How a company treats employees and consumers is a key factor for future investments. Other considerations included how well-prepared they were, and will be in future for an unforeseen disaster, as well as how resilient their business is.

The coronavirus crisis has sparked market volatility comparable with the global financial crisis 12 years ago. But amidst all this turmoil and the bleak human face of this tragedy, some investments have fared better than others. Data from industry tracker Morningstar showed that actively managed ESG funds have, on average, beaten their non-ESG rivals¹. The biggest outperformance was in the UK, where the average ESG fund fell 14 per cent against 16.8 per cent for their non-ESG rivals.

This outperformance is doubtless linked to the fact that these funds have less exposure to both fossil fuel firms, which have suffered from the Russia-Saudi Arabia oil price war, and the high-emitting airline industry, which has been virtually grounded by the pandemic.

Pessimists might also suggest that this resilience in ESG funds will be short-lived. Some governments have responded to contracting economic conditions by repealing or ignoring environmental commitments. Pundits were astonished in March, for example, when the Trump administration announced that the US Environmental Protection Agency (EPA) would be suspending its enforcement of environmental laws during the outbreak. The move means that polluting the air or water will be allowable as long as the violations are “caused by” the pandemic in some way². Earlier in the month, China had said that it would modify the level of environmental supervision of companies to help production in the country resume, although it stressed that this did not indicate that it would relax standards³.

The slowdown in global economic activity has led to reduced air pollution⁴, wild animals in cities⁵ and even a reduction in seismic activity⁶. But any environmental impact that might be seen as changes for the better could be wiped out by restarting those activities that ignore environmental laws and refuse further commitments to reduce climate change. How far governments might push this pursuit of short-term gains remains to be seen, but the gains will be just that – short term. What the pivot to an ESG mindset has shown is that concentrating on long-term goals reaps long-term, sustainable gains.

A lot of the public focus of ESG investments tends to be on the environmental part of the equation. Companies highly publicise their endeavours in this area and it can lead some to diminish the importance of the social and governance aspects. But these are the key assets that impact investors looking for opportunities today.

A company with strong governance will have disaster recovery and business continuity plans in place. They will also have a resilient business that is agile enough to adapt (within reason) to unforeseen crises.

Meanwhile, a company’s impact on society has become a highly distinguishing feature that greatly influences consumer sentiment. Appetite for a public bailout of companies in the airline and travel industry is low⁷ and these firms’ response to the crisis is being noted and criticised or praised across traditional and social media⁸. Similarly, the backlash against English Premier League football teams that chose to furlough non-playing staff that work in their grounds, while levying no impact on millionaire players and billionaire owners was fast and fierce⁹.

These are just a couple of examples, amidst many, of how strongly consumers today have changed how they view a company’s place in society. Good corporate citizens are rewarded with brand loyalty and advocates on social media. Those who may be deemed bad corporate citizens are publicly vilified and stand to lose consumers who can take their business elsewhere.

All of this makes investing with an eye towards ESG credentials an interesting proposition. Strong environmental commitments are necessary to build and develop a sustainable business that will meet standards today and the standards we will need to adopt in the future. In this crisis, more than ever, consumers have shown that they can and will vote with their wallets and voice their opinions, loudly and publicly.

And corporate governance from the bottom up will test and temper the resilience of a company, so that it is better able to weather the vagaries of the marketplace and the kind of unprecedented situations that no-one expects – and yet we find ourselves in.

Find out more about ESG investment opportunities by contacting your Relationship Manager or Investment Counsellor.

¹https://uk.reuters.com/article/us-health-coronavirus-funds-esg/graphic-sustainable-funds-a-safer-harbour-in-coronavirus-market-meltdown-idUKKBN21O1AF
²The Guardian, Trump administration allows companies to break pollution laws during coronavirus pandemic, March 2020
³Reuters, China to modify environmental supervision of firms to boost post-coronavirus recovery, March 2020
⁴The Guardian, Coronavirus pandemic leading to huge drop in air pollution, March 2020
⁵The Guardian, Emboldened wild animals venture into locked-down cities worldwide, March 2020
⁶Nature, Coronavirus lockdowns have changed the way Earth moves, March 2020
⁷Financial Review, Britain says shareholders, not taxpayers, should bail out airlines, April 2020
⁸Business Insider, Airbnb is paying hosts USD250 million after they criticized the company for leaving them on the hook for coronavirus cancellations, March 2020
⁹BBC, Premier League players ‘prepared to step up’ amid coronavirus crisis, April 2020

But so often we witness business owners who do not have a game plan when it comes to business succession or continuity, nor are they able to properly harness the qualitative capital existing within the family.

