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First Sentier Investors

  •   29 April 2020
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COVID-19 shines a light on ESG and investment risk: First Sentier Investors

Media Release, 29 April 2020: The Coronavirus crisis has brought the Environmental, Social and Governance (ESG) aspects of investing to the fore and will give greater momentum to responsible investment processes, according to First Sentier Investors (FSI).

In an investor update, Kate Turner, Responsible Investment Specialist, said that ESG is top of mind right now.

“It’s early days, but from what I’ve seen, issues such as modern slavery and governance have been exacerbated by the crisis and require immediate attention. Others, like climate change and biodiversity, are critical considerations as we emerge from this crisis, and there appears to be an acknowledgement of this within the investment community.”

From an environmental perspective, reduced travel and tourism is resulting in lower carbon emissions. What happens next is crucial, Ms Turner said.

“We have seen temporary benefits, but it will be interesting to see whether there is a rush to get ‘back to normal’ as we emerge from this crisis, whatever the cost to the environment. Or will we see an acceptance that our old definition of ‘normal’ is out of date, and that we should try to re-build our society and economy in a more sustainable way?”

She adds that the current crisis should provide new insights into investment risk.

“Hopefully this pandemic will shine a light on the importance of identifying and mitigating the risks of other potential, high-impact global events triggered by forces like climate change. Even when we don’t know exactly when or how they will hit, we need to accept that they are likely to happen and plan appropriately,” Ms Turner said.

The nature of the Coronavirus has also underlined the connection between people, companies, wildlife and biodiversity. 

Ms Turner said, “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[1]. New research suggests that Brazil gained 3% more malaria cases for every 10% of the Amazon rainforest it cut down[2].

“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. 

“As investors, it’s also crucial to understand the impact of biodiversity loss on the companies that we invest 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[3]. So there are potential long term risks - in addition to the short and medium term ones we are currently managing.”

Australia’s Modern Slavery Act was already a focus for investors, as companies must report on it for the first time in 2020. According to Ms Turner, COVID-19 makes this even more urgent.

“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.”

On the other hand, the apparel industry has seen retailers cancelling orders and delaying payments, with an estimated 60 million workers being impacted[4].

“Many workers aren’t receiving legally mandated wages and aren’t entitled to benefits, so a major production slowdown will 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.

“In response, FSI is launching a firm-wide engagement with companies we are invested in, in the healthcare supplies and apparel sectors, as we want to see how they are addressing the heightened human rights risks as a result of the current pandemic,” Ms Turner said.

The governance aspect of ESG is also a focus, as lockdowns impact traditional shareholder engagement. Regulators have issued guidance around virtual meetings as the Australian mini-AGM season approaches. Companies have been given with additional time to hold meetings, and the Australian regulator has indicated its support for virtual AGMs where the company’s constitution permits it.

“Now that this initial scramble is over, companies and shareholders are turning their minds to how proposals will be impacted by the current crisis, and it is likely that the impacts will be far reaching.

“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.”

[1] https://www.unep-wcmc.org/news/the-pandemic--the-planet--and-where-we-go-from-here

[2] https://www.pnas.org/content/116/44/22212.short

[3] https://www.weforum.org/reports/nature-risk-rising-why-the-crisis-engulfing-nature-matters-for-business-and-the-economy

[4] https://www.business-humanrights.org/en/major-apparel-brands-delay-cancel-orders-in-response-to-pandemic-risking-livelihoods-of-millions-of-garment-workers-in-their-supply-chains#c207158

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