You don’t have to be much of a cynic to see that the ESG agenda rings pretty hollow in shipping as yet.
Despite warm words of consent and oily public relations messaging, much of the industry remains unmoved to take deep and meaningful action on environmental, social and governance issues.
But those deep-rooted ESG challenges remain — from carbon pollution reduction, crew welfare to corporate governance.
Cynics believe they can sit on their hands and save the time and money of taking management action, since there has been little evidence that ESG in maritime gave any significant competitive advantage.
But matters may be changing.
Recent research by BlackRock suggested that not only did sustainable investing provide resilience amid uncertainty, but companies that committed to ESG benefited in unintended but powerful ways.
Amid the financial market crunch triggered by the coronavirus pandemic, the world’s biggest asset manager, with $6.5trn in its portfolio, found the investment performance of companies adopting an ESG agenda was better than just explained by traditional factors alone.
BlackRock believes the answer lies in corporate culture. And that may hold a lesson for shipping.
Outperformance
Sustainable investing is increasingly at the heart of asset managers' approach to business worldwide, whether they are running avowedly "green" funds, or are just searching for growth.
Bodies such as the Sustainable Accounting Standards Board and the Task Force on Climate-related Financial Disclosure are driving the agenda, and pushing banks, other finance providers, and investors to make sustainability a fundamental benchmark in their decision-making.
Performance measures appear to support the drive. In the first three months of 2020, data provider Morningstar said 51 out of 57 of their sustainable indices outperformed their broad market counterparts, while US finance company MSCI said 15 of 17 of their sustainable indices outperformed.
BlackRock believes that companies with strong profiles on material sustainability issues have potential to outperform those with poor profiles.
"In particular, we believe companies managed with a focus on sustainability should be better positioned versus their less sustainable peers to weather adverse conditions while still benefiting from positive market environments," it said.
Counter to the commonplace historic assumption that sustainability demanded a trade-off in terms of financial performance because of the costs of implementation and risk of inefficiency, it now appears that ESG-driven companies are more resilient, and hence a better investment risk.
However, the traditional factors to explain corporate resilience — such as quality and low volatility — do not describe the full set of features that make companies resilient.
Resilience
BlackRock now believes resilience and outperformance are driven by what you might call a culture of sustainability — fundamental issues such as corporate culture, job satisfaction, the strength of customer relations and the effectiveness of a company’s board of directors.
While the asset management giant was not addressing the specific challenges shipping faces with implementing ESG goals, its conclusions go to the heart of the additional value the industry can gain from committing to address them.
Analyst Michael Webber has already published clear evidence of the positive correlation in US-listed shipping companies between corporate governance standards and financial performance.
Increasingly, bank signatories to the Poseidon Principles will focus shipping borrowers’ attention on cutting carbon emissions.
And borrowers seeking bond finance will find a bigger investor pool and lower coupons for projects that can win a green rating.
But BlackRock's findings suggest that even if the big hurdles shipping companies face cannot be quickly solved, the very commitment to address them brings a positive force to corporate culture.
New, younger staff are inspired to join such companies, perhaps, while older staff will find new intrinsic benefits of fresh approaches to ingrained problems. Management will see results faster, while customers will be more supported and supportive.
It will all help reinforce companies and strengthen them amid difficult markets.
Some cynics in shipping remain convinced ESG is just the latest virtue-signalling fad, just like corporate social responsibility before it.
Yet BlackRock’s conclusions are clear: adopt ESG to build business that is more resilient, sustainable, and ultimately, more investable.
