Uncharted territory

During times of crisis, the way companies respond can have a major impact on society as a whole, not just their balance sheets. Rathbone Global Sustainability Fund manager David Harrison discusses why he believes companies with strong  sustainability principles have a greater potential to weather the pandemic.

28 April 2020

This week as I stood at my back door with my morning coffee, I noticed something remarkable. The sky was the brightest azure blue I’d seen in years, the songbirds were louder than ever and there wasn’t the slightest rumble of a jet engine in the distance.

In normal times, we’d call it paradise. But this is another side of paradise – one created by a necessary pause in human activity rather than a profound transformation.

To say that our world has been turned upside down may seem like hyperbole, but the COVID-19 pandemic has plunged us into a global crisis. Businesses are closed, aviation is mostly grounded, and economies around the world have been wound down.

Inevitably, there was a stock market sell off.  Both central banks and governments alike have swooped in with stimulus measures dwarfing anything seen during the 2008 global financial crisis.

It's about more than being environmentally friendly

With the situation evolving daily, we’re clearly in uncharted territory. As sustainable investors, we’re not immune to falling stock markets. However, we feel a degree of comfort about the companies in our portfolio precisely because of our sustainability screening process.

While much of the focus in ESG investing has been on the E in recent years, during this coronavirus crisis, we are seeing the true importance of the S and the G – social and governance factors – coming to the fore.

One thing I’ve noticed is how many companies are proving their mettle and adapting to the situation, as well as how they are managing people and dealing with adversity.

The philosophy behind the Rathbone Global Sustainability Fund is to create long-term value for investors, society and the environment by investing in companies with strong ESG principles. When we invest, we select companies for several qualities that stand out: we want them to be cash generative, have no financial stress and be long-term thinkers.

We also want companies to have quality management teams, good corporate governance and a strong culture that benefits employees and society. This is because, in my view, companies that have a positive and sustainable approach stand a greater chance of survival than those with short-term views.

Positioning for uncertainty

Throughout the pandemic and this period of volatility, we have analysed every aspect of our portfolio to double-check that we are comfortable with the stocks we own. We cannot escape the fact that every company will be affected one way or another by the shutdown: earnings and profits will be impacted. But I feel the portfolio is in a strong position for the current environment.

The situation we are in is not simply unprecedented, it is extraordinary. What we are likely to face is not a recession in the traditional sense, so a focus on quality is crucial. Companies that have strong management team and embody solid social and governance ideals are at the core of sustainable investing and, for me, are more attractive over the long term.

The path for recovery once the pandemic draws to a close and the economy begins to rebuild is uncertain. We can’t promise that sustainability investing will always fare better than other strategies, but firmly believe our focus on quality places us in a stronger position.

When times get tough, companies are just as responsible for the way they treat their employees and society as a whole as they are for the financial performance. Those that ignore their social and governance responsibilities during these uncertain times may benefit in the short term, but at what long-term cost?