Our Perspective

Please see the below ESG article from Aberdeen Standard Investments written by Jerry Goh, their Asian Equities Investment Manager, received yesterday afternoon (13/08/2020).

These past few months have forced fund managers, like everyone else, to become more flexible while waiting for life to get back to normal.

Luckily, technology allows me to work from home with minimum disruption. I can mirror my office desktop on my home computer to securely access work programmes and files. I can easily talk to company executives via widely-used video conferencing apps.

My job is to analyse corporate governance (G) issues at Asian companies. Governance, along with ‘environmental’ (E) and ‘social’ (S) factors, make up the ESG trinity.

ESG, and responsible investing, have become hot topics in recent years. This will become even more so as the coronavirus pandemic forces us to rethink our priorities when pursuing economic growth.

As governments around the world pledge trillions of dollars to support businesses and save jobs, this presents a one-in-a-million opportunity to make a substantial commitment towards a sustainable future. One thing I have learned during this time is that sustainability and resilience are often synonymous.

Asia’s record on ESG matters is mixed. After decades of rapid growth, the world’s 10 most polluted cities are located within this region¹. Labour conditions can be appalling². Corporate governance standards, while improving, tend to lag global best practice.

Having said this, there are many signs that things are getting better. Here are a few from my travels – in person and online:

In recent years the region’s investors – asset owners and asset managers – have shown more of an interest in responsible investing. This will put more pressure on companies to change bad behaviour.

For example, Japan’s Government Pension Investment Fund, one of the largest pension funds in the world, announced in 2017 its plan to increase allocations in responsible investments to 10% from 3%³. The targeted amount is equivalent to some US$33 billion today.

Fund managers are signing up to internationally recognised agreements, such as the United Nations Principles for Responsible Investment (PRI), to demonstrate their commitment to sustainability tenets. In China and the ‘rest of Asia’, the number of net new PRI signatories grew 64% and 17% during 2018/2019, compared to a year earlier. In Japan and Australasia, gains were 12.5% and 8% respectively. Combined, net new signatories in all these markets rose by 339⁴.

Regulators are also doing their part. The Singapore Exchange introduced sustainability reporting for listed companies on a ‘comply or explain’ basis in 2016⁵. Hong Kong Exchanges and Clearing is implementing the recommendations from a consultation paper designed to strengthen ESG rules⁶. Policymakers in Thailand are driving changes that have made Thai companies among the region’s best for sustainability disclosure⁷.

Regional industry groups, such as the Asian Corporate Governance Association, provide platforms for stakeholder conversations on responsible investing via conferences and other events.

As a result, Asian companies have become more fluent in the language of ESG, demonstrating evidence of ESG considerations within business strategies and adopting more robust governance practices.

There is still room for improvement, of course. For instance, there is insufficient transparency around materiality assessment – identifying the ESG factors that affect business performance. There is confusion over disclosure of relevant ESG-related data. Lack of reliable data remains a problem.

As I write this, Singapore (where I am based) has relaxed some of the restrictions put in place to combat the spread of the coronavirus. A few countries within this region are also taking the first tentative steps towards normality.

Everyone has to think carefully about the sort of future they want. Even when the coronavirus is beaten, the world still faces significant challenges.

But this cannot mean that it’s ‘business as usual’. Everyone has to think carefully about the sort of future they want. Even when the coronavirus is beaten, the world still faces significant challenges.

For example, climate change poses an even greater long-term threat than Covid-19. Many people around the world would have seen, or experienced, the effects of rising temperatures. Societies are already counting the human and financial costs of higher sea levels and extreme weather events.

Social inequality – the growing gap between the world’s haves and have-nots – is another major challenge. Inequality has led to widespread anger that, in some cases, has unleashed social and political upheaval.

The world is also consuming resources at an unprecedented rate. People are depleting the world’s natural resources which cannot be easily replaced, if these resources can be replaced at all.

Investors everywhere have an important role to play in finding answers. We can help direct investments towards companies that are working on sustainable solutions, or engage with companies to help change bad corporate behaviour.

Recalcitrant firms that persist with carbon-heavy activities, that exploit their workers, or damage the environment, can be penalised by having their access to capital revoked.

Even if our work and personal lives won’t feel completely ‘normal’ for some time, we mustn’t allow this sense of suspended reality delay those important decisions that will have profound effects on the world.

