The current global pandemic will push the ‘S’ and ‘G’ components of environmental, social and governance (ESG) investing higher up the engagement agenda, a new T Rowe Price report suggests.
In the US-based manager’s second annual ESG report, Donna Anderson, head of corporate governance for the US$1 trillion plus T Rowe Price, says while the long-term economic fallout from COVID-19 was difficult to forecast “what is clear at this stage is that the culture and values of corporate issuers around the world are being tested like never before.”
“Companies’ previous statements about their management of human capital, health and safety, community involvement, and the overall importance of stakeholders to their businesses will be assessed in a whole new context,” Anderson says. “We predict that these topics will become central to the engagement that takes place between investors and corporations.”
The T Rowe Price short-list of post-coronavirus ESG corporate talking points includes:
- compensation (for executives and employees);
- the effects of the crisis on stakeholders;
- the effectiveness of “virtual” shareholder meetings;
- government relations and lobbying;
- share buybacks;
- operational resilience; and,
- postcrisis regulatory reform.
At a broader level, the study cites income inequality as “one of the defining socioeconomic issues of our time” that investors will have to grapple with over coming years.
The report says while the rich-poor divide varies across jurisdictions, income inequality has been widening overall. (NZ has the 10th highest income inequality rating in the developed world, according to OECD figures.)
“If this continues, it will likely lead to increased indebtedness, steeper yield curves, inflation, higher corporate taxes, and tighter trade restrictions,” the T Rowe Price study says. “It will also create sectoral opportunities as consumption patterns change and the demand for cheaper goods and services grows.”
But the report also says investors must closely evaluate the potential long-term effects of climate change across portfolios despite the fact global warming has yet to materially damage short-term corporate earnings.
“We believe that almost the entire investment universe will feel some impacts of climate change—through revenues, sourcing, or their cost structure—and companies that can create economic value with a low or zero carbon footprint will be better positioned than their peers in a world of rising environmental regulation,” the T Rowe Price paper says.
Primarily known as an active growth equities manager, T Rowe Price has a number of institutional mandates in NZ as well as retail representation via the almost $110 million Harbour Asset Management global equities fund.
Over the last couple of years in particular, T Rowe Price has ramped up its ESG resources, developing a specialist in-house research team and the proprietary analytical tool dubbed the Responsible Investing Indicator Model (RIIM).
Maria Drew, T Rowe Price head of responsible investing research, says in the report that the group expanded RIIM coverage from equities to fixed income assets last year while also providing portfolio managers comprehensive access to the ESG analytical tools.
“This interface allows [T Rowe Price portfolio managers] to access the RIIM profile for a universe of approximately 14,000 securities and dig into each of the underlying data points, so they can see what is driving a company’s score on supply chain, employee treatment, business ethics, or other factors,” Drew says.
Furthermore, the manager plans to “launch more ESG-oriented products in the coming years”, the paper says, in line with trends identified in a Morningstar study released last week.
According to the Morningstar ‘Global Sustainable Fund Flows’ report, the ESG fund sector has a “steady increase” in assets under management and product launches over the last three years. The Morningstar database covers almost 3,300 ‘sustainable’ funds, defined as those “that use ESG criteria as a key part of their security-selection process and/or indicate that they pursue a sustainability-related theme and/or seek a measurable positive impact alongside financial return”.
Morningstar’s unwieldy definition reflects the growing difficulty of categorising ESG products as investment managers, or marketing departments, flood the sector with new and rebranded funds.
“Product development in the first quarter of 2020 stood strong, despite the lower number of sustainable funds brought to market relative to the previous quarter. The 102 new offerings in first-quarter 2020 compares positively with the 85 fund launches in first-quarter 2019,” Morningstar says.
“Meanwhile, asset managers continued to convert existing funds to sustainable investment offerings and incorporate new specific ESG criteria into their investment objectives. In the first quarter of 2020, 24 funds rebranded to make their new or not-so-new sustainable mandates more visible to the public.”
Following a burst of product issuance in 2018 through to the middle of last year, the Australasian fund market, however, has been through an ESG dry patch of late “with no sustainable fund launches in first-quarter 2020”.
“With only 75 sustainable funds domiciled in Australia, that market remains quite concentrated. The top 10 funds account for 54% of total assets in the sustainable fund universe,” the Morningstar analysis says. “… There are only 11 sustainable funds domiciled in New Zealand, the largest being the AMP Capital Ethical Leaders Global Shares fund with USD 39 million in assets.”
During the March quarter, the Australasian ESG fund sector saw net inflows of about US$320 million, the report says, with products from Russell Investments and Australian Ethical topping the charts.
In total, the Australasian sustainable fund sector managed about US$8 billion at the end of March, down from over $10 billion at the end of 2019 as volatility hit early in 2020, according to Morningstar.
“The market share of passive sustainable funds has slightly decreased to 16% from 17.3% at the end of 2019,” the study says. “It remains higher than 12% from three years ago.”