With the airwaves jammed full of Covid-19 related news, little attention is being paid to ESG and what the crisis means for it.
Environment
Clearly the environment will have received a huge boost during this lockdown, purely from the reduction in vehicles on the road, air travel and consequential falls in emissions and pollution. We have been emphasising for some time that oil is not the future and have not invested in fossil fuels for at least 5 years, but whoever would have dreamed that oil prices would move into negative territory due to the global glut caused by the lockdown and lack of storage capacity? Could the crisis spur further investment into alternative ways of powering our economies? Has it made any immediate difference to corporate environmental principles and practice? It is too early to tell and the focus is probably not on this right now. Longer term we believe the move to remote working and work patterns established during this lockdown period are unlikely to disappear. Companies will come to realise, as many individual white-collar workers have realised, that workforces can be just as efficient working from home ‘offices’. Less time and resources are wasted, and rental costs can be reduced. The reduction in carbon footprint from the daily commute and the improvement in the work/life balance are added bonuses for employees. Companies that facilitate remote working, from the tech giants like Microsoft with its Teams to more specialist companies, like German quoted TeamViewer, will thrive in this environment.
An area where the lockdown may turn out to be environmentally devastating is in the increased use of disinfectant wipes following advice to regularly wipe down all surfaces and touchpoints as well as hands. Most of these wipes are non-biodegradable and the packaging they come in is mostly non-recyclable. It is already reported that the water companies in the UK spend £100m annually clearing blockages in the sewerage network caused by mountains of wipes and a new riverbed has been formed in the Thames and other rivers around the world from them too. The wipes contain plastic fibres for strength and plastic particles slowly leach out polluting land, rivers and oceans, entering wildlife and eventually the human food chain. It is estimated that one large manufacturer of wipes produces enough in a single year to stretch to the moon and back, 24 times! We asked a couple of European paper and packaging companies on our watchlist for a comment about this, but unsurprisingly have received none. It is an environmental hot potato we will hear more about in years to come. We suspect also that the Covid-19 crisis will result in more plastic packaging around food, despite widespread desire to reduce it.
Social
Just as the financial crisis eroded trust in the ability of so called ‘experts’ to avoid catastrophe, so this health crisis has diminished confidence that the ‘experts’ in the field of public health really know what they are doing. As we suspected would happen, it is the corporate sector that is stepping into the breach. We have been heartened to see reports of European companies demonstrating a high level of social responsibility. A number of companies we either hold, have held or follow, have retooled factories to produce personal protection equipment (PPE).
Kering has launched several initiatives including importing 3 million masks and donating to four major hospitals in Italy as well as to the Hubei Red Cross. Its fashion house Gucci is preparing to manufacture 1.1 million surgical masks and 55,000 hospital gowns in Italy, subject to the necessary authorizations.
Burberry is using its global supply chain to fast-track delivery of 100,000 surgical masks for the NHS. They are also repurposing their coat factories to produce non-surgical masks and gowns, subject to approvals from the Medicines and Healthcare Products Agency. They have donated to charities fighting food poverty in the UK. This includes setting up community produce hubs, delivering food to young people who rely on free school meals and increasing pre-packed food parcels to help food banks cope with demand while maintaining social distancing policies. They have also donated funding for vaccine trials at the University of Oxford, which has one of the better track records in emergency vaccine development, with past success in fighting Ebola and MERS.
LVMH’s subsidiaries, Louis Vuitton, Christian Dior Couture, Loewe, Celine, Kenzo and Fred have all begun making or supporting production or distribution of non-surgical face masks as well as hospital gowns. Jewellery house Fred has joined the “Visières de l’Espoir” initiative, which is making full face shields for hospital medical staff. The first batch has been delivered to Paris public hospitals, with many more to follow in the weeks ahead. The group has also been producing hydroalcoholic gel at its Christian Dior, Guerlain and Givenchy factories, which it has donated free of charge to the French health authorities.
Inditex, the world’s largest textile company has brought more than 35 million units of medical equipment to Spain since the crisis began, according to El Mundo. Pictures of the green medical attire with Zara labels surfaced on social media recently as a Galician hospital received 4,000 gowns.
