The COVID-19 crisis is likely to change how investors assess corporate governance, according to analysts at Morgan Stanley, who have identified five metrics they think will “become key to evaluating whether a company is responding fairly and equitably to challenges such as COVID-19”. Companies’ management of its staff and other stakeholders will “impact investor expectations around 2020 dividend payments”, the authors said in a note published today. “Directional changes in pay ratios of executives to average labour costs are likely to be under scrutiny” and it’s possible that the inclusion of social metrics within remuneration policies could increase, mirroring similar moves on climate targets and pay in recent years. Investors will step up pressure on companies to pay fair tax, the note said, as well as focusing more heavily on the corporate purpose.
The head of ESG and stewardship at American Century Investments, Guillaume Mascotto, says the reduction in emissions and air pollution triggered by the ‘lock downs’ around the world may encourage investors to step up on climate change. While there are concerns that climate efforts may take a backseat in light of the current pandemic, Mascotto argues that they could in fact be helped by mitigation measures being put in place to fight the virus. “Geospatial data from the European Space Agency’s Sentinel-5P satellite and NASA show a 40% reduction in nitrogen dioxide (NO2) levels over Italy. Similarly, NO2 levels over eastern and central China have fallen 10%-30%,” he said in a statement. “While weather conditions could skew data of satellite observations, asset owners focused on decarbonising their portfolios may take the opportunity to redouble their efforts—arguing that urgently transitioning toward a lower-carbon economy is, in fact, doable.”
Europe’s carbon market has been turned “upside down” by the current crisis, not long after its health began to restore following the 2008 financial crash. According to figures from IHS Markit, prices in the EU Emissions Trading System have fallen 40% since early March, from around €24 per metric ton to between €16 and €18. At its high in 2019, a ton was trading at €29. The collapse has been prompted by reduced economic activity and demand for power and aviation, weakening oil prices, among other things, IHS Markit says. “Depending on the severity and extent of power demand impacts going forward, the IHS Markit outlook for EU ETS prices ranges from an average of €12.6 per metric during second quarter-fourth quarter 2020 (in the reference case) to as low as a €5 per metric ton average over the same period (stress case)”, it continued. The Market Stability Reserve – a mechanism introduced to reduce volatility in the EU ETS following the 2008 slump – should remove nearly a quarter of the excess allowances created by the COVID outbreak, the firm added.
Global emissions for 2020 are likely to fall by 2.1% compared with 2019 – representing an 8.3% decrease from expected emissions this year – according to MSCI. Oliver Marchand, Head of Climate Risk Research at MSCI, pointed out that the drop is still “well short” of being Paris aligned.
Mining companies are among FTSE100 companies to have seen an uptick amid the general market carnage, according to Hindsight investments. A study shows that while airlines and hospitality companies have seen some of the sharpest falls, precious metal companies Polymetal and Fresnillo comprise two of the three firms identified as having seen growth over the past three months. Polymetal, a mining corporation, saw a “staggering” increase of 42% while Frescnillo grew just 6%.
MAPFRE AM, the asset management arm of Spain’s largest insurance company, is advising investors to decide on the timeframe of their investments before responding to the crisis. Managing Director Javier Lendines said that the economy still had “healthy foundations” to support a recovery, so investors that are prepared to commit to holding stocks for five years or more could benefit from equity buying. However, he said that public debt would probably become less attractive as governments increased borrowing by cutting pricing. “Regarding private fixed income investments, deteriorating credit quality, rising bankruptcies and higher financing costs mean they are generally an asset to be reduced in portfolios. Only the deep knowledge of issuers, prioritizing under-indebted companies and reduced exposure to the cycle could justify investing in certain issuers,” he added.
Moodys has published its latest quarterly ESG update, this time dedicated to the coronavirus pandemic. In it, it says the outbreak is considered a “social risk” under its ESG framework, and will have “credit implications that will continue to play out in the years to come”. The report, known as ESG Focus, looks at the credit impacts across sectors and geographies.