For millions of Britons, March 24 will be remembered as the lockdown moment when they either lost their job or were told not to come back to work for months. For Andy Howard, it was the day his workload doubled.
In addition to running a team of 13 investment analysts at London-based asset manager Schroders, he now found himself caring for four children under the age of eight, housebound as schools and nurseries closed. “The first challenge was, how’s this going to work?” says Howard, whose wife works for the UK government and continued to travel to the office.
On his first day of confinement, in between mediating arguments about whose turn it was on the iPad, Howard formalized a research project his team had been toying with for a few weeks to look at how companies were responding to the pandemic and treating their workers. With the help of Schroders data scientists, his team gathered information on some 10,000 companies from their public statements, media reports, regulatory filings, and other sources.
Covid-19 revealed a lot about how companies were run and what their managers prioritized. Some laid off workers, while others guaranteed jobs; some offered extra benefits, such as covering employees’ medical costs; still others repurposed operations to assist the Covid relief effort. “There was no time to think strategically about what’s the right thing to do here,” says Howard, 44. “It was a live test of how do they instinctively respond.”
As the mass of data accumulated, it revealed something surprising. Companies that responded to the pandemic by hiring staff rather than shedding workers saw an average 18% increase in their share price relative to their peers in the first six months of the year; those that offered financial help to employees did about 5% better. And the stock prices of companies that closed stores and laid off people trailed those of their peers by 10% or more.
“Every so often you get events that basically expose what people really care about,” Howard says. “There was an apparently logical course of action, which was to fire everybody, shut up all your shops, and refuse to pay any bills. Actually, even from Day 1, what was quickly emerging is that was the wrong long-term course of action.”
Howard says he even saw this behavior at his own company. Some Schroders fund managers, dissatisfied by a large internet retailer’s efforts to protect its staff during the pandemic, sold their holdings in the company, which Howard declined to identify.
The startling conclusions he was reaching in the spare bedroom of his North London home grew out of a career spent asking questions about the best ways for businesses to operate and looking for data, sometimes in unusual places, to find the answers.
Howard, whose eclectic background included a stop at a corruption-fighting nongovernmental organization, joined Schroders in 2016 as head of sustainable research and was promoted to global head of sustainable investment in June. His rise at the £471-billion ($599-billion) asset manager coincided with the industry’s growing focus on investments that take into account environmental, social, and governance, or ESG, issues—a niche area that’s expanded into a $30-trillion-plus business.
ESG is a salmagundi of often unrelated issues that fall outside the traditional parameters of financial analysis but may still have a bearing on a company’s earnings or share price. In theory, ESG investment focuses on matters ranging from health and safety to gender diversity. But in reality the big money has been drawn to climate change issues in recent years as fund managers and banks increasingly plug the warming planet into their risk calculations.
The pandemic changed the ESG dynamic. Then came the Black Lives Matter (BLM) protests following the May 25 killing of George Floyd, which broke out first across the US and soon around the world, sharpening attention on racial injustice. Suddenly, social issues such as inequality, workers’ rights, and health-care provision rose in prominence.
Fiona Reynolds, chief executive officer of Principles for Responsible Investment, whose signatories include thousands of investment firms, expressed concern in March that the “social” in ESG is “the issue that gets left behind.” That’s changing. “It’s not that the ‘e’ is now in the back seat. It’s that the ‘s’ has climbed into the front seat,” says John Goldstein, the San Francisco-based head of Goldman Sachs Group Inc.’s sustainable finance group.
The sudden elevation of social issues has not only exposed ESG managers’ blind spots, but it’s also left them grappling with a familiar problem: finding data they can use to measure a company’s progress. While businesses routinely share information about their earnings, cash on hand, and assets and liabilities, disclosing ESG data isn’t mandatory, and, when the information does see the light of day, it’s often incomplete.
And “s” data are hard to pin down. “I don’t think there was ever a point where investors engaged on the topic of ESG were dismissive of the social aspect,” says Steven Desmyter, co-head of responsible investment at Man Group in London. “But you have materially higher challenges when it comes to data gathering, scientific proof, and standardization vs. the ‘e’ and the ‘g.’ ”
Howard got his start in finance as a mining analyst, an unlikely launchpad for a career in sustainability. In the late 1990s and early 2000s, first at a now defunct unit of Commerzbank and then at Deutsche Bank, he spent his days poring over the balance sheets of the likes of Rio Tinto and BHP Group, forecasting how changes in commodity prices, economic growth, and exchange rates might affect profitability.