L’Oreal is taking initiatives across the business including: 1) hand sanitizer production to be donated across hospitals, health centres, pharmacies, care homes and food distribution customers; 2) freezing payments to SMEs in their distribution network until businesses resume; 3) shortening payment times to suppliers most exposed to the crisis; and 4) donating EUR1m to partner non-profit organizations.
Beiersdorf established a EUR50m international funding programme to support communities fighting against COVID-19 particularly in regions with weak public health systems and areas that are hot zones for the disease. They have donated 1,000,000 litres of disinfectant and have activated factories on 5 continents to produce disinfectants. They have also donated at least 5,000,000 NIVEA skin and hand-care products to medical personnel around the world whose skin is currently under stress.
Governance
In terms of governance the delay of AGMs, the withdrawal of guidance and the widescale cancellation of dividends is a clear negative for investors. We fail to understand why physical lockdown should mean a lockdown on the flow of information. It was explained to us, however, by one UK company, that the FCA had instructed audit firms not to sign off on companies with an unqualified opinion unless they could see the company as a going concern over the next 12 months, even with no business. This may be why there have been so many placings of late, which of course dilutes shareholders. Companies are required to produce their annual accounts within 6 months of the financial year end, so they are between a rock and hard place if the auditors refuse to sign off on their accounts. Delays make it hard for investment managers to do the necessary due diligence and this is ultimately bad for shareholders.
We have found that good governance and transparency of reporting often goes hand in hand with good social responsibility. Unite Group, the provider of student accommodation, contacted all its students to see if they wished to leave their accommodation for the summer semester and the company has announced that it now expects to forego rent on 43,000 to 46,000 beds, 62-65% of all managed beds. The company’s view was that though they were entitled to this rent contractually, rent forbearance was the best policy to protect and enhance the company’s reputation both with students and universities. The remaining beds are accounted for by students who chose to remain or beds that were let under nomination agreements with the universities. Overall, the company expects a reduction in current year income of 16-20% but notes that reservations are currently 80% vs 81% at the same time last year for the coming academic year with nomination agreements accounting for 70%. The Board agreed a 30% reduction in salaries and pension contributions of Executive Directors, 10-20% for senior managers and 30% in fees to non-executives for 4 months from 1st April plus suspension of bonus payments. Operational cost savings and the ability to in-source work for the summer turnaround has meant the company has not had to utilise the government’s furlough scheme.
MJ Gleeson, the builder of affordable homes, announced 76% of the workforce would be furloughed with the company topping up salaries of those affected to a minimum of 80% and maximum of 95% of salary. All Board members would take a 30% reduction in salary/fees and senior management reductions of between 5% and 20%. Together with the cancellation of the interim dividend, pausing all build activity and land acquisition, cutting discretionary costs and implementing a recruitment freeze, the company has now implemented a range of actions to ensure that it is well placed to restart operations once conditions allow. Gleeson builds low-cost 2, 3 and 4 bedroom homes, sold largely to first time buyers on average and lower incomes across the Midlands and North of England, areas where there is a shortage of supply. Two-thirds of the homes they sell are to people in key worker roles and the company has decided that, when it is able to recommence activities, it will prioritise sales to these people in recognition of their efforts during the crisis.
According to Bloomberg, at the time of writing more than $70bn of dividends earmarked for investors had been cancelled, the bulk from Western Europe where more than half came from the banking sector, fortunately not an area in which we invest. We are, however, closely watching what our portfolio companies are doing in respect of their dividends: to date, less than half our companies have reported Q1 figures, but so far there is a 50/50 split between those maintaining or increasing and those reducing their dividends/interim dividends and we are pleased to see that where the latter is the case management are taking salary cuts also, up to 100%. It would be very poor in our view to cut the dividend and not managerial salaries. Companies cannot credibly draw on the taxpayer for financial support, whether for furloughing or any other purpose, while continuing to pay a dividend. But many retirees depend on dividends for their income, so cutting the dividend while maintaining managerial salaries or paying bonuses is not in order either. There has been only one report of layoffs within our portfolio, though hiring freezes are widely in place. How sustainable this is longer term remains to be seen. It rather depends how quickly people get back to work, whether consumption resumes, and whether there is a second wave of Covid-19 after lockdowns are lifted.
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