Making the most amount of money possible isn’t the be-all and end-all it once was for investors, according to Fidelity International head of equities Ned Salter.
While the coronavirus crisis won’t end investors’ focus on earnings, this is unlikely to remain the only thing that is concentrated on, said Salter. Rather, he expects investors to pay more attention to how earnings are achieved while companies meet their social responsibilities.
“The bottom line isn’t the top priority that it once was,” Salter said.
“In decades past, corporate earnings calls focused on quarterly earnings per share, performance relative to past quarters and future expectations. These numbers express the priorities of shareholder capitalism and its measures of corporate success.”
And while the drive for high returns aren’t likely to change, Salter said that the position of CEOs has shifted since the pandemic outbreak.
“They are striving to communicate different numbers, which represent their efforts to protect and support employees, customers, suppliers and communities,” he said.
“The Covid-19 crisis has accelerated the adoption of sustainable capitalism, in particular on matters related to the social good which may ultimately prove to be ground-breaking.
“There is growing recognition in the corporate world that its existence as a system for allocating resources is based on an implicit licence granted by society, one that can only be strengthened by seeking win-win, rather than win-lose, outcomes.”
This idea of investing in more ‘sustainable’ companies has existed in markets for decades, In recent years has found a greater voice in the rallying around ESG (environmental, social and governance) investing.
And this has only increased during the pandemic, according to Salter, as evidenced in Fidelity’s monthly analyst survey where more than half of the firm’s 140 analysts “indicated an increase in company plans to step up focus on workers, consumers and the wider community as a result of the pandemic.
One recent case study of this ‘sustainable capitalism’ mentality has been fast-fashion clothing giant Boohoo, which is in the middle of claims of labour malpractice in its supply chain. The claims centre around a Leicester factory where workers were allegedly paid as little as £3.50 an hour. Boohoo denies all claims.
Facing an investigation, the consequences of this have been widespread, with a ‘Boycott Boohoo’ campaign hitting the firm and it being removed from global fashion websites.
Major investment house Standard Life Aberdeen (SLA) dropped its stake in the company as a result.
Boohoo’s share price plummeted 42 per cent in three days when the allegations came to light; it is now down 22.79 per cent year-to-date.
Boohoo’s returns YTD
Source: FE Analytics
Eleanor Price, fixed income investment analyst at Kames Capital, said: “[It] has shone another spotlight onto the importance of responsible investing and the resulting fallout if companies are found deficient on the ESG front.
“In a corporate world with global supply chains resulting in a proliferation of subcontracting and foreign jurisdictions, there will always be Boohoo scandals to be uncovered, and not just in the retail sector.
“However, the market response to these issues and the public demand for ever more scrutiny means that corporations worldwide should be paying more attention to these issues in order to continue raising ESG standards across the board.”
The idea of good governance equating to better business practice and more profits is a common-sensical idea, one which has been compounded immensely in the coronavirus crisis.
Companies that have supported their workers and supply lines or helped socially have been heralded by consumers and investors, while those that made redundancies and pay cuts have been chided by the same crowds.
But those with better ESG practices have also performed better in the crisis, according to Salter.
Research carried out by Fidelity into a correlation between ESG ratings and volatility across more than 2,600 companies found that looking companies with a higher ESG rating performed better during the February/March 2020 sell-off.
Looking ahead, Salter concluded: “It is likely that the extreme and tragic experience of the Covid-19 pandemic has resulted in a permanent change to the mindset and attitudes toward sustainable capitalism. If the door to combining corporate purpose and the common good was open a crack before the crisis, the events of the last five months have thrown it wide open.”