RI DigiFest write-up: Plenary 1: Covid-19 and the future of capitalism

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Responsible Investor Digital Festival: Summer 2020, Plenary 1: Covid-19 and the future of capitalism.

Companies that don’t transform their business model to integrate ESG will have a tough time attracting capital in the years ahead, Michael Baldinger, Global Head of Sustainable and Impact Investing at UBS Asset Management, warned delegates at the Responsible Investor Digital Festival (June 15-19). Speaking during a sweeping plenary session that explored how the impact of the Coronavirus may play out in the future, Baldinger said that over two thirds of asset owners now consider ESG in their investment decisions and there is “less and less tolerance for bad corporate citizens.”

Moreover, in an increasingly transparent world, companies face more pressure to improve ESG integration: “Tough times shows the resilience of sustainable companies; you see it in their performance,” he said, adding that UBS’s “number one focus” is to help its clients find solutions to ESG issues. 

Equalisation of E, S and G

Baldinger told delegates that the pandemic has underscored the importance of companies’ ability to deal with social challenges. There has been a clear impact on companies unable to deal with employees working from home, or who lack a loyal employee base. These are now headline risks for companies, alongside climate. “It harms their stock price,” he said, referring to an “equalisation” in ‘E’ ‘S’ and ‘G.’ 

Baldinger acknowledged that weaker oil prices have helped boost ESG portfolios during the crisis, but he said excluding oil hasn’t been the only factor contributing to portfolio performance: “Even in volatile and difficult markets, ESG leaders are better prepared for black swans.”

Elsewhere, Baldinger flagged that the US is home to around 52% of global pension assets. Although US investors “get a bad rap” on integrating ESG, he said that when these investors move they are “fast” with reverberations that are felt globally. He also said that he believed capital markets are the most powerful transition mechanism to an ESG-focused world: “Climate change disruption could be on a much larger scale than the pandemic,” he warned.

Government distortions

Fellow panellist, Magnus Billing, CEO, of Swedish pension fund Alecta, which runs pensions for 2.5 million Swedes, highlighted the risk of government bailouts distorting efficiency as the liquidity crisis shifts to a solvency crisis. He noted some “positive signs” whereby governments are linking their support to ESG, particularly around bailouts for national airlines. Yet this comes with a concern that governments “step into” companies, leading to distortions and inefficiencies: “We have to be mindful of this,” he said, stressing the role of asset owners to help ensure “we don’t end up in a nationalised economy,” but transition out with a functioning market where the allocation of capital is still efficient. He also stressed the supportive role of policy makers in nurturing innovation and new concepts like carbon capture. “There would have been no Tesla or Internet without government support,” he said. 

Support for real estate

The crisis in real estate has already prompted a change of tact at Alecta. Billing told delegates that the fund had taken an active role in supporting tenants in some of its properties, adjusting payment terms, and also looking at different business models to ensure incumbent tenants don’t leave. There are “very few tenants available if they leave,” Billing told delegates. “There is a demand on us to review business models in a different way.” 

In the equity portfolio, the pension fund is focusing on SME support particularly. Businesses must address changes across their whole operation from health and safety to their supply chain, as well as changes in customer behaviour. Billing said investors have a fiduciary role to work with SMEs to prioritise business models that steer away from “a return to growth at any cost” but focus instead on a path to sustainability: beneficiaries will change to another pension fund if their money is not invested sustainably, he warned. 

Billing said that he had been concerned that the crisis would slow down ESG trends, but believes this is now not the case, particularly given ESG’s strong performance. Elsewhere, he said that the pension fund’s belief in active management and fundamental analysis is now centre stage, and an opportunity to find “long term winners of tomorrow.” 

DFIs and asset owners

Yvonne Bakkum, Managing Director, FMO Investment Management, told delegates that the crisis has hit emerging economies hardest. It has made sustainable finance and impact investment more crucial and brought the importance of counter cyclical DFI investment to the fore given multilaterals “continued commitment” to invest through a crisis. 

She also espoused the importance of long-term illiquid capital in a crisis. “You don’t see commercial outflows in our illiquid activity. You can’t get out of illiquid investment that easily. And in this crisis, it brings calm to the market.” It is an area where DFI’s align with long-term pension fund investment. “Sticking around” especially when times are tough, in a long-term approach pays off in financial terms too, she said: “We are engaged with institutional investors to build structures and vehicles for them to join in these investments,” she said.

Indeed, development institutions are looking at all kinds of ways to effectively work with emerging economies to “get through this crisis,” she said. A particular area she highlights is effective structuring where DFI investment acts as a catalyst for institutional investment. Governments can reduce the risk profile of a senior tranche, allowing institutional investors to pick up larger tickets than normal given their capital restraints, she said. She cautioned it was “still too early” to confirm the extent of a ‘Just Recovery’, although FMO is “hopeful and positive,” she countered that “when it comes down to surviving,” acting long-term is more difficult.

Regulation to achieve outcomes

There is a “strong case” to find win-win opportunities that support the recovery and responsible investment via bailouts and longer-term stimulus, Ben Caldecott, Director, Oxford Sustainable Finance Programme and Associate Professor, told delegates. He said alongside corporate bailouts being made conditional on sustainability the debate would continue into the “recovery stage” to shape the stimulus. For example, investment would skew more to broadband infrastructure than say, another runway at Heathrow – now a “dim and distant” memory. This could see themes like the ‘polluter pays’ and carbon pricing coming centre stage, he suggested. “We need to think about how we use regulation to achieve outcomes,” he said.

Caldecott also referenced how governments will now have bigger stakes in companies. “Debts that are converted to equity and not paid back will give governments’ stakes in companies,” he said. He noted that this could make for “progressive ownership” since governments will manage their ownership in line with their own ESG policy. Investors also need to think how they plan to work with governments, he said. 

Valentijn van Nieuwenhuijzen, Chief Investment Officer, NN Investment Partners, told delegates that the crisis has highlighted the speed at which future change would also occur: “The key lesson to take away is that we have to adapt much faster than ever have.” He said that now investors are focused on how the current shock will create lasting change in behaviour, not all business models will succeed going forward. Moreover, more capital flowing into sustainable investment given its better investment returns will help finance change.