Value creation amidst uncertainty – IR, ESG and risk mitigation
More than ever, investors are looking for resilience, relevance and purpose as they reassess their portfolios for the long-term. Competition for capital in the post-COVID-19 environment will be heightened. ESG has become mainstream and a critical risk mitigant for investors.
Most management teams have lately only had bandwidth to deal with the immediate existential threat in front of them, with no capacity to explore values and corporate purpose. However, the most resilient cases for investment will be looking to reframe their purpose and adapt their engagement to meet the growing expectations of investors around responsibility.
Juggling the rebuilding of share registers and resisting short-termism
Investor behaviour is evolving, and we are likely to see increasing levels of volatility as investors and corporates navigate the recovery. Despite pre-pandemic shifts to limit short-termism, including the switch to semi-annual reporting, Covid-19 has shortened investor time horizons to months and even weeks as investors assess their investments’ ability to survive.
Meanwhile, IROs have been dealing with the potentially profound impact the pandemic has had on the make-up of their investor base. Having worked diligently to align the make-up of their share registers with their corporate strategies, the investment universe has for many been turned on its head. Value funds are coming in and out of share registers to capitalise on the array of value opportunities available. Income investors are reassessing their ownership of companies whose dividends have been withdrawn, while growth-oriented investors are grappling with long-term risk and opportunity. Index funds are simultaneously responding to all the above on top of the flurry of changes following the latest FTSE Russell quarterly review.
Investor primacy and the two-way relationship between corporate and society
If there is a silver lining, at least the pandemic has demonstrated how corporate and state can come together in a crisis. Instinctif clients, such as Spire Healthcare, have joined many enterprises in playing key roles in helping the NHS combat the virus and provide critical resource to the health service. As our colleague Damian Reece recently observed, companies are not responsible for Coronavirus, but they are responsible for their response to it. This is where reputations will be won and lost. Legitimacy, earnings and long-term viability are at stake.
When it comes to policing behaviour, the primacy of shareholder value is about to come under even closer scrutiny. Corporates must assume that their social contract is under review as the public assesses how business can and cannot behave. As critical stewards of public savings and pension capital, investors inevitably play a key role in policing corporate behaviour. Consumers will walk away from poor behaviour with their wallets, while investors will withdraw capital from business models they deem unsustainable.
SRI is not just a bull market luxury
Across the wealth of investor research carried out by Instinctif over the years, we can see clear signals pointing to the importance of sustainability, but with a great deal of uncertainty around timing. “It will be of critical importance, but it’s not quite the time for it” was often fed back.
The market has, however, spoken. During the sell-off that immediately followed the Covid-19 lockdown, ESG ETFs saw more inflows than any other ETF (according to Nasdaq). Investors are reassessing their portfolios for the long term and the time to explore legitimacy and sustainability is now.A recent Ethical Corporation webinar involving a prominent US debt investor highlighted that ESG has always been mainstream:
“Investors just didn’t realise it…ESG is a material risk and investors have always been asking ESG questions…”.
Whatever the terminology used – responsibility, ESG, sustainability or resilience – proactivity in the face of a series of on-going threats beats firefighting. Investors realise that sustainable issuers add a layer of safety that conventional investment cases do not. To that end, corporates that demonstrate social purpose and resilience will preserve and maximise their access to investor capital.