It is becoming clear that the effects of the COVID-19 pandemic will reverberate long after the outbreak has passed.
They predicted a slowing economy and unprecedented disruption, and implied active stock selection and risk management would be critical.
We explain how sustainability will be fundamental to understanding this shift, focusing on six key areas that point to a changing role of the corporate sector in society.
1. Re-writing social contracts: responsible “saint” companies will outperform the “sinners”
Figure 1: Sector-relative performance of companies announcing responses to COVID-19, since start-Jan
Source: Company announcements, JUST Capital, Schroders. Past performance is not a guide to future performance and may not be repeated.
The current consumer attention on companies’ roles in society – and the gap between “saints” and “sinners” – is likely to accelerate.
The “inescapable truths” predicted subdued growth and low inflation against a backdrop of disruption from populist politics, technology and climate change. How companies respond to an environment of considerable change will be critical, and investors will need to be more agile than ever.
Unlike with the global financial crisis, where scrutiny was focused on the financial sphere, this crisis is prompting introspection and scrutiny of corporate behaviour in general – with consumer sectors facing more scrutiny than most.
Those behaving responsibly towards their employees or redirecting capacity to social challenges to support public relief efforts have outperformed, according to our research.
We put together Figure 1 to show the equity returns of companies taking different actions.
While performance is measured relative to sector peers to adjust for the different pressures facing each sector, we recognize that many actions may not be a direct cause of outperformance.
However, the relationship between the responses to COVID-19 and the equity market’s appraisal of their value is telling. Those hiring workers, relaxing attendance policies or offering financial assistance, for example, have been appraised positively.
We believe those companies with a longer-term outlook are likely to be those still standing once the crisis has passed.
2. Companies must be better prepared for “black swan” events
|Figure 2: Growing frequency of natural disasters and terrorist impacts||Figure 3: Economic policy uncertainty index|
Our Chief Economist and Strategist Keith Wade has observed that the economic effects of crises like pandemics can reverberate for as long as 40 years.Events such as terrorist attacks, political disruptions, natural disasters and other climate risks are coming thicker and faster, making so-called “black swan” events more frequent.Their causes may be different, but the business effects are similar: supply chains are disrupted, movement slows and demand falters. Compounding the impact, industry supply chains have become longer, more diverse and with thinner inventory buffers.In many cases companies will be forced to build “inefficiencies” into their supply chains and operations – some slack that has periodic value to compensate for its structural costliness. In other cases, smarter sourcing decisions and choices over where operations are located will help.