Driven by the dozens of news articles I read in recent weeks about sustainable investments, or, what many have referred to as investments in companies with an “ESG” agenda (acronym for Environmental, Social and Governance), I decided to go deeper into the subject and get a better grasp of the movement. In this process of immersion and, in an attempt to find the core of the discussion, I recalled the bedtime story of the three little pigs – which, in my opinion, illustrates this theme very well.
As a starter: if you had to bet your money on one of the three houses that would withstand the huff and puff of the big bad wolf, which one would you bet on? And if the two youngest piglets had a chance to rebuild their homes, how do you think they would proceed? In the story, the brick house is the most resilient towards the danger of the big bad wolf.
Making a parallel with what we are experiencing today, COVID-19 resembles the big bad wolf and the sustainable companies resemble the brick house. The current crisis has put a magnifying glass on the issues between companies and their stakeholders. How companies are managing their relationship with their employees, their customers, the environment, and the community will tell a lot about how they will survive the crisis. Companies that better satisfy their various stakeholders are more likely to survive in the long term and this will cause an impact on the risk / return on investment analysis.
In his recent open letter, Larry Fink, CEO of BlackRock, the world’s largest asset manager, responsible for investing and managing approximately US$ 6.52 trillion, addresses the CEOs of all companies in the world to talk about this matter. The introduction is mellow: “Dear Presidents”, but the message is bitter. In the letter, he states that a company cannot achieve long-term profits without considering the needs of a wide range of stakeholders. Investors are increasingly considering climate, social and governance issues as investment risks. Companies that do not face the risks of sustainability, will find increasing scepticism on behalf of the markets and, in turn, a higher cost of capital. Whereas companies that defend transparency and demonstrate their responsiveness to interested parties, on the contrary, will attract investments more effectively, including higher quality and long-term capital.
But are companies entering the ESG wave to exchange “values” for “value”? In other words, do they want to become more sustainable and transparent only because of the greater intrinsic value they will generate in their stocks?
I do not think so. I believe that the crisis has shown that the brick house is really the best option, even if it takes more time to assemble and more work. The real purpose must be the driver of the business!
By Renata Simon, partner at Candido Martins Advogados