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.
For the next 17 years, he paid an annual premium of around £1.5m until 2020, when Covid hit and the tennis tournament was abandoned. The resulting losses would have been a huge blow to the club were it not for their insurance, which has paid out more than £180m. Not a bad return on premiums of around £25m.
Few companies were as astute about pandemic risk as Wimbledon. However, there were many caveats. In 2019, Peter Sands, the former CEO of Standard Chartered, presented a paper at Davos that should have sent a shiver down the spine of every CEO. Based on the experience of Sars and other outbreaks, Sands predicted that there would be devastating global pandemics in the coming years, the average annual cost of which would be $570 billion, 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 could ensure (like the All England Club) that they had business continuity insurance that did not “rule out infectious disease outbreaks”.
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Most companies were undoubtedly too busy to read the report. But for the management teams of investment managers, it should have provided a useful to-do list. Its 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 high-profile issues like biodiversity, the threat of pandemics was clearly something that presented significant medium-term financial risks, and there were things that could be done to mitigate those risks. Right in the sweet spot of intention you might think.
All of this is worth bearing in mind if you read a new report on the impact the UK Management Code 2020 has had on investment management practice and reporting. The code, overseen by the Financial Reporting Council, is a set of comply-or-explain principles that asset managers are expected to follow in their management. Most large investment managers operating in the UK have subscribed to the latest code, which requires them to identify and respond to systemic risks and then record the result of their efforts in their annual management reports.
Last year, David Styles, the FRC’s director of corporate governance and stewardship, confirmed to me that companies’ management of pandemic risk would be one of the things they would have to address in their management reports for the 2020. This seemed reasonable, given that the pandemic caused a 30% drop in global share prices in one month and (despite massive bailouts by governments and central banks) has left the share prices of many large companies (easyJet for example) trading at less than half their pre-pandemic levels.
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So how did the investment management industry perform? Uh… not good. As far as I can see, no major manager paid attention to pandemic risk and virtually none even mentioned it in their management reports for 2020. The most important ESG event of 2020 was essentially ignored.
Now the FRC has produced an optimistic report on the impact of the new code, which in its 87 pages has 20 references to climate change, six to biodiversity and only one to Covid (and that’s about how custody teams are they adapted to work from home). .
It is hard to avoid the conclusion that the industry is engaged in a conspiracy of silence to cover up its failure, a conspiracy of which the FRC, which declined to comment, seems inexplicably complicit.
This is not good enough. Not taking pandemic risk seriously is one thing. Many other people were guilty of this, including me (although identifying ESG is at the risk of literally not being my job). It is very difficult to go against the herd. What is not acceptable is refusing to admit your mistakes. How much more will you learn from them?
Did the experience of the pandemic make companies wonder if other (non-fashionable) risks were also being overlooked, such as the business and reputational risk of doing business with Russia? We don’t know because the industry is in total denial.
That seems very short-sighted. The industry’s attitude plays into the hands of cynics who claim that ESG management is less about reducing financial risk and more about marketing and virtue signaling on issues of interest to lobbyists. It should also raise questions about the value investors get from their managers for management. 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, please email David Wighton
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