ESG analysis can help investors identify the long-term sustainability of a business as well as any intangible risks arising from these matters.
Background: ESG is an acronym for Environmental, Social and Governance-related parameters used to assess how companies are interacting with all their stakeholders (and the society in general) as a part of their business processes. ESG has evolved from socially responsible investing but has become a much broader way of capturing sustainable business practices. ESG analysis can help investors identify the long-term sustainability of a business as well as any intangible risks arising from these matters.
Companies with a strong ESG practices score higher in terms of reputation and carry lower risk probability because they incorporate sustainability as a core value. This translates into steady and more sustainable performance for the business over the years. On the other hand, companies with a low ESG score due to irresponsible business practices expose investors to higher risks and greater potential for sudden shocks/losses over the long term.
How ESG investing has fared in the current environment
While ESG is a nascent concept in India, globally it has seen dramatic growth in recent years. In the US, net flows into sustainable funds reached $20.6 billion in 2019, more than four times the previous annual record which was set in 2018. Even so – given the relative limited life of this concept – how the space would behave in a market crash had not been tested. The current crisis has provided us an insight into the same. Thus far, the evidence seems encouraging – both in India and globally.
In terms of performance over longer term, we have expected sustainable companies to show lower volatility due to lower incidence of controversies and occupational mishaps; greater loyalty from customers, employees and even shareholders; and often more conservative balance sheets.
Moreover, it seems to us that this crisis has actually increased the visibility and perceived importance of sustainable business practices. Amid terrifying headlines and unprecedented disruption to our day-to-day lives, we are all rethinking our personal values and priorities.
Response by domestic companies to the ongoing crisis
We have witnessed several companies going out of their way to help the society at large. A few include:
1) Companies such as HUL and Nestle which provide essential goods have taken efforts to keep their operations going while taking utmost precautions on employee safety. Nestle has provided its sales force with a Covid-19 insurance cover. They are also working to help grocery stores by providing them masks, gloves and sanitizers. HUL has supported hospitals by providing them with its health and hygiene products and to create isolation facilities.
2) Retail companies such as Avenue Supermart have taken steps to keep their stores running wherever possible and to ensure that they are focused on retailing daily use essential items. Moreover they have introduced bulk delivery directly to large housing complexes.
3) Banks as a part of essential services have kept their branches open even as they have cut down on the number of staff and working hours and stopped non-critical activities in branches. Again care is being taken for employee safety including making safe travel requirements and to ensure social distancing in the branches. Banks have also used the window created by RBI to provide EMI moratorium to those whose livelihoods have been severely affected by the lockdown.
4) Automobile manufacturers like M&M & Maruti Suzuki have taken steps to assist in the production of ventilators and other protective equipment.
5) Hotel chains like India Hotels & Mahindra Holidays are offering free stays for medical personal and even converting facilities into makeshift quarantine centers.
The International Landscape
Internationally too companies have stepped up to help society in these dire circumstances.
1) Amazon’s infrastructure has become increasingly important as citizens are confined to their homes and supermarket shelves are stripped bare. The company has responded by prioritising essential items in its warehouses.
2) Shipping company Maersk is offering its ships and cargo space to transport emergency supplies, including maintaining or creating shipping routes that are not commercially viable.
3) Alibaba has provided measures to help small and medium-sized enterprises in China, including waiving fees, offering low and interest-free loans and subsidising logistics for deliveries.
Summary and Conclusion
The above is by no means an exhaustive list of companies that are doing their bit to support society through this crisis, but gives a flavour of how firms in different industries and geographies are responding. This current emergency throws a spotlight on these types of actions.
It is reasonable to expect that companies that attract positive recognition will see greater loyalty from their staff and be more able to attract new recruits after the crisis. Conversely, staff may leave employers that they felt abandoned them in the crisis (once they can afford to). Workers may be less inclined to trade off flexibility for security, and be looking for employers that offer good non-statutory benefits rather than just the highest salary.
And every employee is also a consumer, so we could also see market share shift to companies that are deemed to have ‘done their bit’ during the crisis. Companies that have good relationships and visibility in their supplier base will be more able to manage their working capital and minimise disruption to production.
To summarize, ESG or sustainability is a theme that is becoming not just a luxury, but indeed a necessity in the present-day scenario. With all stakeholders such as customers, investors and regulators demanding changes in the way businesses are being run, these non-financial factors are coming into the forefront for most companies. The winds of change are upon us, and ESG is going to be a theme that is here to stay for the long term.
(By Jinesh Gopani, Head of Equity, Axis Mutual Fund)
Disclaimer: This is the personal view of the author. Also, stocks & sectors mentioned above may or may not form part of portfolios managed by Axis Mutual Fund. The information mentioned in the document should not be interpreted as a recommendation to buy and sell securities of companies mentioned above.