24 Sept 2020
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.
Ninety One UK Sustainable Equity assesses companies on three pillars of sustainability:
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.
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.
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.
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.
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!
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.
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.
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.
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