ESG - has it become lost in all the noise?
The pandemic has forced investors to rethink how companies treat their employees, customers, and suppliers in the long term.
Environment, social and corporate governance (ESG) are the three key factors in measuring the sustainability and societal impact of an organisation. However, since company share prices are now being impacted based on how effective their COVID-19 response is, has ESG become lost in all the noise?
In short, no. There is a mountain of growing evidence that shows how the ESG agenda is thriving despite turbulent economic times. Investors have devoted huge amounts of time and resources over the last couple of years to push the ESG agenda to the forefront, and it seems they are not about to let it drop. Arguably, the pandemic has forced investors to rethink how companies treat their employees, customers, and suppliers in the long term.
Cynics might argue that the current crisis makes ESG issues irrelevant, but based on our discussions and research with clients, accountants, investors and regulators, we believe that the current crisis is forcing us all to rethink our values and the purpose of business and finance. The litmus test will be in the months to come if companies honour their sustainability commitments and continue to push their ESG agenda forward.
For the time being, there are a number of positive signs which indicate why ESG really matters despite the COVID-19 pandemic:
Purpose outperforms profit
For years, business has been all about maximising profits and keeping shareholders happy. Now, thousands of companies are having to showcase, during this real-life scenario, how they put purpose over profit. The spotlight is on how companies are putting their employees, communities, and the environment ahead of shareholder returns.
There are many examples of companies not giving dividends this year to save cash and keep their workforce in place, but there are also companies who are going even further to push forward their ESG agenda. Total, for example, committed to net-zero emissions by 2050 on 5 May 2020 following investor pressure, despite the price of oil plummeting, demonstrating how mitigating climate change is core to their business purpose.
Those who have a set of values and secure sense of company purpose will be more adept to guide critical and decisive action in the future, in particular to threats such as climate change. Now is the time to plan for the future.
According to Rebecca Henderson, author of Reimagining Capitalism, the epidemic demonstrates how governments and companies can make tough and unprecedented decisions in times of need. Henderson is adamant that purpose-driven companies are at the heart of the systemic rethinking of capitalism and will be “catalysts for uncovering new ways of working” moving forwards. However, we are yet to understand the long-term impacts of public brand perception of companies that may have behaved irresponsibly during the pandemic.
ESG bonds on the rise
As the coronavirus started to spread, the global equity markets faced heavy loses; however, despite this, it seems ESG bonds are on the increase. Many investment firms have been releasing data about how their ESG funds are outperforming the wider market. According to research from the Morgan Stanley Foundation, the issuance of green ESG bonds in April 2020 was 272% higher than the same month the year prior, with the total issuance figure sitting at $48.5bn.
Coronavirus is shifting the focus of leading ESG investors. BlackRock, for example, is still strongly pursuing its ESG investments having recently launched new ESG ETFs, suggesting “they see the sustainable investing wave playing out in financial markets over the coming decades. This year’s fund flows may offer a miniature version of this shift.”
In addition, mainstream banks like Barclays have also said: “COVID-19 will accelerate this trend towards ESG even further, creating a greater sense of urgency and responsibility toward everything from consumer behaviour to climate change, supply-chain practices and the future of work and mobility, and potentially alter the nature of the investment process as a result.”
As the EU’s new taxonomy regulations on green finance come into effect in 2021, which aim to tackle greenwashing and ensure adequate finance is allocated to ESG funds and projects, the resilience of the ESG bonds will begin to truly show. Is this the new norm or just the current fashion?
Increased focus on the “S” in ESG
Before the pandemic, investors and financial institutions traditionally saw the “S” in ESG more from the perspective of community engagement and charitable works. However, there is now greater scrutiny, from the public, investors, and government, on the wider social impacts of corporate activity, on issues such as financial inclusion, gender inequality and employee physical and mental wellbeing.
Companies not focused on employee wellbeing look to damage their brand reputation in the long term. Sports Direct, for example, was targeted on social media after attempting to keep outlets open despite a government order to shut all non-essential shops, raising concerns over employee safety.
Other companies, however, have shown how culture can be strengthened, not diminished, despite compromises and new ways of working. There is now an expectation from society that businesses must behave differently in the future.
An increased spotlight on governance
According to the University of Oxford, the management of public companies and the investment priorities for asset managers have become “a first order question in corporate governance across the developed world.”
Usually seen as a separate function within a business, the importance of governance integrated with the management of environmental and social issues is becoming more recognised. The COVID-19 crisis looks likely to alter the way that investors assess corporate governance of employee rights, community engagement and the long-term impacts that climate change may bring, according to Morgan Stanley. This has only been reinforced with the new Section 172 requirements, which will be scrutinised by investors, as they seek to understand how a company responds to stakeholder concerns. To learn more about Section 172 please see our research and sign up to our webinar on 27 May.
Make noise about ESG
There is a huge opportunity to integrate “decision-useful” ESG into the new future we all face. This is for the good of the planet, but also for businesses who need to prove their long-term value within society.
To find out how you can integrate decision-useful ESG and implement a powerful strategy into your business, get in contact at firstname.lastname@example.org