Finding solutions will generate new investment opportunities. However, our generation also has a huge responsibility to all those that follow us. We cannot let them down.

¹World Economic Forum

²The New York Times, Foxconn Is Under Scrutiny for Worker Conditions. It’s Not the First Time, June 11 2018

³Reuters, Japan’s GPIF to raise ESG allocations, July 2017

⁴UN PRI, Annual Report 2019

⁵SGX, Sustainability reporting guide and rule, June 2016

⁶HKEX, Exchange Publishes ESG Guide Consultation Conclusions And Its ESG Disclosure Review Findings, Dec 18 2019

⁷CFA Institute, Market Integrity Insights, June 12 2019

Our Comment

This blog highlights Asia’s focus on ESG and ‘responsible investing’, and as we have noted before, the Coronavirus Pandemic has brought ESG matters to the forefront, not just in Asia, but globally.

It seems that this type of governance and investment will become (to use a phrase which now seems to be used daily) ‘the new normal’ with investing.

If you haven’t already, please see the below links which will take you to our 3-part blog series, ‘An Introduction to ESG’ which we posted throughout July for an introduction to what ESG is, how its measured and what we at People and Business are doing to make sure we are moving in the right direction with regards to sustainable investment themes.

We will continue to post regular ESG content, both our own original content and a selection of good quality input from various Fund Managers and investment houses.

Part 1 – https://www.pandbifa.co.uk/what-is-esg-an-introduction-part-1/
Part 2 – https://www.pandbifa.co.uk/what-is-esg-an-introduction-part-2/
Part 3 – https://www.pandbifa.co.uk/what-is-esg-an-introduction-part-3/

Andrew Lloyd

14/08/2020

Please see the below insight from Jupiter Asset Management’s Environment & Sustainability Fund Manager, Abbie Llewellyn-Waters, which we received earlier this week:

It has become clear that we are at a precipice of change. The status quo has been shattered and there is an opportunity to reconsider a new normal. This applies to capital markets as well and underpins the need to deliver a more regenerative approach to investing and how we rebuild our economies to become structurally more sustainable.

Despite the easing of lockdowns throughout the world, there remains speculation about whether the old demand trends for fast or luxury fashion, as well as eating, drinking and travel, will hold. For example, only 9% of people polled by YouGov in the UK wanted things to return to exactly how they were before the crisis.

From our perspective, we see a great opportunity in companies that are positioned to transition to a more regenerative form of capitalism – where companies that treat workers well, don’t exploit vulnerable communities in their supply chain, that take proactive action in a crisis, and that limit their impact on the environment, will be more attractive to investors.

We anticipate that asset prices will increasingly reflect this. In fact, Harvard published a white paper in May  that looked at parallels between US share prices and salient corporate social responses to Covid-19 (such as sick pay policies, appropriateness of government aid acceptance, dividend cuts), and concluded that there was a clear alpha correlation between the two.

Sustainable investment themes have accelerated

Sustainable themes have accelerated as a result of the Covid-19 crisis. Firstly, momentum for environmental policy has gathered pace, despite the fragile state of the global economy. Policymakers have been quick to draw the link between the coronavirus and the environment – like viruses, greenhouse gases care little for borders. The debate around carbon policy, and specifically carbon tax, has notably speeded up. The recent eye watering impairments within the oil sector brings further caution to the broader carbon capital at risk in the system.

There has also been important research quantifying pollution reduction, one of the few positives from this crisis. There has been a staggering drop in emissions through the crisis, at a level that is obviously unsustainable but has at least demonstrated the efficacy of urgent policy response. As a result of the global measures to combat Covid-19, the IEA (International Energy Agency) expects global CO2 emissions this year to decrease to levels of 10 years ago. This is significant and could support the case for a more agile economic culture that includes more working from home. It is effectively an ‘investment-free’ solution to help deliver the legal commitments of the Paris Agreement.

There also continues to be strong momentum in human capital management within the sustainable companies that we focus on, with an increasing correlation between fair treatment of workers and share price returns.