How might the members of a family business collaborate amidst the seismic market challenges we are seeing in recent times?

How does the founding generation relinquish the reins and gradually empower and engage the next generation effectively?

How do business families secure their own legacy?

These kinds of questions are best tackled during times of stability and growth, when family businesses have time to think through their succession plans. Such is the best-case scenario. However, sometimes crises happen before succession planning has finished or even started, and the ensuing storm exposes family businesses to otherwise avoidable risks.

Don’t leave it to chance

In face of disruptions and adversities like the current global COVID-19 crisis, it underscores why family businesses cannot leave their succession planning to chance.

Reinforcing this point, Jack Ma, during his farewell speech to over 60,000 Alibaba employees, reiterated his vision for Alibaba to last for 102 years, and crossing three centuries. To achieve this, Ma described how he looked at the succession practices of many firms to “keep them alive” when responsibility was passed down. For Alibaba, he decided not to simply pass the company on to the next generation or hand it off to professional managers, but instead took a third way to “nurture our own team, and make sure the succession process is smooth with the help of system and culture. That is why, I have been preparing for 10 years for today..." ¹

That Ma had planned his departure from and passing on of Alibaba for a decade with such a keen focus on generational succession accentuates the need to discuss candidly the legacy of any family business. During the stewardship and legacy phases of the wealth cycle, a long-term perspective is needed to ensure that all family members are working to uphold their business’s reputation and stability.

At HSBC Private Banking, we work closely with a wide range of multi-generational family businesses on their succession plans, as well as frameworks for preserving their legacy. No family business is the same, but all want to avoid the commonly cited curse of “shirtsleeves to shirtsleeves in three generations”². Turbulence and unsettled times can become a catalyst for family members to focus on discussions about the future. We are able to meet these needs and channel this focus into open discussions on longer-term legacy and succession. Communication at these times can successfully navigate the storm and protect the wealth and sustainability of family businesses.

The golden key?

Dennis T. Jaffe, a pioneer in the field of family enterprise consulting, has conducted extensive research on the subject of how family businesses sustain themselves over generations. The results, derived from interviews with established family businesses across 20 countries, were presented in his recent book, "Borrowed from Your Grandchildren: The Evolution of 100-Year Family Enterprises". A consistent trait that pops up is how these families are able to communicate better than others and are therefore effective in navigating difficulties hence preserving wealth and weathering uncertainty better. ³

At HSBC Private Banking, we have consistently seen that family businesses plan better for the future when they have a well thought through approach to communicating about succession. Communication is a simple concept but knotty to execute in a sea of differing views, dynamics and interests. It is therefore critical to establish proper communication and decision making mechanisms both at the family and business level.

Below are some approaches to consider to improve communication within a business family:

• Embarking on family projects and endeavours
When family members collaborate on projects together, it builds solidarity around a common mission and purpose. Whether it’s building a new school or providing support to villagers in underprivileged communities, family members need to communicate effectively to achieve their shared goals.

• Creating family stories and testimonials
Crystallising the legacies, traditions and heritage that epitomises your family history go a long way to unite the family through storms of change. It reminds the family how we have overcome challenges before and that we can do it together again.

• Embracing the entrepreneurial spirit
Families establish entrepreneurial funds that look to investing in businesses across new markets and industries, while simultaneously creating opportunities for the up-and-coming generation to assume leadership roles. In this way, parents and children must learn to communicate about expectations and responsibilities, which is an important bonding process. Many families also seek help in establishing their own family office to professionalise and manage their joint assets.

• Clarifying priorities, roles and responsibilities
Communicating about roles and responsibilities is important for maintaining stability in family business operations. Identifying potential sources of tension is a good exercise for developing effective decision-making mechanisms. In this regard, families often seek help in drafting family constitutions, which can go a long way to managing expectations about the up-and-coming generation’s commercial and familial roles.

