Environmental, social and governance factors will become more important as the global economy recovers from the coronavirus pandemic, say asset owners.
Speaking during a virtual discussion Thursday organized and hosted by Bloomberg, panelists considered the investment implications of the COVID-19 outbreak on regions, assets and investments.
While ESG has been a theme in investment for some time, the accommodation and help provided by governments to companies around the world means there is an "expectation that these companies will … be good corporate citizens and repay society in some way," said Morten Nilsson, CEO at BT Pension Scheme Management, which manages the assets of the £52.2 billion ($64.4 billion) BT Pension Scheme, London.
Moves toward enhanced corporate responsibility have already been made, but due to the "bold" and "extreme" responses from governments in helping businesses, "I think that pressure will only increase," Mr. Nilsson said.
Citizens in a number of countries are "starting to be more accepting of tax rises potentially coming out of this crisis, but I don't think they will be very accepting of companies not behaving well," Mr. Nilsson said.
Simon Pilcher, CEO at USS Investment Management, said a corporation's license to operate is "critical" in the world in which we're living and headed into post-COVID-19. Mr. Pilcher said companies that have "abused their position … can expect very little mercy from governments and also consumers going forward." USS Investment Management is the wholly owned money management subsidiary of the £68 billion Universities Superannuation Scheme, London.
However, the economic fallout of the coronavirus pandemic and subsequent lockdowns might be a hindrance to the development of ESG.
"Everyone is talking about ESG, but we're going to be in a world where unemployment will be very high (and) people will worry more about growth and jobs than the environment," said Nouriel Roubini, CEO at Roubini Macro Associates. Due to the collapse in energy and oil, from a pricing point of view the "transition to a green economy will be less advantageous," he warned.
Mr. Roubini added that the social factor might also suffer because "there is tons of debt. … Many corporations are on the verge of not being able to survive," and these firms are also under pressure to achieve earnings targets. The response from corporations will be to "slash costs," with the first target on labor.
Mr. Roubini said he worries that "while, yes, asset managers are talking about ESG and punishing those firms that don't follow that, in practice in a world where (firms are working to survive) it may get us in a different direction unless government starts to have much more progressive and inclusive economic policies."
Asset owner panelists also outlined investment changes as a result of the coronavirus pandemic.
"We don't have a playbook ... or any clear way of navigating through a scenario that ... none of us have thought through," USS's Mr. Pilcher said. "How do we navigate this cautiously, with extreme humility and with trepidation?"
USS held a lot of U.S. Treasury inflation-protected securities and conventional long-dated fixed-income instruments, "and as those frankly went to the moon and outperformed all other assets, particularly in an environment where there was a flight to safety and liquidity. We used that opportunity to reposition that back into the U.K." where equivalent assets had not performed as strongly, Mr. Pilcher said. The fund was also "pretty light" on investment-grade credit and saw an opportunity to buy repriced and cheaper assets.
For BTPS, Mr. Nilsson said he expects infrastructure to perform well, "and I also think that this realignment toward a net-zero carbon target and realignment to a green recovery are areas where we expect there will be structural growth, and that's where we are looking for yield." However, he said executives' main focus has been to protect the fund.