Finally, another interesting new theme is sustainable supply chain management. For years, efficiency has been the overriding aim in supply chains – “just enough, just in time”. Covid-19 has shifted the focus to security. While this has implications for working capital, it also offers new revenue opportunities. For example, infectious diseases have previously been mischaracterised as an issue mainly for developing markets. But R&D investment into non-Covid infectious diseases in developed markets is increasing, which has the potential to create entirely new revenue streams.

All in all, we expect the journey ahead to be much more complex than the Q2 market rally might suggest. As active long-term investors, our focus remains finding high quality companies that are leading the transition to a more sustainable world.

As we have highlighted over the past few months, sustainable investment themes and ESG are being talked about now in the press more and more by the regulator, fund managers and investors.

If you haven’t already caught up with these blogs, please see the below links which will take you to our 3-part blog series, ‘An Introduction to ESG’ which we posted over the past month for a basic introduction to what ESG is, how its measured and what we at People and Business are doing to make sure we are moving in the right direction with regards to sustainable investment themes.

Part 1 – https://www.pandbifa.co.uk/what-is-esg-an-introduction-part-1/
Part 2 – https://www.pandbifa.co.uk/what-is-esg-an-introduction-part-2/
Part 3 – https://www.pandbifa.co.uk/what-is-esg-an-introduction-part-3/

Andrew Lloyd

29/07/2020

What is ESG? – An Introduction – Part 3

This is the final instalment into our 3-part introduction to ESG.

Recap

In part 1, we explained what ESG is. In part 2, we went a little deeper and looked at the 10 ‘UN Global Compact Principles’ and the screening process for firms when selecting ESG compatible investments and companies.

Please check out the first 2 instalments if you haven’t already.

Part 1 – https://www.pandbifa.co.uk/what-is-esg-an-introduction-part-1/

Part 2 – https://www.pandbifa.co.uk/what-is-esg-an-introduction-part-2/

Here in part 3, the final instalment in our ‘What is ESG? – An Introduction’ blog series, we will look at what we at People and Business are doing as a firm to make sure that we are moving in the right direction by selecting firms with good ESG processes.

Due Diligence

We are required to write an annual Due Diligence report as a firm, to demonstrate our processes into making sure all the firms we use, whether it be a platform, product provider or investment solutions, are and remain suitable for our clients.

We measure this in a number of ways including service levels, performance and now, their ESG processes.

Whilst this is an annual requirement, we don’t view this as a once a year ‘tick box’ exercise. Our Due Diligence process is built into everything that we do. We continuously look at the companies we partner with, to ensure they provide the best possible service for our clients. The annual report is just a summary of our findings over the past year.

As our Due Diligence is something we build into our way of working on an ongoing basis and our ESG research is ongoing, this will be added as a permanent section of our annual Due Diligence report which we complete in the last quarter of each year. This month, we wrote an addendum to this report, fully focused on ESG.

Our ESG Focus

Last year, when the ESG investment focus really started getting some momentum, we made the decision to build this into our Due Diligence process and move towards an ESG investment approach where possible, and suitable for our clients.

We have asked our clients (both new clients and as part of our annual review process) for their thoughts on ‘ethical’ investing for years. Traditionally, ‘ethical’ investments haven’t produced the same level of returns as standard investments, but this has been changing. You no longer need to compromise on your investment returns to be a ‘good’ investor.

Just over 2 years ago, we became aware that Blackfinch Asset Management were due to launch a series of ESG approved Managed Portfolio funds. However, with any brand new investment, it’s not practical to go jumping in straight away. We need to see past performance over a real measurable period and how firm’s manage their investments and keep us, as the IFA, updated into the management of their Model Portfolio Services.

We were impressed with what we saw from Blackfinch and their ESG screening process. They use a combination of positive and negative screening, with much more of a focus on positive screening.

Over the past 2 years, we have been monitoring the progress of these portfolios and how they manage them. In September 2019, Steve actually went and visited Blackfinch’s Head Office, meeting key investment personnel and fund managers in Gloucester.

On the 2 year anniversary of the funds, we undertook analysis on the Blackfinch portfolios against their peers in the market which we currently use or have recommended in the past, and not only found they out performed, but had the strongest ESG processes.

Given our research, we have made the decision to introduce these Blackfinch Managed Portfolio Solutions into our investment proposition, where appropriate for our clients.

We are satisfied that they are ahead of the game on their ESG policies and feel that they will only continue to enhance these.