The flip side to a crisis

Crises have a way of providing clarity to the way we see things. The suddenness and scale has awakened many family business owners to the importance and urgency of succession planning.

In Chinese, the word for "crisis" (危機) is comprised of two characters, which mean "danger" and "opportunity" respectively. During the current challenges presented by COVID-19, positives are emerging not least from the fact that it is providing family businesses an opportunity to prioritise what is most important for their cross-generational aspirations.

Let's take a lesson from the eagle and be inspired. The eagle is an extraordinary bird. During storms, instead of hiding to escape the danger, eagles use the power of wind to propel themselves higher. At HSBC Private Banking, our desire is for your family and your business to rise above the storm and emerge stronger, be more resilient and better able to ride out the next wave of growth.

Please contact your Relationship Manager to discuss how we can assist you in achieving the enduring legacy of your business and family.

¹https://qz.com/1706408/excerpts-jack-mas-farewell-speech-to-alibaba-employees/
²https://www.oxfordreference.com/view/10.1093/oi/authority.20110803100502580
³https://www.nytimes.com/2019/11/06/your-money/wealth-100-year-family.html

The answer can be found behind the intriguingly titled article - "How Taylor Swift's Chinese Fans Are Helping Fight the Coronavirus". In addition to sharing a touching story about how various fan-based communities in China are coming together to assist those affected by the coronavirus outbreak, it also provides insights into effective philanthropic practices.

The Taylor Swift fan club’s approach included identifying immediate needs by phoning hospitals to ask what supplies are lacking; mobilising and organising people and resources efficiently; and holding themselves accountable through transparently reporting their activities. It is a powerful and multifaceted example of how to approach the designing and managing of philanthropic projects.

Those mobilising to respond to the coronavirus outbreak include community groups, multilateral institutions, national governments, businesses and philanthropists. A vast range of individuals and communities have the shared aim of arresting the pace of the outbreak, delivering protective gear and equipment to responders and supporting the development of vaccines and treatments for those affected.

The World Health Organization (WHO) announced that USD675 million is required to develop a global response plan¹, and this urgency was matched by the actions of prominent foundations from both East and West. For example, the Bill & Melinda Gates Foundation (The Gates Foundation) committed USD20 million in support of the WHO plan. In addition, the Gates Foundation pledged USD80 million in grants to support governments and researchers in the search for a vaccine, strengthen detection capabilities and limit the spread of the virus, especially in nations with weaker health infrastructure². In Asia, the Jack Ma Foundation is working with the Chinese Academy of Sciences, Chinese Academy of Engineering, Guangzhou Institute of Respiratory Health and other organisations to develop a vaccine³. Ma has also ensured that the capabilities of Alibaba Cloud are made available to provide artificial intelligence tools to support scientists in their research⁴.

Not unlike the Taylor Swift fan club, these efforts identify the most pressing needs, discuss with partner institutions where they can make the greatest difference and lean on their networks to coordinate a response plan. This user-centric and science-based approach is enabling governments and non-governmental organisations to take immediate steps to tackle the outbreak. Their efforts are highlighting the essential role of philanthropy globally during health emergencies.

While organisations such as the Gates Foundation and the Jack Ma Foundation are providing flexible funding to address immediate relief measures, there remains a requirement to support affected communities over time. This is to both tackle the effects of COVID-19, which continue to evolve, as well as encouraging recovery at the appropriate time. For those interested in understanding more, below are several considerations:

• Local organisations serving low-income and vulnerable communities. Many elderly, ethnic minority and low-income families have been struggling to source and pay for protective equipment such as masks and sanitisation products in affected areas. The evidence suggests that they have less access to healthcare networks, while disability or language barriers can hinder communication with the healthcare professionals they are able to reach. Locally-based organisations with strong community ties will tend to be in prime position to assist with distributing resources, monitoring health conditions and helping donors keep track of the evolving needs of the communities they are assisting.

• Organisations promoting health and hygiene. With the medical profession emphasising the importance of personal hygiene and handwashing to limit the spread of the virus, the distribution of protective gear, promotion of preventative behaviour and dissemination of accurate medical advice is invaluable. As one example, according to the Global Handwashing Partnership, handwashing with soap can cut acute respiratory infections by 25 per cent.⁵ Raising awareness about simple methods to promote hygiene and making available sanitising products can and will go a long way towards containing the virus and promoting healthy living.

