Companies and investors take to socially responsible investing

Gone are the days when a CEO could appear on the media and justify the company’s stance because it was in the financial interest of shareholders.

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  1. Charles Stanley

There was a time was when the job of an investment analyst was to forecast the turnover and profits and concentrate on the hard numbers of business life. The role of the Investment strategist was to do the same for the economy and market as a whole. If you could be accurate in your forecasts of growth, profitability and shareholder returns, you could hope to invest enough in the market when it was rising and to select individual company shares that did well compared to the average.

As recently as this January, arguments about whether the world economy might grow a little faster than 3% or a little slower were still at the heart of deciding whether there could be another good year for stock markets, or whether they were running out of momentum for future gains. We pored over figures for money and credit growth, budget deficits, and consumer spending. We tried to calculate the possible boost in the USA from an election year and the likely fiscal relaxations in parts of Europe. Stock markets would probably turn on the figure after the decimal point for world and national growth. Companies on average were expecting a normal low figure percentage increase in profits on stable or gently rising turnovers. None of us entered 2020 saying governments worldwide would close down around a third of their economies, and damage the output of another third, creating an enormous recession.

When this happened the investment world clearly changed dramatically. After a big sell-off, investors got used to company after company cancelling its guidance and its dividend. Attention turned to charting the course of the virus and trying to estimate when lockdowns would be relaxed. In practice, the only thing that mattered was to follow the Fed and the other leading Central Banks as they turned their attention to rescuing debt markets from disaster and launching a tsunami of money at any problem. Some people still try to forecast and describe the world in rational and traditional terms. They currently end up with a bearish script which is made redundant by the temporary bubble in assets being inflated by Central Banks. All the time they remain determined to stave off financial disaster, on top of the great recession and the health problems, to support the markets if they dip too far.

Before the virus hit some investors and the regulators were taking more interest in the social impact of big companies. Some said the corporate sector should do more to curb wars and internal repression by states. They wanted businesses to stop making weapons and instruments of repression, or to limit more strictly who they sold to and for what purpose. Some said the corporate sector spoke the occasional greenwash, but needed to take much more action to cease dependence on fossil fuels and move into alternative energy. Some said companies were not doing enough to look after their employees, wanted more evidence of opportunities for women and minorities at the top, and more progress in providing a higher minimum or living wage.

It is likely that these pressures from society and from political groupings are going to get a lot more intense now we are living through the Covid-19 crisis. In Europe, the new Commission is determined to make its Green Deal the centrepiece of its approach, requiring a huge change in energy supply, transport and heating. In the USA, Mr Biden, if elected, will want to go in a similar direction. There is a growing gap between the rich who own shares and bonds and are benefitting from the current surge in financial assets thanks to money creation, and the lower-paid subjected to losing their jobs or experiencing wage and bonus cuts thanks to the downturn. Political parties and governments will seek to tip the balance by legislating on the side of those who are suffering from the situation.

Alert chairmen and chief executives of large companies will need to satisfy politicians, investors and regulators that they understand these feelings and wish to contribute to solutions. Gone are the days when a CEO could appear on the media and justify the company’s stance because it was in the financial interest of shareholders. They now have to understand they need messages that are crafted for their customers, for their employees, and for the wider, often critical public and their politicians. The investment analysts and managers are still primarily interested in advancing earnings and dividends to make an investment worthwhile, but they need to recognise that corporate survival now needs more than a strong balance sheet. BP’s stumble with a single well and VW’s bruising brush with the emissions regulators, remind us how much damage ignoring the wider social and political context can cause. The current wave of protests should pass but the underlying issues remain to be resolved. Investors need to grapple with the profound economic impacts of the digital and green revolutions, and with the issues of social responsibility, many now pose to markets.

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