The demand of investors for companies to measure, disclose and explain their ESG credentials has come as a surprise to many corporate leaders around the globe. In the Middle East, for example, the regional legacy of strong CSR programs provided, many believed, precisely the kind of soft, non-core activity that would satisfy ESG investor demands.
Instead, many regional firms have been surprised to find themselves behind the curve, toward the back of the queue when it comes to capital-raising in international markets, because of their low-grade or non-existent ESG disclosures.
Unfortunately, while some regional issuers have responded quickly and begun to measure and disclose those metrics that are important to ESG investors, the large majority have ignored the trend. Now researchers at HSBC have come up with fascinating evidence of why ESG should matter to all companies that are interested in delivering shareholder returns and, critically, evidence of the defensive qualities a strong ESG regime can deliver.
The bank’s analysts measured the performance of shares in 613 public companies around the world valued at more than $500 mn where climate solutions generate at least 10 percent of revenues. They also looked at the 140 stocks with highest ESG scores and values above the global average. The study ran from December 10, 2019 until March23, 2020, and from February 24, 2020 – when high volatility began – to March 23, 2020.
This latter period has seen the greatest value destruction of equities since the financial crisis, unprecedented volatility in all asset classes, and huge government and central bank intervention in the capital markets.
The climate-focused stocks outperformed others by 7.6 percent from December and by 3 percent from February. The high ESG-scoring shares beat others by about 7 percent for both periods.
The outperformance of climate-focused businesses is perhaps understandable: the oil markets are undergoing the largest price war and oversupply situation in generations, and oil demand has dropped dramatically as a side-effect of the global coronavirus lockdown. The outperformance of the high ESG-scoring companies is harder to explain, but with a little deduction the reasons behind outperformance are obvious.
Good governance is a central element of corporate resilience. When firms have a tried and tested command and decision-making structure, when risk management is at the center of that structure and when adequate independent scrutiny and testing is the norm – from the board down – companies are better able to withstand shocks, take the right decisions and execute their strategies amid mayhem.
The place of the company in society is fundamentally linked to its reputation and standing with its stakeholders: customers, employees, communities, policymakers, regulators and investors, among many others. Firms that neglect their role in society are likely to find little sympathy in times of crisis – when they need it most.
In the environmental theatre, coronavirus has removed cars from the road and planes from the skies, and shut down carbon-emitting factories. Many commentators are openly debating how the world might harness and preserve the climate bonus coronavirus has delivered. Companies that are already taking material steps to lower their carbon footprint are likely to be able to adjust best to a new world that insists on lower emissions and waste.
HSBC is in no doubt about the significance of the findings. ‘Our core ESG conviction is that issuers succeed long term – and hence deliver shareholder returns – when they create value for all stakeholders: employees, customers, suppliers, the environment and wider society. When crises like Covid-19 manifest, particularly with social and environmental causes and implications, investors can see ESG as a defensive characteristic,’ the report concludes.
When the coronavirus crisis blows over, all companies in the Middle East (and elsewhere) will need to start taking ESG more seriously. Paying lip service to this core investor demand will no longer suffice.
Oliver Schutzmann is CEO of Iridium Advisors and a regular contributor to IR Magazine