Currently, we are still under way with our ESG project and are looking into the ESG policies of all the investment firms/ solutions we have under our proposition and will continue this throughout the rest of this year, and then monitor this on an ongoing basis.

We are now building ESG into our client review process, highlighting ESG to our clients and getting their views.

Although ESG is still a relatively new concept within the industry, we have been looking at this for a while behind the scenes and will continue to embed this focus through everything we do at People and Business. As the market becomes more ‘ESG aware’ we expect there to be much more of a focus on ESG in this industry and we will monitor this to ensure that we keep up to speed.

Summary

Hopefully this blog series has given you a brief understanding of what ESG is, how this is measured and what we are doing as a firm to ensure we are moving towards more sustainable and socially responsibly investments.

This may be the final instalment into this ‘What is ESG? – An Introduction’ blog series, but this won’t be the last you will hear from us on the subject of ESG (far from it!).

As this blog notes, this is becoming a big theme in this industry, and we want to make sure we are and continue to be ahead of the curve, by selecting investments and firms that, we believe are ‘doing the right thing’.

The current Covid-19 Pandemic has further raised the profile of ESG as people contemplate potentially the next major crisis, global warming.

Along with our regular industry updates, we will continue to source good ESG content to keep you updated, and later this year, we will post an update into how we are getting along with our ESG processes.

As a business, we will also consider how we can move in the right direction too. We are about to invest in new lights in the office that use far less power.

Andrew Lloyd

20/07/2020

What is ESG? – An Introduction – Part 2

Last week, we posted part 1 of our 3-part introduction to ESG blog series. If you haven’t read this already, here’s the link: https://www.pandbifa.co.uk/what-is-esg-an-introduction-part-1/

In part 1, we explained what ESG is. Here, in part 2, we dig a little deeper

As we noted last week, a lot of the ESG processes within this industry are built upon the 10 ‘UN Global Compact Principles’.

The United Nations Global Compact is the world’s largest corporate sustainability initiative.

This is a call to companies to align strategies and operations with universal principles on human rights, labour, environment and anti-corruption, and take actions that advance societal goals.

Their mission:

‘At the UN Global Compact, we aim to mobilize a global movement of sustainable companies and stakeholders to create the world we want. That’s our vision.’

To make this happen, the UN Global Compact supports companies to:

1. Do business responsibly by aligning their strategies and operations with 10 Principles on human rights, labour, environment and anti-corruption; and
2. Take strategic actions to advance broader societal goals, such as the UN Sustainable Development Goals, with an emphasis on collaboration and innovation.

The 10 UN Global Compact Principles:

Human Rights

Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and

Principle 2: make sure that they are not complicit in human rights abuses.

Labour

Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;

Principle 4: the elimination of all forms of forced and compulsory labour;

Principle 5: the effective abolition of child labour; and

Principle 6: the elimination of discrimination in respect of employment and occupation.

Environment

Principle 7: Businesses should support a precautionary approach to environmental challenges;

Principle 8: undertake initiatives to promote greater environmental responsibility; and

Principle 9: encourage the development and diffusion of environmentally friendly technologies.

Anti-Corruption

Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.

The Screening Process

A key strategy of sustainable and responsible investing is incorporating environmental, social and corporate governance (ESG) criteria into investment analysis and portfolio construction across a range of asset classes.

The 10 UN Global Compact Principles are the foundation for investment firms who wish to bring ESG on board within their investments.

Firms use 2 methods of screening whether the companies they choose invest in are considered compatible with the 10 principles.

Positive Screening

Investment in sectors, companies or projects selected for positive ESG performance in comparison to industry peers.

This involves selecting firms that show examples of environmentally friendly and socially responsible business practices. This also includes avoiding companies that do not meet certain ESG performance thresholds.

Negative Screening

The exclusion from a fund or certain sectors or companies involved in activities deemed unacceptable or controversial (e.g. tobacco, arms, gambling etc).

This involves avoiding companies that create negative impacts considered incompatible with the UN Global Compact Principles.

Summary

Positive Screening is our preferred method when we are looking at how firms screen, as this shows a more active approach into looking into firms that are committed to making a difference, rather than just excluding the ones that don’t. However, most companies use a combination of both as in reality, as the UN Global Compact was only started in 2015, most investment firms/sectors still have a long way to go towards meeting their ESG goals, but it’s good to see that the industry is starting to adapt.