• Institutions focused on medical research. In addition to vaccines and anti-viral drugs, there is still much to understand about the long-term health impact of those infected by COVID-19. As most of the funding for research is currently being channelled towards resolving the coronavirus outbreak, scientists still need support for research that is unrelated to the immediate crisis, but nonetheless vital to the future wellbeing of millions of people. Such avenues of research, even if not directly related, are often still useful when emergencies such as the coronavirus outbreak occur. For instance, it was the millions of dollars in funding dedicated to genomic research over the past decade that enabled scientists to map the DNA sequencing of COVID-19 within just a few weeks.

• Groups providing services to address mental health challenges. From those individuals under self-quarantine to families who have lost loved ones, there is a considerable need for services to help with the effects of social isolation, anxiety and grief. Mental health affects how an individual thinks, feels and acts, influences his or her willingness to engage with others and contributes to their overall satisfaction with life. Collectively, it can also affect a society’s productivity and social cohesion. In addition to enabling the provision of professional help, philanthropists can support organisations using online tools to provide mentoring and counselling services. These services are necessary because they can help vulnerable individuals stay connected with others and receive the support they require.

• Institutions working on recovery and emergency preparedness plans. The golden rule of crisis management is to remain vigilant, both through practice exercises and by considering the lessons learned from other representative crises. Philanthropists and charitable organisations are in a unique position to help public health institutions and NGOs learn from past experiences, a relatively underfunded focus area. The beneficiaries of such funding will have the opportunity to build capacity and lay the groundwork for initiatives, as well as set up systems and infrastructure, so as to be prepared for future health emergencies.

These are only a few of the ways individuals and organisations can use their resources and networks to aid in the recovery from a health emergency. For our part, HSBC Private Banking has been working with clients to identify areas in need and assisting them make their donations. Our own involvement has included the purchasing of medical equipment for a hospital in the Greater Bay Area, providing financial and non-financial aid to Hong Kong residents under quarantine and making grants to families who lost their source of income due to the coronavirus’ impact on the hospitality, catering and tourism sectors.

Long-term thinking is required to restore the economic damage already caused by the coronavirus. Building more resilient communities during recovery requires the smart allocation of resources to address health-related issues, as well as an integrated plan involving effective policymaking, the strengthening of social ties and building of sustainable infrastructure. We have been working closely with our clients to address the issues afflicting their communities wherever that may be.

Please contact your Relationship Manager to discuss how we can assist you in achieving your philanthropic goals.

¹World Health Organization Website. Last accessed 17 February 2020
²Bill & Melinda Gates Foundation Website. Last accessed 17 February 2020
³Jack Ma Foundation Official WeChat Account. Last accessed 17 February 2020
⁴Xinhua "Jack Ma Foundation donates another 1.4 mln USD for coronavirus drug development" published 14 February 2020. Last accessed 17 February 2020
⁵Global Handwashing Partnership Website. Last accessed 18 February 2020

At the heart of Asia’s wealth boom, HSBC Private Banking also recognises the looming financial impact that climate change has on the business community. Unchecked, climate change could shave off an estimated 11 per cent off Southeast Asia’s gross domestic product by the end of the century.¹

“We need to and can help these families make their businesses more sustainable. A lot of them, through their family offices, are already deeply involved in sustainable investing. But more can be done to incorporate sustainability into their own business, which has been their source of wealth to begin with,” said Philip Kunz, Head of Global Private Banking, Southeast Asia at HSBC.

A 2018 study by HSBC found that only 24 per cent of businesses in the region have an ESG (environmental, social and governance) strategy, compared with 48 per cent of corporates globally. Asian companies, particularly those in Southeast Asia, are at risk of falling off multinational corporations’ supply chains if they do not address their ESG strategies.

Likewise, the drive to become sustainable is increasingly at the top of domestic agendas, and countries are stepping up their hard targets for green policies. Singapore, for example, has recently implemented a carbon tax to encourage companies to bring down emissions. It’s a conscious decision, an acknowledgement that habits and practices must change in order for us to thrive.

