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What can investors learn from the COVID-19 pandemic?

In the pursuit of resilience, efficiency will sometimes be the answer, but it should never be the question, warns Martin Rich

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In a recent paper, published through our partnership with The Blended Capital Group and The Legal 500, we explored the question “What can business learn from the COVID-19 pandemic?” In this article, we narrow the focus to investors, and consider how the three questions we identified for helping businesses to pursue extra-financial success can also guide investment and engagement decisions.

1.      Look for resilience, not just efficiency

Efficiency is good. What right-minded investor wants to put their money into a wasteful, inefficient organisation? However, you’ve probably heard (and noticed) that the world is becoming more ‘VUCA’ – volatile, uncertain, complex and ambiguous. And uncertainty requires resilience. So how can investors recognise which companies are seeking an appropriate balance of resilience and efficiency?

The oil industry is extremely high on my list of those demonstrating a complete lack of resilience in the current crisis. Back in May, oil futures were briefly trading below negative $30 per barrel. Yes, that means you could have been paid to take the one commodity that is so precious nations go to war over it on an almost daily basis. That was something of a technical trading quirk I grant you, so what about the major oil companies that shore up so many equity portfolios? At the end of July, Royal Dutch Shell narrowly avoided a first quarter loss, but took an impairment charge of $16.8bn and slashed its dividend for the first time since World War II. A week or so later, BP reported a $16.8bn quarterly loss and cut its dividend in half. At the time of writing (mid-August), their respective share prices had fallen roughly 45% and 35% year-to-date, broadly in line with many of their peers. Efficient? Quite possibly. Resilient? Clearly not.

Against this backdrop then, it’s interesting that neither company is seeking to shore-up share prices by a drive to eke out a few more percentage points of efficiency, but rather focus on their environmental footprints and seek to position themselves at the forefront of the transition to a low-carbon economy. Whether these are genuine efforts or platitudes to protect an industry under fire is a moot point – but herein lies the first key question for investors. In a world where the impact of environmental and social changes can no longer be ignored, for financial as well as existential reasons, what are your investees doing to transform into a business that is truly resilient for the 21st Century? In the pursuit of resilience, efficiency will sometimes be the answer, but it should never be the question.

Companies may seek to defend the status quo by building an SDG narrative around what the business is already doing. Others offer a selective stance, responding to just a few SDGs and quietly ignoring those where their impacts are more detrimental. Neither of these approaches stand up to scrutiny and should be red flags for investors.

2.      Look for competitiveness, not just compliance

Two months ago, fast fashion retailer Boohoo was riding high on a wave of online clientele unable to indulge their passions in a physical shop. Its share price was up over a third on the year, and MSCI reiterated its AA ESG-rating, praising its supply chain labour standards. It was both competitive and, seemingly, compliant. 

(Apparently producing cheap, disposable outfits didn’t raise too many concerns…) Roll forward, and accusations emerged of UK workers being paid £3.50 an hour, in conditions where they were unable to socially distance during the pandemic. Cue a collapse in both share price and consumer confidence, not to mention many red faces across the responsible investment sector.

The company has subsequently sought to defend itself, the share price has rebounded, and only in time will we know for sure what really happened. But the damage is done. I’m definitely not their target consumer, but friends’ daughters have told me they won’t touch the brand again with the proverbial bargepole – one proudly showing me where she’d deleted the app from her smartphone.

This is not about maintaining a license to operate, but rather winning support to succeed. How long the aforementioned teenage angst will last is yet to be seen. However, to identify the businesses whose clients will stand by them, investors need to look beyond good ratings or nicely-worded website platitudes and at the core business commitments to ensure that compliance is more than skin-deep.

3.      Look for a holistic response to the SDGs

The pandemic has brought fresh understanding of our collective social and environmental challenges. From cleaner air and emergent wildlife, to being deprived of social contact, we have been given an opportunity to re-evaluate the path we were on – the one that created the conditions for the Covid-19 virus to thrive. It’s no wonder that a drumbeat of ‘build back better’ has started to emerge, and businesses that position themselves to be a part of this are far more likely to flourish. Helpfully we already have a picture of what this ‘better’ looks like in the form of the Sustainable Development Goals. But how can investors identify the genuine from the ‘blue-wash’?

Companies may seek to defend the status quo by building an SDG narrative around what the business is already doing. Others offer a selective stance, responding to just a few SDGs and quietly ignoring those where their impacts are more detrimental. Neither of these approaches stand up to scrutiny and should be red flags for investors.

By contrast, what investors should be looking for is a holistic approach: one which considers all of a company’s SDG impacts, both positive and negative, across the company’s entire value web. This is by no means straight forward and involves the company asking itself “How might we redeploy our core competencies, existing assets and know-how in completely new ways, to make money in service of the SDGs?” If investors want to identify the leaders and winners of tomorrow, they must ask this same question of their investees and apply as much thought and rigour to the response as they would to an answer on next year’s profits.

Such a transition will, for most, be a long and complicated journey requiring patience and support from employees, customers, investors and wider society. That is why we created the Future-Fit Business Benchmark as a free, open source methodology designed to equip companies of any size or sector to operationalise this journey. It offers detailed guidance on how to set the right extra-financial ambitions, how to take better day-to-day decisions in pursuit of those ambitions, and how to transform stakeholder engagement through more authentic and inspiring disclosure on progress. Armed with such a clear, forward-looking vision, investors will be able to make better-informed decisions around engagement and capital allocation, and help drive the change we need to create a future-fit society.  


Martin Rich is Co-founder and Executive Director of Future Fit. Before that, he spent more than a decade in structured debt and derivative products at JP Morgan, HSBC and UBS. 

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