Check back for Part 3 of this blog series next week, in which we will look at what we at People and Business are doing as a firm to make sure that we are moving in the right direction by selecting firms with good ESG processes.

Andrew Lloyd

13/07/2020

Data Source: unglobalcompact.org, ussif.org and Blackfinch Asset Management’s ESG Policy July 2020

What is ESG? – An Introduction – Part 1

ESG. You may have seen this term in the financial press or in our blogs. We recently posted the following blog, which was an update from Jupiter on Sustainable Investment Themes. https://www.pandbifa.co.uk/jupiter-the-acceleration-of-sustainable-investment-themes/

In our closing comments of this blog we said that we were currently developing our own ESG processes and would post more content on this shortly, so here goes.

What does ESG stand for?

ESG stands for Environmental, Social and Governance

But what is it?

Investopedia definition for ESG is;

‘Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.’

ESG is more of a theme or a set of principles to follow rather than a single set principle.

Over the last few years, ESG has started being used more to describe how well a business is managed than to explain how sustainable its product or service is.

More recently, the mainstream press has been using ‘ESG’ as a catch-all term for investing with a ‘responsible’ or ‘ethical’ screen.

There are no official industry or regulatory standards for comparing these different approaches. However, with ESG now so important, some key definitions for certain factors have been accepted across the industry.

Breaking it down

(E)nvironmental

Investing with consideration for the environment. This includes working to reduce pollution and climate change, and to source sustainable raw materials using clean energy sources. The focus is on how a firm approaches environmental concerns, the ecological impact of its products and its carbon footprint.

(S)ocial

Investing with consideration for human rights, equality, diversity and data security. The focus is on how companies are incorporating these. It’s also about looking to see if each is actively investing/working towards a healthier and higher quality of life for staff and stakeholders.

(G)overnance

Investing with consideration for positive employment practices, business ethics and diversity. The focus is on how a company builds its management structure and works with all its different stakeholders. How does it approach investor and employee relations? Does the board work with transparency, honesty and integrity? Does this filter down to the rest of the company?

Summary

Renewed efforts to combat global warming, cutting emissions and reducing our carbon footprints has been highlighted by the Covid-19 Pandemic and this has further raised the profile of ESG.

‘Doing the right thing’, ‘socially responsible’ and ‘ethical investing’ has now hit the mainstream press and become one of our regulators, the FCA’s, focuses.

As a firm, we are committed to ensure that we review the ESG policies of all the companies we work with and recommend.

We started looking at ESG over a year ago and discuss this regularly in our weekly team meetings. We decided that we would make this one of our key projects this year to ensure we stay ahead of the game because we believe this is the right approach and we believe that the regulator will issue guidance for firms over the next few years to ensure ESG is incorporated within their propositions.

We can already say that we are starting to incorporate this within our firms service proposition and are committed to driving this forward even further.

This blog is aimed as a gentle introduction to ESG. A lot of the ESG processes within this industry are built upon the 10 ‘UN Global Compact Principles’.

Check back for Part 2 of this blog next week, in which we will look at these 10 principles and the screening process investment firms use to assess whether an investment is compatible with these principles or not.

Andrew Lloyd

06/07/2020

Data Source: Investopedia and Blackfinch Asset Management’s ESG Policy July 2020

Please see the below update from Legal and General posted yesterday (29/06/2020) regarding the current situation in the US.

Their Asset Allocation team discuss their thoughts on the presidential election, the market’s likely reaction to what could happen, and the ongoing spread of Covid-19 in some states.

The electoral collage

Momentum is clearly with Joe Biden at the moment. Donald Trump’s handling of the pandemic and protests after the death of George Floyd have eroded his approval rating and have led to him losing ground in poll after poll.

Biden has always held a lead in national polls, but that advantage in poll averages has jumped from 4% in May to 10% now. Arguably even more worrying from Trump’s perspective are polls in swing states also shifting significantly towards Biden, and losses of support among both older voters and even his most reliable base of ‘white, no college’ voters.

Nevertheless, don’t count Trump out (again)! Our baseline remains that it will be a tight race to the end. The heat Trump is taking from the dual crises could calm down and the economy may well look stronger by November. Trump’s strategy again seems to be all about turning out his base. If he can get all of the 35-40% of voters that back him no matter what to turn out to vote, then it will take much more excitement about Biden from the rest of the electorate than is evident so far for him to beat Trump.

