Andrew Parry: The ESG themes accelerated by the pandemic

Newton IM's head of sustainable investment looks at how Covid-19 has propelled many existing themes

The global pandemic and lockdown have increased investors’ focus on the role of companies in society, most notably around the treatment of their customers, employees and suppliers.

Many workers who are on precarious contracts and receive low wages and few, if any, benefits, are now viewed as essential to societal and economic systems. The lockdown also appears to be accelerating a number of pre-existing trends such as the shift to automation, re-shoring of supply chains, and flexible working arrangements.

Social factors – the ‘S’ in ESG – are material to stakeholders. Particularly so for employees, who in the UK spend almost 10 full years at work over a lifetime, but also for companies for which social factors can be financially material in the long-term. Despite this, social factors are less well understood by investors and though the focus on these issues appears to have intensified since the Covid-19 pandemic, the lack of access to high-quality data, or disclosures, continues to compound investor challenges in understanding social risks and opportunities.

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Looking beyond the pandemic, a number of structural market trends have characterised developed labour markets for some time now. These include nugatory productivity growth, stagnating wages, the rise of automation, and changes in employment legislation. Social tensions have risen in recent years through the spread of ‘in-work poverty’ and growing inequality.

These trends, mispriced risks and the shockwaves created by the pandemic will undoubtedly have investment implications. Some will be far more tangible than others, and many existing trends, risks and opportunities have merely accelerated. Central to these trends, we believe, is the demand for ‘good employment’. We believe a company should consider the wider social impact of its employment, which in turn requires consideration of its business model, corporate purpose, and the compatibility of capital allocation and internal investment decisions with these aims.

It will also be important to consider the changed macroeconomic backdrop, including the increased levels of government spending and debt, the potential for government stimulus, and the associated opportunities for the structural reform of national labour markets and macroeconomic policy. Such developments will be instrumental in shaping our working lives.

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Other themes associated with the future of work include the growing acceptance of the view that companies are social enterprises, which may benefit local businesses or see a rise in ‘B Corporations’, whereby a company makes a legal commitment to running itself in the interests of stakeholders over just shareholders, and delivering purpose over profits. Alternatively, we may see increased regulation and legislation aimed at addressing the impacts companies have on stakeholders, such as via tighter taxation or employment laws.

We have also seen a sharp shift towards flexible working practices, driven by necessity. Growing numbers of employees are likely to request a permanent shift in favour of working from home and there is a commercial reality that in order to attract key talent, companies will have to offer attractive, flexible working practices. This could have numerous long-term implications, such as a change in the demand and pricing of commercial property, higher demand for suburban living, increased spending on the home, increased home entertainment, or changes to hobbies.

The pandemic has also highlighted other population and demographic-based themes, some of which are interlinked. For example, populations are living much longer, and there is a greater requirement for life-long learning. An aging population has implications for the workforce, government spending, and for pensions and retirement savings. It also affects consumer spending, as well as prospects for younger generations. Many forms of education could be affected and the specific skills required may change rapidly owing to other themes discussed, and the means of delivering education may shift towards an online model.

The pandemic has accelerated themes which, in some cases, have been observable for some time. These include digitalisation, automation and deglobalisation. These have a plethora of thematic, macroeconomic and security-specific implications, as well as considerations for society and workers. These range from a focus on supply-chain resiliency, to threats to lower-skilled employment, and a shift to virtual employment. We believe that these will change how we conduct business, and our lives, and will create both financial risks and opportunities for companies, which companies will need to balance against their societal obligations.

Andrew Parry is head of sustainable investment at Newton Investment Management and ESG Clarity editorial panellist


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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...