Insights
Corporates Under Pressure
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Sustainable Investing
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September 09, 2019
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Corporates Under Pressure
Corporates Under Pressure |
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Environmental and social issues are a significant risk to the continued success of compounders, along with other changes, such as technology. Companies that fail to look after their relationships with customers and regulators are playing fast and loose with their core intangible assets.
CULTURE, POLITICS, REGULATION
Companies are coming under increasing pressure from all sides to meet a growing number of standards, guidelines and social demands. Failure to meet them can trigger public backlashes or boycotts when a company is seen to have failed. The resulting publicity can be devastating to a firm’s reputation and profits.
While product safety has always been a key concern there is now additional focus on the impact of products and services on the environment and society, including climate change and ethical and sustainable sourcing. The attitude of the company on equality and discrimination can also be a source of vulnerability.
It’s not only customers that companies have to please – governments too are weighing in. Regulatory backlashes have become increasingly severe towards companies that break the law or fail to meet regulatory standards – just ask the banking sector, which has been hit with $300 billion in fines since the global financial crisis in 2008.
Political trends, too, suggest a less benign environment for corporations, especially in the realm of antitrust and taxation. Strengthening populist movements are giving a voice to those concerned about market concentration and tax avoidance, notably by large technology companies with complex corporate structures.
BIG DATA, BIG RESPONSIBILITY
The volume of data available about all of us has exploded in recent years. According to insideBIGDATA, human and machine-generated data is experiencing an overall 10 times faster growth rate than traditional business data, and machine data is increasing even more rapidly at 50 times the growth rate. While such proliferation has generated significant opportunities – for example, health care companies using big data to understand population health trends – with big data come risks. If a company is seen to misuse or neglect the security of customer data, it jeopardizes its reputation, customer loyalty and market value, as demonstrated by the drop in share price of an American social networking company and a multinational consumer credit reporting company when news emerged of data breaches and hacking. Meanwhile, regulations such as the General Data Protection Regulation (GDPR) have ushered in a tougher era for companies operating too close to the line.
Our investments in the technology sector tend towards ”enterprise staples” that are typically less exposed to direct consumer data risks.
Regulatory and technological changes have made environmental and social concerns even more important than before. We would argue that a company’s ability to deal with them effectively is central to quality management, to governance and to sustaining high returns.
RISK CONSIDERATIONS
There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy's assets were invested in a wider variety of companies. In general, equity securities' values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. Option writing strategy. Writing call options involves the risk that the Portfolio may be required to sell the underlying security or instrument (or settle in cash an amount of equal value) at a disadvantageous price or below the market price of such underlying security or instrument, at the time the option is exercised. As the writer of a call option, the Portfolio forgoes, during the option's life, the opportunity to profit from increases in the market value of the underlying security or instrument covering the option above the sum of the premium and the exercise price, but retains the risk of loss should the price of the underlying security or instrument decline. Additionally, the Portfolio's call option writing strategy may not fully protect it against declines in the value of the market. There are special risks associated with uncovered option writing which expose the Portfolio to potentially significant loss.
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Managing Director
International Equity Team
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Signals Survey