It should go without saying that it’s still early in the race and a lot can and will happen. To mention only a few wild cards: What will the economy look like in late October? What if there is a second wave of the virus in the autumn? What if a significant number of people get sick after Trump rallies? What if states need lockdowns on election day? What if targeted lockdowns inadvertently favour Democrats or Republicans? What if COVID-19 influences turnout differently among age cohorts? What if Trump or Biden themselves become ill?

Blue wave versus Trump 2.0

We would not expect a big equity market reaction to any type of divided government. If Trump wins, it would be roughly the status quo; under Biden, it would likely prevent many of the most market-moving policies in either direction.

Yet a Biden victory of any flavour could still bring a few market-related policy changes. America’s China policy would largely remain unchanged in substance, but could become less volatile in style. A multilateral approach to China should make an all-out trade war with the EU less likely. Tech regulation should continue to tighten gradually but, unless personnel choices say otherwise, this has not been a policy area Biden about which has shown particular passion. Generally, expect the policy direction to be more social, more green and more redistributive.

On the other hand, a ‘Blue Wave’ in which Democrats control Washington would be the most market-moving outcome, in our view; this has become the single most likely outcome in betting markets. In short, from a market perspective, this would imply higher corporate taxes and more fiscal spending. Even if these two ultimately balance each other out, the market’s gut reaction seems likely to be negative.

And what would Trump 2.0 look like? The desire to be re-elected has arguably been a moderating force on Trump’s policy choices around issues like the trade war. But in a second term this factor disappears. So what does Trump want to achieve with a second term? Money? Power? Policy? Legacy? Dynasty? We don’t have a clear answer for this question yet. Either way, it is unlikely that Trump 2.0 will be calmer than Trump 1.0.

The only two things we are certain of are that the campaign will get very ugly, and that if Trump loses he will not go quietly into that good night.

Houston, we have a problem

The virus continues to spread at an alarming pace in southern states, with the one-week change approaching Italian peak levels in California, Texas and Florida – a risk James highlighted over a month ago. We don’t think this is due to greater testing (which would dilute the share of positive test results). State governors are becoming concerned, with some Texan cities suspending elective (non-urgent) surgeries to free up hospital capacity.

By and large, the re-opening of the local economy is being ‘paused’ rather than ‘reversed’. But new research from the University of Chicago argues that lockdowns only account for 7% of the loss of economic activity. Instead, it is fear that prevents people going out. The study calculated this by examining economic activity in border towns located between different regulatory regimes.

Apple mobility data also suggest Texans are already cutting back on activity, and there appears to be an inflection point with activity levelling off in the median US state.

From a market perspective, there has been a tug-of-war between economic data continuing to paint a V-shaped recovery picture and deteriorating virus newsflow. We would argue that equities are pricing something at the optimistic end of our Scenario 1, implying there will be little market tolerance of signs the virus is significantly slowing down the economic recovery. But at the same time, the starting point for sentiment is already slightly bearish, so it would not take much of a correction to turn our sentiment signals much greener.

As you can see from this update (and from the news!), the situation in the US looks problematic, with no resolution in sight. The run up to a presidential election is always volatile and this one is likely to no different (if not worse due to the Covid-19 situation).

It will be an interesting few months for the US in the run up to November.

Keep an eye out for further updates here on the US and the impact of their Covid-19 and election struggles, and of course general market updates and other content which we continue to post regularly.

Andrew Lloyd

30/06/2020

Please see the below article posted by Jupiter earlier this week from their Global Sustainable Equities Fund Manager, Abbie Llewellyn-Waters:

‘Several sustainable themes have continued to accelerate as a result of the Covid-19 crisis, said Abbie Llewellyn-Waters, Fund Manager, Global Sustainable Equities.

Firstly, momentum for environmental policy has gathered pace, despite the fragile state of the global economy. Policymakers have been quick to draw the link between the coronavirus and the environment – like viruses, greenhouse gases care little for borders. The debate around carbon policy, and specifically carbon tax, has notably accelerated. Abbie remarked on the recent write-downs and substantial price disparities within the oil sector as a further pressure point for tightening carbon policy.

