The COVID-19 pandemic has profoundly changed the economic landscape. We analyse the impact on the corporate bond market and ESG investments, which have contributed to a shift away from the considerations of the shareholder to be the ultimate priority.
- Companies have issued a record number of corporate bonds since the onset of the pandemic.
- Environmental concerns driven by COP26 will likely have enduring impacts on how companies conduct their business activities.
- The shareholder bottom line will no longer be the defining feature of corporate governance for the foreseeable future.
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The impacts of the COVID-19 pandemic, both temporary and permanent, are already having ramifications for markets, consumers, business and all other stakeholders concerned. More importantly, what are the impacts that are proving more enduring than had previously been thought?
A consideration of these impacts on all stakeholders is very broad, so this blog will focus only on the affects on business. This is because it is business who arguably will see some of the biggest shifts in how they now conduct themselves as we continue to emerge from this COVID-19 pandemic.
So what have been the major themes?
Corporate bond issuance at record highs
Businesses of all shapes and sizes certainly took advantage of generous government stimulus packages and issued a record number of corporate bonds, many of which ended up on the balance sheets of central banks.
The chart below shows that global corporate bond issuance increased by 84 percent from pre-pandemic levels.
With governments now starting to wind down their asset purchase programmes, demand for these bonds would need to be met by institutional and retail investors, otherwise we would expect there to be a sizeable drop in corporate bond issuance.
This may adversely affect companies with already poor balance sheets and those termed “zombie companies” leading to an increase in insolvencies.
However, this may be completely offset by funding from equity markets (both public and private) as investors seek to diversify their portfolios and seek returns in a world fast approaching negative real yields.
The “E” in ESG got even more serious
Prior to the COVID-19 pandemic, ESG was already fast becoming an important component of how businesses conduct themselves. But COP26 only served to supercharge its importance. For example, most UK big businesses will soon outline how they plan to move to a low-carbon future by 2023.
In addition, $130tr globally managed by banks, insurers and pension funds have signed up to 2050 net-zero goals. Businesses that succeed at keeping on top of their environmental and ESG commitments will inevitably be more attractive to investors and are likely to perform better over the longer term.
Because of these factors, we can expect business to have an outsized role in ensuring we limit carbon emissions and eventually move to net zero.
The chart below illustrates just how much emissions need to fall for certain countries in order to limit global warming to 2 degrees by 2030.
A move away from shareholder bottom-line
So what does this mean for the supposed temporary changes in corporate governance experienced at the height of the pandemic? I’d argue that many of these will endure for a considerable time.
For example, shareholder bottom-line can no longer be the ultimate priority if it disregards the full range of factors that enable companies to create sustainable value over time.
Propped-up companies that have relied on government support will also think twice about re-instating previous dividend policies. And employees, many of whom currently have more bargaining power, will inevitably end up working for those who value their health and well-being as long as labour markets stay relatively tight.
I’m sure there will be frequent debates over the merits of these impacts for years to come. But it is crystal clear that business cannot go back to how they operated pre-pandemic if they are to survive in a sustainable and holistic manner that many will argue is already “the new normal”.