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The Covid-19 pandemic and the subsequent containment of nearly a third of the world’s population have seriously challenging the way we work, travel and consume.
The current crisis also highlights several important social issues. In recent years, the focus has mainly (sometimes even exclusively) been on the “E” for Environment and climate in particular. However, this pandemic also emphasises the relevance “S” and brings social issues back to the forefront. This is highlighted by the main results of the recent research launched by JP Morgan on the consequences of the Covid-19 crisis on sustainable and responsible investments1.
Covid-19 has revealed the many disparities between each sector’s situation, and the vulnerability of supply chains created by the race to globalization and especially delocalization.
Several economic sectors such as tourism, aviation and the automotive industry have come to a complete standstill, which has significantly affected employment. Meanwhile, others have had to completely reorganise their businesses to cope with the explosion in demand. The e-commerce giant Amazon, for example, has optimised its storage capacities to prioritise basic foodstuffs. So-called superfluous products have been relegated to the back of the warehouses to maximize storage and simplify access to the most demanded products. Teleworking has become the norm in some sectors. In others, companies are trying to protect their staff as much as possible to ensure the continuation of their business operations: the contrast is striking. Indeed, Amazon is considering hiring an additional 100,000 people to meet the sudden demand. Supermarkets are outbidding each other by offering additional bonuses, exceptional overtime pay or an increase in hourly wages. They want to make sure to keep their employees at work, despite a flagrant lack of protective material and equipment to ensure the health and safety of their workers. In spite of the health risks, employees have generally welcomed these financial incentives. This is particularly noticeable in the United States, where social security coverage is less developed than in Europe.
SHORT-TERM MEASURES WITH MEDIUM- AND LONG-TERM IMPLICATIONS
The stakes are also high for sectors that have come to a standstill. Many employers have had to temporarily reduce their workforce to ensure the survival of their firm. Still, a company’s employee-support will become important medium-term criterion with serious ramifications for its corporate culture. Indeed, both employee support and satisfaction play an increasingly important role in the economic and financial performance of companies. They are long-term differentiating elements that attract both customers and talent. Surveys show that a growing number of consumers are willing to pay a premium for their products, as long as the company showcases a respectful attitude towards its stakeholders and the environment. As far as human capital is concerned, “Millennials” consider corporate culture to be a very important criterion. In a job interview, they might even put greater emphasis on the culture than on the proposed remuneration2.
By proactively adopting measures to support their employees, and by having a flexible profile, companies manage to not only cope with the restrictions of the current situation, but can also enhance their attractiveness: Measures taken today will have a positive impact in the long term. Employee satisfaction and loyalty influence productivity, stock market performance and company returns.
In these times of crisis, with drastic governmentally-enforced containment measures, companies have a social and societal responsibility towards their stakeholders, now more than ever before. It is both an opportunity for those companies that are ready to face the situation head on, and a threat to those that fail to rise to the challenge.
THE VULNERABILITY OF SUPPLY CHAINS, BEYOND RESPECT FOR HUMAN AND LABOUR RIGHTS
The deplorable lack of medical masks for health workers (and other exposed workers) shows the vulnerability of our supply chains, and especially highlights the dangers related to a production process which is heavily reliant on a single country. Several years ago, a sell-side ESG research report already brought up the issues related to the large-scale outsourcing of drug manufacturing to China and India. The study mainly addressed the questionable product safety and quality in countries where controls are less strict than in the EU. However, it also brought up the potential shortage risk of certain basic drugs. Indeed, today China is the main producer of active pharmaceutical ingredients (IPAs) in the world. These biologically active components form the basis of many drugs. India, the second largest subcontractor to the pharmaceutical industry, is itself dependent on China for more than 70% of its IPAs to produce generic drugs and antibiotics. Generally, the main pharmaceutical companies have to declare potential drug shortages to international authorities, such as the FDA in the United States. However, the rules for medical equipment are less strict, which has subsequently led to the current shortage of medical masks.
From a sustainable and responsible investment point of view, supply chain challenges have always been a key topic of discussion. However, in this regard, one generally focuses on a different aspect of the supply chain, namely the respect for human and labour rights in sectors such as textiles or high-tech equipment. The vulnerability of the supply chain itself must also be at the heart of the debate to properly anticipate all future risk. Moreover, the geographic concentration of supply chains must also be addressed. The example of Apple, which is gradually relocating its supply chain to India, shows the vulnerability of a business model which is based on large-scale subcontracting. This is especially the case in technology sectors, where the pace of new product launches must not be interrupted or slowed down. However, let’s not be naïve: Apple mainly seeks to limit its dependence on China. In addition, it also wants to take advantage of the comparatively cheaper labour in India.
The upheaval created by COVID 19 has brought the importance of the social pillar back to the forefront. Human capital management remains an essential element of any company’s ESG analysis. The Covid-19 measures taken by companies are short-term decisions that can have impactful, long-term repercussions. Employees and consumers alike will be paying attention to companies’ response to the current interruption of activities and the resulting economic downturn. These could be important differentiating factors in the medium- and long-term and significantly impact employee and consumer satisfaction and loyalty. Investors will need to take these different criteria into account in order to successfully invest in sustainable businesses going forward.
1 Stay safe and think long term, JP Morgan, 30 March 2020
2 A study carried out by Optimy in 2017 shows that 60% of consumers are willing to pay a premium for corporate products with a positive brand image, a good reputation and strong ethical values. Meanwhile, 71% of millennials would prefer to work for a company that has demonstrated a strong commitment to the community and societal welfare, all other things being equal.