4 minute read
In the age of coronavirus, conditions at food processors and distributors are suddenly in the spotlight. In this feature, we analyse workers’ conditions, and the influence of safety issues on market performance.
Early on in the coronavirus crisis there was heightened awareness of potential food-chain vulnerabilities. Yet despite reports of food shortages and hoarding, the sector held up well overall. This doesn’t mean that no issues arose. In particular, there have been a number of high-profile coronavirus outbreaks at meat packing plants, most notably in the US and Germany, where new cases continue to emerge.
So with this increased focus on the food industry and the safety of people who work in it, how did food companies meet their social obligations to their workforce, while continuing to provide an essential service? And did investors take notice?
What we looked at
To help answer this question, we reviewed the social element of the environmental, social and governance scores (ESG-S scores) of a basket of 47 companies involved in the food chain. The companies are active in areas such as production and processing, packaging and distribution, and retail. The ESG-S scores range from 0–100, with higher numbers representing better social practices. We evaluated how their ESG-S scores changed between the end of January and May and their investment returns over the period.
We also took a more granular look at their social performance, analysing two specific scoring issues related to employee working conditions and safety– and their link with investment returns:
- Occupational Health and Safety: Workplace-related health and safety performance
- Employment Quality: Working conditions and employee satisfaction
What we found
Of the 47 companies in our study, 39 saw their ESG-S scores fall over the period. These were mostly negligible drops, but ten companies saw their score fall by an average of 10%. Only eight firms experienced increases in their scores.
But what about their investment returns? We found that companies that suffered the largest declines in their ESG-S scores during the coronavirus crisis saw their stock prices underperform broader related indices, in many cases falling by twice as much. The results for the eight companies whose ESG-S scores increased were more mixed, suggesting that other issues could outweigh the potential positive impact of improved social scores.
When we dug deeper, looking beyond their overall ESG-S scores and at the granular working conditions and safety criteria, the results were more striking: a basket of the worst-performing companies in these more specific metrics saw falls two to four times as big as that suffered by the broader food and beverage market. What’s more, the best-performing companies in these areas outperformed the broad industry.
What’s going on here?
First, let’s consider how the overall ESG-S scores affected returns. It’s important not to try to draw too many conclusions as lots of factors will have affected these companies’ investment returns, not just their ESG-S scores. For example, several of the firms whose ESG-S scores fell the most were small caps, which in general suffered more than large caps over the period. And yet even when we adjusted our results for market cap, these companies still underperformed.
Why didn’t the firms whose ESG-S scores improved outperform? It’s possible that we’ve witnessed an asymmetric response that penalises negative news rather than reward positive developments. We intend to investigate this as part of our ESG analysis, as it’s a really interesting phenomenon that we’ve seen several times before. It may be that investors are quick to sell firms that are hit by negative ESG news, while improvements take more time to for them to process.
So why the stark differences in the returns of companies with differing working condition and safety performance? It could be that these specific metrics are particularly important to investors at present as they’re hot topics that many consumers are increasingly concerned about and investors feel they just can’t afford to ignore them.
The top takeaway: ESG investing is becoming even more granular
Whatever the exact reasons for the performance dispersion we’ve seen, these results highlight the importance of specific ESG considerations in investment decisions. And as the availability and quality of granular data on factors such as occupational safety continue to improve, their role in investment decision-making looks set to grow.
The bottom line is that ESG investing, in our view, is not simply about avoiding particular sectors, it’s about the growing role of increasingly specific factors for companies across industries. And of course there are important implications for firms in the food industry too.
We’ve already seen a significant shift towards more ethical production chains in other industries, such as clothing and electronics, in response to consumer demand. Investors could also play an important role in improvements in the food industry.
