By Thomas Kostigen
The COVID-19 pandemic has investors running to, and fleeing from the stock market. Market volatility — wide swings up and down — is making some people rich and some people poor.
Risk, of course, is what’s behind the action. How much to take or how little is very much an individual decision. But Wall Street analysts are starting to chime in to help people assess risk so they can make proper decisions about in which companies to invest.
Much of this risk is invisible: unexpected challenges from an unseen virus. So, it helps to have professional analysis. To be sure, the service industries’ risks are rather obvious. The restaurant, retail, fitness, hotel, and cruise industries are experiencing historic losses and shutdowns. Pretty much any business that is consumer facing is being punished by the COVID-19 lockdowns and shutouts. Yet there are hidden risks that will come to fore in other sectors of the economy, as well — just not as immediately. Segments of the manufacturing sector, for example, are poised to get walloped. Those losses will involve supply chain disruptions.
A general filter that Wall Street analysts are utilizing to screen top line risk candidates is the environmental, social and governance (ESG) filter. Companies that abide by ESG criteria are more likely than “financial only” companies to take into account external factors such as climate change, gender diversity, or labor rights, including the health and welfare of workers throughout a company’s supply chain. Financial only corporations focus on earnings growth and profits and care less about being good corporate citizens.
“The pandemic has demonstrated on a large scale the importance of other factors that are paramount to ESG investors. Among them: disaster preparedness, continuity planning and employee treatment through benefits such as paid sick leave as companies direct employees to work from home,” The Wall Street Journal reported last week. And now even more external business considerations are being added to the list. “Companies should expect more investors to ask questions about resilience and contingency planning, viewing the issues in light of the pandemic as relevant to a company’s long-term performance,” says the Journal article.
While a financial advisor can certainly conduct a risk assessment of companies and ensure the proper checks and balances are being adhered to, and to which risks investors are being exposed, there are also resources individual investors can use to examine risks. Third-party data and analysis firms can provide good intelligence.
Let’s circle back to supply chain risk, for example. According to a recent report by Verisk Maplecroft, a global risk analytics and advisory firm that helps organizations understand how human rights, political, and environmental risks impact their supply chains, African resources for consumer products will be put a standstill. “As the novel coronavirus pandemic expands its reach into DR Congo, both provincial and national-level shutdowns will begin to weigh heavily on Congolese copper and cobalt output,” Verisk Maplecroft reports. Copper and cobalt are critical components of electronics, batteries, and machine parts the world over. “As the severity and frequency of lockdowns in DR Congo increase, we forecast supply shocks to be felt immediately,” Veris Maplecroft says. And this is just one area of possible supply chain breakdown for major manufacturing industries. Others will become known as time — and quarantines — go on.
While we may see the threats to certain industries on the news every day, risks linger behind the scenes. A safe and sound investment strategy would be to review for risk of disruption all the supply chains and distribution relationships of companies in a portfolio. Investing in ESG funds or companies that abide by ESG criteria may be a good preventative measure to the financial risks of COVID-19 and other threats that are sure to follow.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor , the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.