What We Look for During a Crisis

COVID-19 is creating a tragedy of exceptional proportions. If left unchecked it could lead to more than 40 million deaths worldwide, i.e., approaching the total casualties during the Second World War, the deadliest conflict in history. The bold public policy response, with a focus in many countries on national lockdowns, has been unprecedented but essential and is already sending shockwaves through the economy, with large-scale layoffs and business collapses that can only be partly mitigated by rapid fiscal intervention. 

Against this backdrop, those managing investments need to ensure that a third potential disaster is averted — the permanent destruction of value for the pension funds and the savings of wide swathes of the population. Simply put, investors need to be holding the right securities through the crisis. 

At Impax, based on the lessons from financial crises over 20 years or more, we are seeking to invest in companies that score well in five key areas.  

The first two are being vigorously tested right now. Resilience: Although no one appears to have anticipated the COVID-19 shock, those companies with low levels of debt, redundancy in supply chains, diversified customer bases and effective business continuity plans have performed relatively well. As for stakeholder management, yes, staff and customers should come first, but we believe those companies with well-developed government relations, connections to community groups and other NGOs and proactive social media policies are at an advantage.

The third and fourth dimensions will be assessed over a longer time frame. Take strategy: Few business investments pay off in fewer than five years, so most companies need to articulate a plan that will be successful in the world of the late 2020s. By then, the direct and indirect effects of environmental damage, social inequality, political dislocations and demographic change, including urbanization, will have stressed many business plans, but also underpinned countless new business opportunities, for example in personalized healthcare, smart materials and fintech. COVID-19 is an early example of the type of shock that may be in store.  

And in terms of leadership: COVID-19 is ruthlessly separating the leaders from the managers, giving those who can inspire and nurture their teams the impetus to adapt quickly, while exposing those who look to the spreadsheets first as “not up to the task.” 

Finally, governance: Those businesses with effective boards that have systematically provided constructive challenges to management, ensured that risk analysis is rooted in real-world scenarios rather than theoretical box ticking, and checked that business continuity arrangements, including succession plans, are effective are likely to be in better shape today than those that are stumbling in these areas. 

At a time of global crisis, talk of how to preserve investment value can sound discordant or even insensitive. However, without effective action in this area, we’re at risk of compounding the problems of large numbers of ordinary people by exposing them to long-term financial distress.