ESG Isn’t Going Anywhere: Investor Expectations in the Age of COVID-19

The COVID-19 pandemic has created a global health crisis, upended the economy, and led to major stock market declines. As a result, many investors are reevaluating both short-term and long-term portfolio strategies, and companies are reevaluating their sustainability priorities. This raises an important question for corporate sustainability professionals: how will the rise of COVID-19 affect ESG investing strategies both in the short term and the long term, and what does it mean for companies? 

Preliminary indications are that the COVID-19 pandemic has—if anything—increased investor attention on corporate ESG management. In particular, investors have been even more vocal about their expectations on issues such as employee health and safety, workforce policies, job security, and business operational and strategic resilience. Front and center are investor concerns about responsible corporate governance, specifically related to COVID-19 response.  

Preliminary Indications Are That Investors Are Full Steam Ahead on ESG
Leading asset owners and institutional investors are renewing their ESG investing commitments. The Government Pension Investment Fund (GPIF) of Japan, the world’s largest asset owner, and other major asset owners remain steadfast in their expectations of ESG and long-term investing. Even as the virus and market turmoil spread in mid-March, a new round of major asset owners joined GPIF’s letter.  

Larry Fink, the CEO of BlackRock, the world’s largest asset manager, also released a letter at the end of the first quarter in which he emphasized that “the pandemic we’re experiencing now highlights the fragility of the globalized world and the value of sustainable portfolios. We’ve seen sustainable portfolios deliver stronger performance than traditional portfolios during this period.” Blackrock is also continuing to take ESG action as a shareholder even during the crisis, notably voting against a board member at a natural gas distributor based on the company’s inadequate climate-related risk disclosure.

Early data seems to show that ESG funds are performing better and proving more resilient during this turbulent moment in time. S&P Dow Jones' analysis notes that ESG portfolios have delivered better returns during the COVID-19 crisis and over the longer-term as well. 

BSR has partnered with Polecat since 2017 to deliver real-time corporate reputation and ESG intelligence from global online and social media discourse. Our review of data from Polecat indicates that many ESG topics (e.g., climate change, indigenous rights, etc.) are being reframed in relation to COVID-19, increasing their urgency and reach.  

The Wall Street Journal also envisions that the pandemic could elevate ESG factors in investment decisions, characterizing remarks from the head of research at the British investment bank Barclays: “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. Down the line, those conversations could evolve to broader ESG discussions…”

More broadly, COVID-19 has also highlighted enormous disparities in society and corporate performance on the “S” in ESG. As the world assesses the challenges and rebuilds—and invests the capital to do so—it is likely to be guided by the imperative to “build back better” with a more just and sustainable economy. Companies will be evaluated by how they address those challenges in their businesses and being part of global solutions will be both a competitive differentiator and an ESG differentiator.

COVID-19 Will Demand Emphasis on Different Areas of ESG
Many, if not most, corporate sustainability materiality matrixes will need some updating. The pandemic has demonstrated that many companies might generally have identified the right set of issues but may not be prioritizing them correctly or setting the right agendas to address them. For example, many service companies have not thought that employee health and safety was a high risk for their business. This thinking is obviously now changing. 

In this regard, BSR has seen a variety of material issues emerge as areas of particular interest to ESG investors. These include employee health and safety outside as well as inside the workplace, supply chain and resource risk and resilience, and employer-employee social contracts. It will be noteworthy to see how companies begin to report on COVID-19 in relation to these material issues, especially with the impending release of many corporate sustainability reports. 

COVID-19 has also put a spotlight on building resilient business strategies through scenario planning and considering second or even third-order effects. Issues that may have been deprioritized because they seem attenuated have—by the nature of the virus and its related effects on labor, supply chains, etc.—highlighted that a one-dimensional view of risk is not sufficient in designing resilient business strategies. Using scenario analysis in materiality and integrating the process with enterprise risk management are examples of ways that companies can better identify emerging ESG issues, some of which could manifest as quickly as COVID-19—and manage those risks accordingly.

COVID-19 Is a Reason to Accelerate Efforts on ESG, Not to Pause Them
Companies that are more strategically and operationally resilient and that treat their workforces better will likely be more attractive to all investors. In the short term, that means companies should increase efforts to integrate ESG investor expectations, ratings, and perspectives as part of sustainability initiatives, stakeholder engagement, and resilient business strategies.  Corporate leadership should also be conversant in ESG topics that relate to the COVID-19 response as investors ask tough questions and stakeholders evaluate companies on their effectiveness, credibility, and leadership on those material topics.

Longer-term, COVID-19’s effects and the responses may also become a testbed for ESG analysis that helps create a new understanding of ESG impacts on business. For example, many investors have struggled with how to model and quantify the “social” aspects of ESG (whereas “environmental” are quantitative and more understood), and this may improve understanding of the financial impacts of major social disruptions. If this happens, companies should expect to see an increase in the quality of ESG investor expectations for corporate reporting.

As we look ahead to the day when COVID-19 is no longer front-page news every day, it will be imperative for companies to learn and apply the lessons of this crisis. We believe investors will in turn hold them to higher ESG expectations. It will only become more important for companies to turn corporate sustainability principles into action, placing robust approaches to ESG at the center of resilient business strategies.