Wimbledon beats investment industry amid pandemic threats


In 2003, following the outbreak of the Sars virus, the directors of the All England Lawn Tennis and Croquet Club made a smart decision. To protect the club from financial disaster if a pandemic forced them to cancel the Wimbledon Championships, the board took out insurance.

Over the next 17 years he paid an annual bonus of around £1.5m until 2020 when Covid hit and the tennis tournament was scrapped. The resulting losses would have been a blow to the club had it not been for his insurance, which paid out more than £180million. Not a bad return on premiums of around £25m.

Few companies were as savvy about pandemic risk as Wimbledon. Still, there were plenty of warnings. In 2019, Peter Sands, the former chief executive of Standard Chartered, presented an article at Davos that should have sent shivers down the spine of all chief executives. Based on the experience of Sars and other epidemics, Sands predicted that there would be devastating global pandemics in the years to come, the average annual cost of which would be $570 billion, or two-thirds of the cost of global warming.

Travel and tourism businesses would be particularly vulnerable, according to the report. But companies could take protective measures. They could make complex supply chains more resilient and they could ensure (like the All England Club) that they had business continuity assurance that did not rule out infectious disease outbreaks.

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Most companies were probably too busy to read the report. But for the stewardship teams of investment managers, it should have provided a handy to-do list. Their main task is to identify environmental, social and governance issues that companies are not taking seriously enough and to persuade them to take action to reduce the associated financial risk.

Even more than more high-profile issues such as biodiversity, the threat of pandemics was clearly something that posed significant medium-term financial risks and there were things that could be done to mitigate those risks. Right in the sweet spot of stewardship, you might think.

All of this is worth bearing in mind if you read a new report on the impact the UK Stewardship Code 2020 has had on the practice and communication of investment stewardship. The code, overseen by the Financial Reporting Council, is a set of compliance or explanatory principles that asset managers are expected to follow in their management. Most of the major investment managers operating in the UK have signed up to the latest code, which requires them to identify and respond to systemic risks and then record the results of their efforts in their annual management reports.

Last year, David Styles, director of corporate governance and stewardship at the FRC, confirmed to me that companies’ pandemic risk management would be one of the things they should address in their reports. stewardship for 2020. This seemed reasonable, given that the pandemic led to a 30% drop in global stock prices in one month and (despite massive bailouts from governments and central banks) left stock prices of many large companies (easyJet for example) are trading at less than half of their pre-pandemic levels.

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So how has the investment management industry fared? Uh… not well. As far as I know, no major manager paid attention to pandemic risk and virtually none even mentioned it in their 2020 management reports. By far, the biggest ESG event of 2020 was essentially ignored.

Now the FRC has produced an upbeat report on the impact of the new code, which in its 87 pages contains 20 references to climate change, six to biodiversity and only one to Covid (and that’s on how teams of management have adapted to working from home) .

It’s hard to avoid the conclusion that the industry is involved in a conspiracy of silence to cover up its failure — a conspiracy in which the FRC, which declined to comment, seems inexplicably complicit.

This is not good enough. Not taking the risk of a pandemic seriously is one thing. Many other people were guilty of this, including me (although identifying ESG risks is not literally my job). It’s really hard to go against the herd. What is not acceptable is refusing to admit mistakes. Otherwise, how are you going to learn from them?

Has the experience of the pandemic made companies wonder whether other (outdated) risks are also being overlooked – the commercial and reputational risk of trading with Russia, for example? We don’t know because the industry is in total denial.

It seems very myopic. The industry’s attitude plays into the hands of cynics who argue that ESG management is less about reducing financial risk and more about marketing and signaling virtue on issues of interest to lobbyists. It should also raise questions about the value investors get from their managers for stewardship. Some investors may wonder if the All England Club could do a better job.

To contact the author of this story with comments or news, email David Wighton


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