Investors realigning their focus

Asset owners and money managers are adapting their engagement efforts as the workers and suppliers of their portfolio companies feel the impact of the coronavirus crisis.

Investors said they have refocused their engagement activities to ensure that executives at their portfolio companies are protecting the health and the safety of workers and are not, for example, keeping non-essential employees at retail, office or even mining sites unnecessarily.

Investors added they are putting pressure on top executives to continue to employ workers and honor existing contracts by paying for goods already produced to keep smaller suppliers in business.

Some asset owners are working with portfolio company executives to help them access governmental loans and subsidies for workers who have been furloughed. Other asset owners are exploring financing options to help counter the fallout from suspended business activities through buying COVID-19-related corporate bonds.

Such social issues are seen by asset owners as key considerations that businesses must address to move forward on a path for recovery. Having laid that foundation, asset owners and portfolio companies can then focus on traditional business concerns.

These engagement activities are all the more important given that annual general meetings have been moved online or been postponed.

"All companies have been hit hard by the crisis but especially companies with a huge workforce and large supply chains," said Anna Pot, New York-based head of responsible investment-Americas at APG Asset Management, the manager of the €420 billion ($456.5 billion) Stichting Pensioenfonds ABP, Heerlen, Netherlands.

"The COVID-19 crisis has highlighted the need for a sustainable approach that relates to health and safety of workers. For us, that includes (checking) if companies have relevant programs in place," she added.

APG set out its expectations of executives at portfolio companies alongside 307 other investors and service providers — representing $8.4 trillion in assets — in an investor statement on the coronavirus response. The effort was led by The Interfaith Center on Corporate Responsibility, a shareholder advocacy coalition of institutional investors, Domini Impact Investments LLC and Office of the New York City Comptroller Scott M. Stringer.

These investors want the boards of portfolio companies to protect the health and the safety of workers, ensure continued employment and paid leave for workers, exercise financial prudence and maintain supplier relations during the crisis. Among other things, investors called on companies to provide paid leaves of absence to temporary workers and contractors and stabilize supply chains by helping smaller businesses survive.

Also, the U.K.'s Pensions and Lifetime Savings Association urged its retirement fund members on April 9 to pay attention to workforce issues during the pandemic, following news reports that directors and CEOs of corporations are maintaining full pay and bonuses while employees are laid off or furloughed.

"The crisis makes it very clear that the workforce issues are financially material issues," said Caroline Escott, policy lead for investment and stewardship at the PLSA in London. Ms. Escott noted the PLSA wanted to remind investors to keep the pressure on in efforts to ensure that companies can get up and running immediately after the crisis.

Ms. Escott said there were other examples of companies behaving badly in relation to their employees. For example, some firms asked their workers to donate their paid annual leave to the sick employees, she said. There also were firms in the tourism industry that laid off hotel employees from live-in hospitality jobs and gave workers two hours' notice to vacate accommodations, she added. She declined to name the companies.

U.K. plan executives also are checking how their managers can achieve their engagement goals as annual general meetings are getting canceled or moved online due to lockdowns.

Rona Train, Edinburgh-based senior investment consultant and chairwoman of the governance committee of the £70 million ($87 million) defined contribution Hymans Robertson Staff Pension Plan, London, recently requested its managers to report the challenges they are facing with their regular engagement agenda and how the crisis has affected their ability to engage.

In Canada, some pension funds have amped up their engagement frequency and are talking with companies weekly to help them through the crisis.

The C$207.4 billion ($148 billion) Ontario Teachers' Pension Plan, Toronto, recruited Boston Consulting Group Inc. to help companies in its portfolio to understand government support programs that have been created around the globe, and hired KPMG LLC to help portfolio companies work under these programs, said Jane Rowe, executive managing director and head of the equities department, in a recent online discussion hosted by the Canadian Club of Toronto.

Other investors are focusing on challenges faced by companies in certain sectors.

For example, APG's Ms. Pot said her approach to portfolio apparel companies involves checking if companies have protected the health and the safety of their workers and how they have dealt with suppliers since the virus outbreak. The fund's expectation is that its companies pay for goods that have already been made in suppliers' factories and honor contracts, she said.

It also is reaching out to companies such as GAP Inc. to see if these contracts were honored, she said.

Adam Matthews, director of ethics and engagement at the £2.8 billion ($3.5 billion) Church of England Pensions Board, London, said in a telephone interview that some companies are unnecessarily putting staff at risk. He added that the fund has contacted a number of companies to highlight its expectations about health and safety of employees, particularly workers at mining companies.

"We are acutely conscious of the pressure in some sectors where executives had to fight the immediacy of the challenges as ports closed and supply chains were disrupted," he said.

Mr. Matthews added that the fund adjusted timelines on other expectations to enable executives to focus on the immediate response to the crisis. For example, the fund delayed upcoming deadlines on mining companies in its portfolio to meet its expectations for waste disposal.

"We have responsibility to help companies navigate this challenging time, and we have responsibility to be supportive of them, but at the same time this doesn't mean we will be supportive at the expense of other things that are important, for example health and safety (of workers)," he said.

Sources said the coronavirus crisis illustrates that companies need to show they are looking after their employees and suppliers. "There is more focus on the 'S' (of ESG), which probably has been neglected due to the focus of climate change considerations in recent years," Hans-Christoph Hirt, executive director and head of stewardship service EOS at Federated Hermes Inc. in London, said in a telephone interview.

"We are not yet at a point where we can name and shame, but we are in contact with many companies. We will have discussions before the annual general meetings about these issues over the next few weeks," he said.

The firm expects the management's remuneration to be reflecting the fact that companies have had furloughed workers, he added.

"We like the German model with short working arrangements, where people work fewer hours but continue to be on the books of the company," Mr. Hirt said.

Investors are also engaging with companies that may require financing to help them cope with solvency issues. He said the firm's preference is for companies to seek financing internally rather than externally. Given the ongoing crisis and the pressure it creates for companies, he said the firm will support companies in gaining access to the capital needed to maintain solvency.