It struck him that whenever he left the bubble of the City of London financial district, he realized there were gaping holes in his analysis. He’d visit a mine, and workers there would go on and on about health and safety. Yet he could stare for hours at the financial statements of the companies he covered and see nothing that pertained to those concerns.
Determined to find some answers, Howard quit the City in 2003 and spent a brief period at Global Witness, a London-based NGO that campaigns against the corrupt exploitation of natural resources, where he investigated how digging things out of the ground can unearth the worst in humans. He then did a short stint at McKinsey & Co., where he’d hoped to better understand how companies work, before jumping to Goldman Sachs in 2007, just after the investment bank launched its Sustain research team to focus on long-term sustainability issues.
Howard’s work at Goldman—looking into which economic and cultural developments would have a bearing on share prices and earnings over the next 10 years—reinforced something he’d begun to suspect as a mining analyst. It seemed to him that financial markets were paying attention only to a limited set of factors that could affect a company’s stock price. For the most part, they were unable to digest other types of data, not typically found in finance textbooks, that could affect earnings and valuations.
Howard quit Goldman in 2013 to try his hand at running his own business, something he’d always wanted to do. But Didas Research, his sustainability research firm, struggled to achieve commercial success. “It suddenly became quite clear, the power of the name,” he says. Relative anonymity wasn’t without its benefits: It allowed Howard to explore things he probably couldn’t have at a firm with a big brand. Suspecting that most companies eschew long-term thinking, for example, he did some research. He found that fewer than 10% of the hundreds of blue-chip companies he studied articulated a vision or strategy that extended beyond just a couple of years.
Even so, when Schroders, a big-brand fund company, called in 2016 with a job offer, Howard says he didn’t think twice. He liked the idea of tapping into the asset manager’s resources. He says it also appealed to him because, unlike others in the industry, Schroders took seriously the kind of work he wanted to do.
Howard’s first undertaking at Schroders was to create a framework for assessing the sustainability of companies. His work was key to the development of a tool called Context that’s now widely used by the company’s portfolio managers. Context helps analysts and fund managers scrutinize a company’s ESG profile as rigorously as they would its balance sheet.
He was also instrumental in the creation of another tool, SustainEx, which quantifies in dollar terms a company’s impact on society and the environment, positive or negative.
Schroders isn’t the only company searching for “s” data. Man Group, the world’s largest listed hedge fund firm, and Boston-based Fidelity Investments, which managed $3.3t-rillion as of May 31, sift through alternative data to determine how companies treat employees. Such data can, for example, illuminate discrepancies between the numbers of women and minorities a company employs and the numbers it reports publicly.
Data emerging during the pandemic have been revealing, says Nicole Connolly, a portfolio manager and head of ESG investing at Fidelity. “This crisis is shedding light on the resiliency of companies in their ability to innovate, the flexibility of supply chains, and whether they are putting words to action on their ESG commitments,” Connolly says. “All of this can tell investors a great deal about the durability of a company’s business model.”
Howard says the hunt for “s” data is still in its infancy. “We’ve got a long way to go as an industry and indeed as a firm,” he says. “We’ve begun the journey. I think we’re further along than most, but the idea still feels a bit premature for me to think about this in terms of achievements or successes.”
In January, Howard convened his sustainability analysts at Schroders’ headquarters to discuss the big trends of 2020. They identified risks associated with global political events, climate change, and employee rights and protections. While they didn’t foresee global economic lockdowns or a pandemic that would kill hundreds of thousands of people, Howard says many of the issues they singled out proved to be key in the ensuing months.
“It’s not that we’re geniuses and we spotted something,” he says. “The point is more that the crisis was an accelerant for trends or pressures that were already building, rather than something which turned everything on its head.”
Howard says the BLM demonstrations that erupted in May caused him to question the real-world effectiveness of promoting diversity on company boards. Intuitively, he says, the idea made sense, but he wanted to know if it was true in practice.
In the three weeks following Floyd’s death, Schroders compiled data on board members at about 10,000 companies. It then applied data-science techniques to estimate which boards were ethnically mixed and to measure how they performed compared with those that weren’t. Schroders found that companies with diverse boards performed about 5% better on aggregate.
One new pet project—Howard calls it “slack”—examines this hypothesis: Has the drive to optimize efficiency and profits shrunk capacity in everything from health care to supply chains so much that the world’s economies are unprepared for shocks, be they terrorist attacks or natural disasters?
For Howard, as he seeks to maximize the potential of responsible investing, ESG is about asking those kinds of questions, and 2020 has already thrown up plenty of them. “The way I think about it is linking the stuff that you see on the front page of newspapers with what you see in the business section,” he says. “We haven’t built a very good frame of reference as an industry for how we translate the front-page headlines.”