There has also been important research quantifying pollution reduction, one of the few positives from this crisis, said Abbie. As a result of the global measures to combat Covid-19, the IEA expects global CO2 emissions this year to decrease to levels of 10 years ago. This is significant and could support the case for a more agile economic culture that includes more working from home. It is effectively an ‘investment-free’ solution to help deliver the legal commitments of the Paris Agreement.

There also continues to be strong momentum in human capital management within the sustainable companies that Abbie and the team focus on, with an increasing correlation between low staff turnover and high recurring revenue models.

Finally, another interesting new theme is the increasing attention on sustainable supply chain management. For years, efficiency has been the overriding aim in supply chains – “just enough, just in time”. Covid-19 has shifted the focus to security. While this has implications for working capital, it also offers new revenue opportunities. For example, infectious diseases have previously been mischaracterised as an issue mainly for developing markets. But a company Abbie recently spoke with highlighted that R&D investment into non-Covid infectious diseases in developed markets has already increased, which has the potential to create entirely new revenue streams not previously captured by analysts. All in all, Abbie expects the journey ahead to be much more complex than the markets rally suggests.’

Socially responsible investing has now gone mainstream and is a key focus for investors with a ‘put your money where your values are’ approach becoming more and more common.

ESG (Environmental, social and governance), which is a ‘set of standards for a company’s operations that socially conscious investors use to screen potential investments’ is now under the spotlight in this industry.

Keep your eye out for more blog content on this over the next few months as we at People and Business, develop our own ESG processes and scrutinise these criteria within the companies we use for our clients.

Andrew Lloyd

26/06/2020

Please see the below weekly market commentary update from Brooks Macdonald received yesterday (1^st June 2020):

All eyes on the European Central Bank

• Donald Trump’s press conference relieved markets by steering clear of a re-escalation of tariffs
• The European Central Bank (ECB) will consider expanding their quantitative easing programme this week
• However, this may reduce the perceived urgency of an EU recovery fund

Markets continued their strong run last week as economies reopen, stimulus is on the agenda and economic data picks up from its COVID-19 lows.

Donald Trump’s press conference relieved markets by steering clear of a re-escalation of tariff

On Friday, Donald Trump held a press conference to announce that Hong Kong would lose its special trading rights with the US. He added that Chinese and Hong Kong officials would be subject to sanctions in relation to their actions in eroding Hong Kong’s autonomy. Nonetheless, markets rallied. The view is very much that Donald Trump held back compared to what actions he could have taken with no re-escalation in tariffs or talk of withdrawing from the Phase One deal. Investors have taken this is a hopeful indication that the US President wishes to avoid the financial and economic ramifications of a step up in trade tensions.

The European Central Bank (ECB) will consider expanding their quantitative easing programme this week

The main event this week is likely to be the ECB meeting. Markets will be watching this closely to see whether there is talk of extending the pandemic quantitative easing (QE) programme, or any reference to the German Constitutional Court decision. Given the lack of agreement around an EU recovery fund, ECB officials will be pondering whether they need to step in to keep peripheral bond spreads under control. Italian spreads rallied when the Merkel/Macron plan was unveiled but given that agreement on the EU fiscal package seems unlikely to arrive imminently the central bank will be cautious of a retrenchment.

However, this may reduce the perceived urgency of an EU recovery fund

There has been a significant debate about the efficacy of QE in the post financial crisis world. Critics say that the depression of funding costs tends to raise asset prices more than it helps the real economy. While the markets would undoubtedly appreciate the pandemic programme being expanded in size and duration, the read across to a boost in economic growth is not clear. The EU recovery fund talks continue in the background, but if there is a perception that the ECB has already done ‘enough’ by expanding their purchase programme, talks could falter. Herein lies the risk to the broader economic stability of Europe, a fiscal response could fail to materialise and the ECB covers the cracks by suppressing bond yields. This will simply ensure the divide within Europe just grows below the surface and will pose an even greater risk during the next crisis.

Another useful commentary into the market activity last week. The markets have had a rally over the last week and into this week. We do expect the volatility to continue and further drops could be around the corner as global economies continue to recover and fight against Covid-19. These commentaries from a range of fund managers help add context to the daily market fluctuations.

Andrew Lloyd

02/06/2020