Championing sustainability

The transition to a low-carbon environment often begins with conversations about awareness and improvisation. As part of one the world’s largest financial institutions, HSBC Private Banking’s role in this transition is to connect clients to new ideas, opportunities and networks that support the sustainable ambitions of these family businesses.

A great example is working closely with HSBC’s commercial banking division to foster deeper client relationships, leveraging each other’s network and capabilities to better identify specific areas for improvement for business owners.

“Rather than telling them to exit their business, we help these families to continue pursuing their business, but in a far more sustainable way. And ultimately, helping them understand that while the path to sustainability may increase costs at the start, but these (costs) will turn into an investment that brings huge benefits in time to come,” Mr Kunz explained.

Aside to providing sustainability-related thought leadership and innovations with capital financing, HSBC also takes a hands-on approach to generate more awareness on climate change.

HSBC Private Banking’s Sustainability Leadership Programme is very much a part of this ethos. The programme provides a platform for the Next Generation of business leaders to explore their own understanding of climate change and sustainability. It sparks a new reality for them to apply sustainable practices to their own business and investment decisions.

“Often, these clients come back to us after the trip and say, ‘How do we kick-start this whole process? Can you give us more insights? Can you tell us what the others are doing?’ There is increasing client proactiveness,” said Mr Kunz.

Finding purpose

The push for greater adoption of sustainable practices in Asia is in part boosted by a generational shift in mindset that HSBC sees in many families.

“The new generation today have greater access to information and education. Many of them are so much more aware of what is happening outside of Asia, and are increasingly socially and environmentally conscious. We see situations where these sons and daughters may not necessarily want to run the company the way their parents do,” said Mr Kunz.

“During this process, they find a common purpose which binds them more closely together. The Next Generation come away feeling empowered to make a positive impact with their inherited wealth through the family business.”

“It doesn't happen overnight, but judging from the encouragement and enthusiasm we've received, and how well our partners are responding to conversations, we know we’re moving in the right direction,” reflects Mr Kunz.

¹Asian Development Bank (ADB). 2015. Southeast Asia and The Economics of Global Climate Stabilisation

Some of the broader consequences of the pandemic will be good for society, others bad. In time, businesses will have to rethink the true level of resilience to potential shocks – virus, climate or otherwise.

The massive reduction in air travel has been positive for the climate as significantly less greenhouse gases are emitted in the short term. Regulators may even stop requiring airlines to fly near-empty planes to retain take-off and landing slots.

But there may also be a rethink about where we obtain fresh produce: less food flown in from abroad may encourage more local sourcing. And this year’s disruption of supply chains may also make firms seek local alternatives.

More meetings – even conferences – taking place virtually will also mean less travel, which is the largest slice of our carbon footprint.

Working from home will reduce commuting, thus lowering emissions and local air-pollution – especially from road traffic – but any savings in heating or cooling workplaces with fewer occupants will probably be more than offset by the extra energy used to heat or cool homes.

And an increase in online grocery ordering has mixed outcomes too: the delivery-van emissions are probably offset by fewer personal shopping trips but it could see more boxes and bags used.

The slowdown in industrial output as COVID spread meant factories consumed less energy and emitted reduced greenhouse gases, but that is temporary. When production resumes, emissions are likely to spike back up as energy demand grows and factories try to catch up on lost output.

Indeed, economic stimulus from governments may focus on short-term revival by helping carbon-intensive industries. Resources could be directed away from long-term issues such as climate change as political attention concentrates on preventing the spread of the virus and treating the affected.

That could delay climate-related action, policy or even negotiations, including the political will to strengthen climate pledges in 2020.

COVID may also result in a review of the resilience of global healthcare. A quarter of US workers lack access to paid sick leave. Companies and regulators may look at how benefits are included in the contracts of service-economy employees or how gig-economy workers are paid.

But after so many workers have had to self-quarantine, more employers may encourage flexible working. And the increase in people having to conduct daily tasks online could lead to functionality and digital access improving over time. For now, however, those without digital access may suffer.

There are implications for corporate governance from the coronavirus too. As companies are disrupted, balance sheets may become stretched but delayed audits could lead to incomplete reports, missed filing deadlines or late announcements. Write-downs of tangible assets, investments or goodwill may affect future earnings and dividends too.

So, when the COVID threat lessens, questions will emerge over how resilient businesses really are to future shocks, including ESG matters.