traditional fundamental analysis: Is a company doing a good job reaching balanced decisions, given the multidimensional issues it faces? Are management’s choices consistent with its culture and strategy? Are these behaviors consistent with the reasons why you own the stock, and with your time horizon for investing?
