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How companies respond to risk: engaging during a crisis

Sustainable fixed income has been resilient amid the market shock, while the crisis offers an opportunity to engage with companies on environmental, social and governance (ESG) issues.  Aaron Hay, Lead Engager - Fixed Income, International at Federated Hermes, discusses some of the companies his team has been engaging with during the crisis and how they have been responding to both the short and long-term issues.

The impact of Covid-19 on engagement
The market shock offers a unique opportunity to understand how companies stay true to their values. As this crisis wears on, we continue to engage with companies on ESG, risk and strategy issues.

From an engagement perspective, we remain impressed with the open dialogue that some companies have sought to maintain, despite all-hands efforts required on urgent business challenges. As investors, the market shock of Covid-19 has offered a unique opportunity to understand how companies stay true to their values.

During recent engagements, we have sought to understand how companies are responding to near-term risks that carry damaging financial, social and reputational consequences if mishandled. This helps our credit analysts develop a more precise understanding of the near-term responses of different companies to key risks, as well as provide a snapshot of the ethos, skill and decision-making capabilities of senior managers. Importantly, our approach provides a very real test of underlying corporate cultures of responsibility. Difficult decisions must be made to preserve financial health whilst balancing the needs of all stakeholders – including worried employees and customers, vulnerable suppliers and the wider communities that these companies conduct business in. Such decisions are powerfully illustrative of broader ethos in management and on the board and provide genuine qualitative insight for long-term investment hypotheses.

Engaging in a crisis
Recently, during a meeting with Sealed Air, a packaging company held in our SGD Engagement High Yield Fund, we came to understand that the personal health of its workforce was its first concern; therefore, 100% of global facilities had shifted to crisis management mode in January 2020, thanks to the company’s rapid decisions based on early experience within China-based production facilities, months ahead of regulator directives for its US operations. We were also impressed with the detail industrials producer, Alcoa, provided on differing regional challenges facing its bauxite, alumina and aluminium businesses, and its openness in continuing dialogue on capital allocation, given the deep uncertainty facing many of its end markets in 2020 and beyond.

We are greatly encouraged that many companies see the long-term value in managing their businesses with sustainability factors in mind.   The fact that through such a violent move against credit fundamentals, companies are still willing to engage with us on their sustainability progress speaks to the permanence of the “green” evolution in priorities for capital allocation and corporate culture.

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