That is, companies are having to change their business models to adapt to the new normal, and in most cases, are using the downturn as an opportunity to address inefficiencies across corporate functions when the economy begins to recover. As investors sift through data regarding the impact of the global economic shutdown, corporate updates are likely to include strategies for survival in the near term and plans for positioning themselves in the future, including permanent changes in business practices.
Socially responsible investing (SRI) originally came onto the scene with a goal of using ethical and moral criteria to screen “bad actors” out of client portfolios. From SRI evolved the notion that environmental, social and governance factors (ESG) could have financial relevance. The thesis is that better corporate behavior enables companies to position themselves to face long-term opportunities and threats instead of a myopic focus on near-term profits. By and large, the “E”, or environmental pillar of this discipline gets the most airtime. Nonetheless, the “S” and “G” pillars of social and governance are taking a critical role as we navigate the current pandemic.
As we ponder how sustainability in corporate behavior will evolve during and after the COVID-19 pandemic, several areas stand out, including:
1. Corporate travel and events
Stay-at-home mandates have shut off all corporate travel, events and entertainment. Yet, employees and their customers still manage to stay connected through programs like Microsoft Teams, WebEx and of course, Zoom. Many companies are finding that these tools are effective in carrying out the tasks typically assigned to in-person meetings or larger events. Of course, in many cases, face-to-face meetings, events and travel are invaluable. But at the very least, the required shutdown is forcing companies to reconsider the cost-benefit of excessive travel and events that can be replicated at a lower cost in terms of time, money and in the use of fossil fuels. It is a reasonable to expect that corporate travel and events will not revert to the old norms any time soon.
2. Stakeholders beyond shareholders
The primary objective for publicly traded companies is to provide value for its shareholders. However, the nature of the current downturn is requiring companies to consider stakeholders aside from the owners of the company, most importantly their employees. Instead of laying off as many employees as possible in order to protect near-term profits, we are witnessing many companies taking alternative actions, such as eliminating CEO and other C-suite pay. Companies are also using government-assisted furloughs and committing to pay for health benefits for employees who no longer have working hours. In addition, several firms, including Ferguson Wellman, have all but guaranteed that every employee will keep their job. Again, the nature of this crisis has changed the playbook for typical corporate behavior in a recession.
3. Collapse in oil prices
One of the major side effects of the pandemic has been a dramatic decline in human and industrial mobility. This has caused demand for oil, gasoline and other fossil fuels to collapse. At the same time, “OPEC+” members Russia and Saudi Arabia failed in their negotiations to curtail the supply of oil. The combination of these factors has caused a drop in oil prices to levels not seen in 20 years. The structural movement toward renewables is in large part dependent on the economics. In other words, the incentive to switch to renewables or forego the use of fossil fuels is much stronger when the cost of gasoline is higher. This crisis has eliminated that incentive in some industries, as substitution is no longer a wise economic decision.
4. Mortality rates and pollution
While there is still a great deal of uncertainty, early studies are beginning to show that communities with high levels of pollution display higher COVID-19 mortality rates. While highly speculative, this discovery could make corporations and voting constituencies more open to behavior, cultural norms and even regulations enacted to reduce the levels of pollution.
5. Flexible business models
Large corporations are only known to operate in one product type, service offering or customer set are shifting their capabilities to benefit society in these challenging times. Companies such as General Motors have rapidly shifted automotive production facilities to produce key components for ventilators. Nike has shifted some of their facilities that make footwear to produce face shields that are critical for the healthcare workers on the front lines. And of course, healthcare companies, such as Abbott Labs, are rapidly scaling-up production for diagnostics to test antibodies in order to determine COVID immunity. In many cases, there is a natural overlap between acting for the benefit of society and adding to profitability, but this crisis has displayed the tremendous ability of large corporations to do their part.
As always, the past can provide perspective for things to come. After 9/11, we did go back to feeling comfortable with flying, but we continue to take off our shoes when entering airport security. This simple analogy reinforces that as investors and consumers, we most certainly will one day go back to normal, but some practices from recent months will endure. As we evolve into our new normal … we will also find new opportunities to analyze and invest in companies.
Peter Jones, CFA, is vice president of equity research and analysis for Ferguson Wellman Capital Management and lead portfolio manager for our Global Sustainable Investing (GSI) strategy. Launched in 2018 as an ESG solution for individuals and nonprofits that overlays MSCI data on our investment principles, GSI has become the fastest growing investment strategy in the history of our firm.