Covid-19

Why stakeholder management could be key to coping in the COVID era

Matt Evans, Portfolio Manager of Ninety One UK Sustainable Equity, shares an update on how the companies he invests in are managing through the pandemic – including the lessons he draws from the fact that some of them are now paying back furlough money.

Sep 24, 2020

4 minutes

Matt Evans, Portfolio Manager of Ninety One UK Sustainable Equity, shares an update on how the companies he invests in are managing through the pandemic – including the lessons he draws from the fact that some of them are now paying back furlough money.
The fast view
  • In the COVID era, managing relationships with all stakeholders is crucial for UK companies.
  • With lives and livelihoods at stake, businesses must retain the confidence of customers, employees, supply-chain partners, shareholders and communities.
  • The fact that some companies are now repaying furlough money suggests that a section of the business community understands this well.
  • We think this focus on ‘internal sustainability’ will give them a better chance of coming through a potentially difficult time ahead.
How are the companies in the Ninety One UK Sustainable Equity portfolio handling the COVID era?

Keeping staff, customers and business partners safe is a huge challenge in itself. At the same time, companies are having to sustain business in a downturn and with supply chains, distribution networks and markets at continual risk of disruption. I think our companies have coped incredibly well, and thankfully that has been reflected in the resilience of the UK Sustainable Equity portfolio.

What have you learned about the portfolio since the coronavirus struck?

Ninety One UK Sustainable Equity assesses companies on three pillars of sustainability:

  • Financial: They should have sustainable investment returns, based on Ninety One’s Quality approach
  • Internal: We look for sustainably run, high-quality businesses aligned with the long-term interests of key stakeholders
  • Impact: Our companies should offer products and services that directly contribute to a more sustainable future

The stresses that the pandemic places on companies have given us deeper insights into the first two of those in particular. In terms of financial stability, this has been a big test of companies’ business models, balance sheets and earnings quality. But perhaps most revealing has been what we’ve learned about ‘internal sustainability’ – i.e., whether companies are well run, and in a way that addresses the requirements of all key stakeholders.

Why does internal sustainability matter?

For too long, businesses have tended to operate in isolation, focusing on generating returns and looking after their own interests. Fortunately, this is changing. More companies are recognising that commerce, society and the environment are interdependent.

We think that businesses that understand this are better placed to thrive in any conditions. But in the COVID era, with so many lives and livelihoods at stake, it is a matter of survival for companies to retain the confidence of customers, employees, supply-chain partners, shareholders and communities. You simply can’t function unless you do.

What have you been doing to assess companies on this front?

Engagement, by which we mean a purposeful conversation with a company on issues that matter to the investment case, is always key for us. But with events moving so fast, we’ve stepped up the dialogue. Over time we have built strong relationships with companies, which allows for an open two-way conversation. This not only helps us stay in close touch with developments, but also gives us the chance to provide a shareholder perspective that we hope is useful for companies. This is important because they are having to deal with issues that they’ve never faced before.

Can you give an example?

The furlough scheme, under which the British taxpayer is part-funding salaries with the aim of preserving jobs through the COVID-19 lockdown, is new for everyone. Since the UK government implemented the programme, we have been engaging with our companies to discuss it.

Furloughing staff is a good way for companies to look after employees, while also protecting their businesses. Alongside the obvious ethical reasons for taking care of workers in these difficult times, we think companies with loyal, motivated and well-trained workforces are more likely to emerge strongly from this crisis. But it’s important that only those companies that need the scheme should make use of it.

Why?

First, unnecessarily accepting furlough payments creates a reputational risk, could sour relationships with customers and other stakeholders, and raises questions over a management team’s motivations and priorities. Second, we are mindful that businesses that receive public funds may not be in a position to justify the payment of dividends. On behalf of our investors, we are obviously keen for companies whose earnings warrant paying dividends to continue doing so!

What did you discuss with companies?

Among other things, we’ve had open discussions about whether they really need the furlough scheme, particularly with companies with stronger balance sheets. Some decided to use it, others didn’t.

In the early days of the virus outbreak, no one knew what we were facing and a safety-first approach was understandable. Now, several of our portfolio companies are paying back to the UK government all of the furlough money their employees received. Not least thanks to the dedication of their staff, they have found that business has picked up much faster than expected.

What lesson do you draw from this?

I take it as a sign that these companies are high performers from an internal sustainability perspective, and that they exemplify what we’re looking for in the UK Sustainable Equity portfolio in this regard. I think that will give them a better chance of coming through what could well be a difficult time in the months ahead – and of bouncing back when something like normality resumes.

 

Specific risks

Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Geographic / Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that the resulting value may decrease whilst portfolios more broadly invested might grow.

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. Past performance is not a reliable indicator of future results.

Authored by

Matt Evans

Portfolio Manager, Ninety One UK Sustainable Equity

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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