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Has ESG ended the era of the dividend? Absolutely not.

By Elisabeth Cowell
15 December 2020

By Elisabeth Cowell

Last week, the true extent of the coronavirus pandemic on corporate dividend payments came to light thanks to research from GraniteShares.

It showed that nearly 500 companies listed on the London Stock Exchange have cancelled, cut, or suspended dividend payments since the start of the year. Of course, the ban on banking stocks from issuing dividends has had a large part to play in this. But, whatever the reason, the end result has been a so-called ‘dividend black hole’ in 2020. The story is similar across each major exchanges worldwide.

According to an array of spokespeople quoted in an article run by the Financial Times in June, investors should not expect corporate dividends to snap back to pre-pandemic levels any time soon. This, they argue, is because “the crisis may catalyse a significant shift in how companies spend their free cash flow, following increasing acceptance that businesses bear a responsibility towards employees and wider society as well as shareholders.”

This begs the question, has ESG ended the era of the dividend? The answer to this, in my mind, is absolutely not.

To say this is to believe that non ESG or green related businesses are not capable of generating strong, sustainable cash flows. In fact, quite the opposite is true; environmental infrastructure and many ESG funds have continued to deliver strong cash flows over the past 9 months which has supported high yielding dividends throughout the pandemic.

An additional observation is that, because businesses backing societal and environmental initiatives generate their cash flows from investments that contribute to the wider society, they can afford to go on to reward those that have backed them. This sits in strong contrast with more traditionally associated income stocks in the financials, property or commodities sectors which have to make payments to shareholders from the cash flows they have generated given that they have been derived from causes which are not affiliated with wider societal contribution.

Therefore, in my mind, this is simply another instance of how coronavirus has accelerated a pre-existing trend. In this instance, the coronavirus has showcased the resilience of environmental infrastructure during one of the most challenging of circumstances, serving as a very strong proof point towards the argument that investing in green initiatives does not have to mean compromising on financial returns. And if we look ahead, right now, there are thousands of start-ups focused on solving deep societal and environmental issues, which are just at the start of their journey. As they grow to become mature, thriving, cash generative businesses, investors will simply have a new hunting ground in which to get their income fix, instead or, or as well as, those sectors more traditionally affiliated with high yielding cash payouts.

There is also an argument to say that the coronavirus is simply bringing us back to a more traditional understanding of the role of the corporation: to have a positive social purpose. Some fascinating research by Leonardo Davoudi, Christopher McKenna and Rowena Olegario, issued as part of the British Academy’s The Future of the Corporationresearch, argues that social purpose has been the defining trait of the corporation since the dawn of legal personhood. It highlights that this connection was only broken relatively recently, in the 19th century, through general incorporation laws, and that “contemporary concerns regarding corporate power are rooted in a long history of similar sentiments.”

This led me to think about what a dividend really means? In the broadest terms, it represents a distribution of wealth. So, for those businesses which do not generate cashflows from ‘green’ initiatives or activities related to the UN’s Sustainable Development Goals, we need really, to broaden our expectation of how we can benefit from dividends, beyond the modern definition of the word. Investors in non ESG/ environmental stocks which decide to compromise shareholder returns in order to make a financial contribution to the planet will still be getting back, just not in quite the way they are used to.