Powerscourt

Why do we think COVID-19 will be the end of ESG as we nearly knew it?

We thought this would be the watershed year for ESG – the evaluation of environmental, social and governance performance by those making investment decisions.

Now, 2020 will forever be remembered for the global coronavirus pandemic and the resultant unprecedented health, social, economic and financial crises that emerged.

On the face of it, investor focus has shifted in the short-term to cashflow and liquidity, and the public lens has therefore dimmed slightly on ESG. While companies need to navigate their way through short-term challenges, they should remember that investors are still watching closely and assessing how companies act and gaining valuable insight into which companies truly prioritise ESG, internalise it and integrate it fully into their business models.

Over the last three months the FTSE4Good index outperformed its mainstream counterparts, FTSE100 and FTSE350, demonstrating sustainable stocks are delivering better returns, even in these challenging times. Our view is that events of recent weeks have massively accelerated the need to be good and the need to be relevant.

Powerscourt has long maintained that the most sustainable businesses will be ultimately be the most attractive for investors. Responsibility means sustainability means investibility. ESG will be entirely integral to a company’s commercial purpose and will not be viewed distinctly.

The “E” in ESG dominated in 2019, and early 2020, with big commitments on reducing environmental impact. However, the “S” has now come to the forefront. Most COVID-19 trading updates begin with a commitment to employees. Words are easy. Investors are looking at the substance behind this. Are they topping up salaries of furloughed employees above the 80% provided by the government or going beyond the monthly cap? Are the senior management team taking a pay cut? Investors believe that companies who protect their staff today will be rewarded in the future through increased employee engagement and reduced turnover.

Beyond employees, there are wider social implications on the communities in which companies operate in and how businesses treat their customers and suppliers. Did they do their bit to help society, whether it is on the front line helping fight the virus or being flexible with customers and suppliers struggling in the short-term?

The decisions companies make now regarding their employees, customers, suppliers and the communities in which they operate can have lasting implications, both positive and negative. These are not just important stakeholders, but the lifeblood of the business without which there is no present or future. Decisions made now will shape the future of the business and determine its ability to rebound successfully when we emerge from this crisis.

The “G”, in ESG should also not be overlooked. Effective governance is more important than ever in a crisis with strong and effective management practices essential for protecting investors and other stakeholders. Ineffective board oversight stemming from a weak or ineffective Chairman, insufficient independent directors, or directors with too many commitments and not enough time, are governance factors that often determine whether companies thrive or fail in a crisis.

The essence of ESG is to drive long-term sustainable value for shareholders. During these difficult times companies are having to focus on remaining sustainable in the long term and ESG plays a fundamental part of this. The current crisis is shining a light on the values and purpose of businesses and whether they are actually “walking the walk”, rather than just “talking the talk”. As the Chairman of the World Economic Forum wrote in the Financial Times on March 25, “The COVID-19 crisis is a litmus test that shows who has been ‘swimming naked’ while endorsing stakeholder capitalism.” Investors have long argued that ‘companies do not operate in a vacuum’ – never has this felt truer.

The shutdown has had a profound impact on social behaviours and mindsets, and this will not be fully reversed when society normalises. Companies need to be on top of these trends and appropriately adjust business practices, stakeholder management, employee relations, technology, and potentially product offering and delivery mechanisms to meet the changing environment they are operating in.

Many companies may be tempted to prioritise short term financial returns over their employees, their customers and the wider communities they operate in. Whether those that don’t gain recognition for this now is arguably irrelevant, however, it is inevitable that in the months and years to come ESG will move back up the public agenda and investors will be asking, what did you do to help your employees, your customers, your suppliers and wider society during this enormously challenging global crisis?

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