Future View: Rathbone

Written by: Rathbone Posted: 26/06/2020

BL68_FutureView_Tim FordTim Ford, Investment Director at Rathbone Investment Management International, considers the prospects of a responsible recession

A huge amount has changed in the first six months of this year, so much so that the world will look a little different and be permanently changed to some degree once we finally overcome the coronavirus pandemic.  

Covid-19 is having a very significant impact on communities and economies across the globe. As the world falls into recession, we draw on our history and strong heritage of seeking to think, act and invest responsibly in order to ponder whether the trend towards ESG investing has simply been a luxury afforded by the longest bull market in living memory. 

In doing so we are able to use our extensive experience in ESG investing, not just through our specialist ethical team at Rathbone Greenbank but also through the lens of our Responsible Investment framework, to fully explore how ESG has fared during a global crisis that was not, on this occasion, manifested in the financial markets.

Ethics and value

Back during the global financial crisis of 2008, knives were out for nascent ESG funds. That familiar, well-worn argument for investing in traditional, defensive stocks which was wheeled out then still echoes today: ‘Invest in stocks steadily in demand’. That means alcohol, tobacco and arms. 

Back then, as now, ethics are seemingly in conflict with seeking value. Can we afford to push responsible capitalism in the current environment? We think we can and should. 

It’s clear to us that a more responsible form of capitalism could have prevented the worst impacts of the Covid-19 pandemic. The warning signs about the vulnerability of our globalised world were there for everyone to see. 

Bill Gates, one of history’s greatest capitalists, was sounding the alarm: “If anything kills over 10 million people in the next few decades, it’s most likely to be a highly infectious virus rather than a war. Not missiles, but microbes… We’re not ready for the next epidemic.” 

He went further, noting that we all need to be better prepared and that technology would be the building block of a response system. But there simply isn’t the will to spend a little to save millions of people. 

Mixed motives

Our healthcare system is beset by incentivisation issues and has seen more than its fair share of scandals. The private sector has little motive to invest in researching goods that might not be immediately lucrative. Its focus instead has been on lifestyle drugs. 

We need coordinated investment in the continued development of antibiotics. Government will has been lacking here, but the private sector could have rallied and built more resilience into the system.

If companies took the sustainable development goals (SDGs) as seriously as their next quarterly earnings report, the world would be a more resilient and prosperous place by 2030.

ESG outperformance

The immediate impacts of this particular crisis have been kinder to ESG investments. According to Morningstar data quoted in the Financial Times, while the MSCI World index fell by 14.5% in March, well over half of global ESG large-cap funds outperformed their benchmark. 

Much of this outperformance can be explained by the sectoral exclusions applied by most ESG funds, especially those excluding oil and gas, which have been hit by Covid-19 and a price war. But for many of these funds, the avoidance of oil and gas was not accidental; it was built on a solid analysis of what climate change could mean for demand. 

Furthermore, a focus on what a more connected, clean, tech-driven future might look like has increased ESG funds’ exposure to the kind of industries doing well in the ‘new normal’ of 2020.

Video conferencing, remote working, online teams and networking were all touted as industries of the future, and most ESG funds were more heavily weighted to these areas.
So far, these sectors haven’t just survived, they’ve thrived. 

Insulated by ethics

It’s too soon to claim a ‘victory for ESG’, but the initial returns suggest a longer-term approach to risk has insulated ESG funds from the worst. In 2020, being vocally responsible has been very positive for business, and those acting fast to protect their workers and customers have received favourable press. 

The insurance company Admiral is a case in point. In April, it gave its car insurance customers a partial refund as recognition of the 70% fall in road traffic because of the lockdown.

With fewer cars on the road, there have been fewer accidents and fewer claims. Admiral could have kept the £110m windfall, but instead it’s returning it to its customers. This type of conduct sent a positive message and will build resilience into its business. 

Being known as a good citizen – or at least committing to trying to be a better one – has also proven beneficial when it comes to seeking support. February saw the first ever sustainability-linked loan granted to JetBlue, an American no-frills airline.
The business has arranged a new $550m credit facility with French ESG-leader BNP Paribas, featuring an innovative incentive structure. It means that the cost of repayments will vary according to the company’s ESG ratings and the reduction of its carbon footprint. 

So why have the ESG-conscious companies seemingly done well? It’s helpful to make the distinction between those trends caused purely by the pandemic, and those accelerated by it. Short-lived supply chain failures of basic goods, for example, or the sudden cut in transport activity are likely to bounce back. 

But in other areas, Covid-19 has sped up trends which were visible, but their evolution and maturity have been hastened. 

As we move through this crisis and emerge on the other side into a different world, we believe that now more than ever it is in our clients’ best interests for the companies in which we invest to adopt best practice in managing environmental, social and governance risks. 

This provides a framework for each company to be managed according to the long-term interests of all its stakeholders. Mindful of our responsibilities to our clients, we act as good, long-term stewards of the investments which we manage on their behalf, as expressed in our Responsible Investment Policy.3 

A copy of our Responsible Investing Policy is available on our website 

• This sponsored article was first published in Businesslife's Future View supplement in June 2020

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