You tend not to hear too much from the city of Leicester here in the UK but it has played host to a number of historical events over the years and I’m proud to say I lived there for nine years before being drawn to the bright lights of London. In 2013, the remains of King Richard III who was killed at the Battle of Bosworth in 1485 were unearthed underneath a car park in the city centre. Then in 2016, Leicester City Football Club completed one of the greatest sporting successes of all time by winning the Premier League title, a result that bookmakers priced at a very unlikely 5000/1. Unfortunately, Leicester has been in the news for more upsetting reasons recently. A spike in renewed coronavirus cases forced the city back into lockdown as the remainder of the country began to ease restrictions. Then, just a week ago, reports came out suggesting that workers in a factory were being paid below the national minimum wage whilst working in unsafe conditions. The inexorable growth of environmental, social and governance (ESG) awareness has been impossible to ignore. We started the year with a huge emphasis on the ‘E’ with Extinction Rebellion’s vehement protests highlighting environmental concerns. However, several stories since then and throughout the coronavirus pandemic have pushed the ‘S’ agenda higher.
One established high street retailer faced a backlash in March as it attempted to keep stores open (and thus exposing employees to health risks) despite government orders for all non-essential retailers to close. Another, a pub operator, was criticised after its chairman stated ‘I don’t see why employees shouldn’t work for supermarkets for the time being’ after their premises were closed. Hardly a message that would make you feel valued as an employee. These are more blatant examples of ‘S’ errors of judgement. The developing news in Leicester over the past week has taken a different form and has highlighted transparency difficulties when evaluating social risks in a company. The factory in question manufactures clothes for a popular online fashion retailer here in the UK and that company has come under scrutiny for its association with the supplier.
Social criteria can be difficult to measure and they don’t necessarily lend themselves to quantitative metrics that environmental and governance matters might. Whilst simple screens may highlight certain ESG risks at a company, the story in Leicester this past week has shown that to have a true understanding of these risks investors must do more and engage with companies at a much deeper level.
Critics have said the coronavirus pandemic and resulting economic implications might push ESG discussions down the agenda once again with strong balance sheets and profits trumping attractive ESG scores. That certainly doesn’t look to be the case. There have been noises for years of interest in sustainable strategies but flows have never really followed. That appears to be changing now. Last week Blackrock announced they have already doubled inflows into their sustainable ETF strategies so far this year when compared to 2019 as a whole. Elsewhere, Morningstar revealed, in their 2020 Q1 Global Sustainable Fund Flows report, their sustainable universe amassed over $45bn of net inflows in the first quarter this year, compared to a $385bn net outflow for the overall fund universe.
The past few months have shown that companies can be punished for not keeping up and abiding by sustainable principles. As signatories to the UN Principles for Responsible Investment (PRI), Momentum is committed to ensuring the managers we invest in understand and assess the environmental, social and governance risks in each of their companies and fully account for them in their analysis and evaluation. With one eye on our managers it would be remiss not to also look more inwardly, leading ESG considerations to be more explicitly showcased in our own solutions going forward.
Lessons from Japan
Richard Stutley, CFA
Economies cannot cope with multiple rounds of lockdowns on the scale of the first quarter, but the world is better prepared for new waves of the virus and hence the effect should be smaller. This is one of the reasons we remain broadly constructive on the outlook for the global economy and markets
The Great Disconnect?
Stephen Nguyen, CFA
With most countries globally facing what could be the worst economic collapse in the post-war era, it is surprising to see markets and most risk assets continue their remarkable rebound. Is this a true reflection of what is going on in the underlying economy or is there a big disconnect?