COVID-19 pandemic highlights the importance of ESG: Lazard

The COVID-19 pandemic has laid bare the interconnection of social and environmental (ESG) issues with the real economy.

‘It is important as an investor that you understand how your manager is looking at companies and researching companies in light of the COVID crisis,’ says Lazard’s Jennifer Anderson.

The COVID-19 pandemic has laid bare the interconnection of social and environmental (ESG) issues with the real economy and enhanced the valuations of companies with responsible and sustainable business models, according to one of the world’s top advisers on ESG investing.

Jennifer Anderson, the London-based global co-head of sustainable investment and ESG at Lazard Asset Management, said the pandemic had provided an opportunity to see how companies were reacting to a sudden and dramatic test of their business models and how they were weighing the interests of different stakeholders.

Amid the rise of passive investment funds around the world in recent years, Ms Anderson said the pandemic had provided an opportunity for active management to again demonstrate its value after falling out of favour.

“It is important as an investor that you understand how your manager is looking at companies and researching companies in light of the COVID crisis. It is fundamental to recognise the bottom-up analysis of companies is critical to understanding those trends,’’ Ms Anderson said.

“It is really hard to do that looking at an external rating awarded to a company by one of the external ratings agencies. You need regular meetings and access to companies to understand how the board and management have managed through this crisis and the aftermath.”

She added that the Australian regulation of reporting on climate risk meant superannuation funds were now more focused than ever on understanding climate risk in their investment strategies.

Climate-related ESG resolutions attracted significant shareholder support at the AGMs of Rio Tinto, Woodside and Santos this year.

“There are a number of large asset owners who have come under pressure from their own beneficiaries to be accountable on what they own in their portfolios. Shareholders will continue to hold the oil and gas and mining sectors to account,” Ms Anderson said.

“The huge support we have seen for shareholder resolutions on climate this proxy voting season shows the emphasis on climate change.”

Australian assets in ESG funds exceeded $1 trillion this year, according to the Responsible Investment Association Australasia‘s annual report released in September.

Jennifer Anderson of Lazard Asset Management.

One of the nation’s most widely held blue chip stocks, Wesfarmers, has launched a sustainability-linked $400m loan, where the interest margin Wesfarmers pays is linked to its levels of Indigenous employment and its efforts to reduce the carbon emissions intensity of its chemicals arm.

Australia was also a pioneer during the COVID pandemic for social measures such as preferential access, when Woolworths and Coles set aside one hour a week for vulnerable customers to enable them to access essentials. These measures have since been put in place by grocery retailers around the world and, in some places, have been extended to include online grocery shopping slots and other key workers, such as health care professionals

Ms Anderson said Lazard’s investment teams had been seeking to understand how human capital was being managed through the global health emergency and, where justified, was advocating for more robust social capital management in support of companies building long-term, sustainable value.

She said recent engagements with company management teams in industries such as luxury retail and pharmaceuticals highlighted how companies were managing the trade-off between short-term profit maximisation and long-term value creation.

“The message for corporations is to understand the material ESG issues that impact your business. It is important to ensure that you have actively communicated this with your investors to ensure they understand your strategy,’’ she added.

“…You can no longer think about ESG as just something on the side.”