The COVID-19 crisis has brought environmental, social and governance (ESG) aspects of investing to the fore and will give greater momentum to responsible investment process, according to First Sentier Investors (FSI).
While the world can enjoy the temporary benefits from an environmental perspective which included reduced travel and, following that, lower carbon emissions, it what be crucial what is going to happen next when the countries would begin to emerge from the crisis.
According to FSI’s responsible investment specialist, Kate Turner, the nature of the crisis also underlined the connection between people, companies, wildlife and biodiversity.
“We know that around 75% of new infectious diseases are transmitted from wildlife to people: COVID-19 is one example, others include AIDS and the H1N1 flu. New research suggests that Brazil gained 3% more malaria cases for every 10% of the Amazon rainforest it cut down,” she said.
“These statistics highlight the need to understand more about the connection between diseases transmitted by wildlife and ecosystem health. It’s just one of many facets of biodiversity that we need to better understand and plan for,” she said.
At the same time, it would be crucial for investors to understand the impact of biodiversity loss on the companies that they are invested in.
“Research by the World Economic Forum ranks biodiversity loss as one of the top five threats we will face in the next 10 years and estimates that over half the world’s GDP is moderately or highly dependent on nature. So there are potential long-term risks - in addition to the short and medium term ones we are currently managing,” Turner said.
On top of that comes Australia’s Modern Slavery Act which was already a focus for investors, as companies must report on it for the first time in 2020.
“FSI has done a lot of work to refine our approach to modern slavery risks within investment portfolios, and we’ve had to adapt our approach in light of the current pandemic.
“For example, the healthcare supplies industry was already identified as a high-risk industry. Now, high demand and tight production timeframes increase the risk to workers even more, particularly where corners are cut to meet demand.”
Following this, investors need to be aware that some industries would be heavily impacted by the crisis such as the apparel industry which saw retailers cancelling orders and delaying payments, with an estimated 60 million workers being impacted.
This would see many any workers who would not be receiving legally mandated wages and would not be entitled to benefits, so a major production slowdown would mean many more people are vulnerable to modern slavery. “Unfortunately, this comes at a time where we need to be reducing that number to meet the Sustainable Development Goals (SDG) target of eradicating modern slavery by 2030,” Turner said.
The governance aspect of ESG was also a focus, as lockdowns impacted traditional shareholder engagement and regulators issued guidance around virtual meetings as the Australian mini-AGM season approached.
Companies had been given additional time to hold meetings, and the Australian regulator indicated its support for virtual AGMs where the company’s constitution permits it.
“Executive remuneration will be a key issue. Salaries are being reduced for both employees and executives in many sectors, and we have already seen widespread changes to compensation programs.
“Where companies have tried to keep executive remuneration at the same level, at further expense of shareholders and other employees, this has not been well received. Remuneration reports will no doubt receive even more scrutiny than normal,” Turner concluded.