Does ESG still matter?

Photo by Alec Favale on Unsplash

A question has come up: Does ESG still matter in a pandemic? Faced with tough economics and massive uncertainty, will companies walk away from their commitments to creating a better future for us all?

In fact, ESG remains extremely relevant during our current crisis. As the New York Times outlined in a series of opinion pieces on April 17 entitled “The America We Need,” we’re seeing increased focus and scrutiny around how all economic actors should unite to build a more resilient and equitable world. Companies have a critical role to play here. How so?

To answer this question, it’s useful to review the what ESG really means — a set of environmental, social and government standards for a company’s operations that investors use as vetting criteria for investments:

• Environmental: A full range of climate and sustainability considerations — things like energy use, carbon footprint and water waste. The environmental impact of our lockdown has had mixed results — emissions are falling, but single use plastic is up.
• Social: How a company manages relationships with key stakeholders, including employees, suppliers, customers and the communities where it operates. Social criteria typically involve areas like pay equity, worker health and safety, and commitments to diversity and inclusion — all things that have taken on heightened importance given companies are being held accountable for how they treat their employees in the pandemic.
• Governance: The central considerations of running a company, including risk management, executive compensation and accountability of board management. Good governance builds trust and resilience — something that every company needs as they make plans to return to work while continuing to care for employees and consumers.

Even in this time of immense market volatility, ESG funds are generally performing well. Bloomberg found that in mid-March, the average ESG funds fell 12.2 percent for the year, compared to the S&P 500, which fell more than 23.2 percent. ESG equities and bonds continued to outperform peers in major global markets, including the U.S. so far in April.

What follows is an outlook for ESG and some considerations as you tell your ESG story to stakeholders:

• ESG will remain to be a priority for investors: Even before the pandemic, investor interest in ESG was rapidly increasing, with heavy hitters like Blackrock’s Larry Fink prioritizing ESG in his firm’s investments strategy. ESG’s strong performance during the pandemic will translate to increased interest by investors. In fact, early signs show that net inflows into ESG funds have not slowed and 2020 proxy season already includes 400-plus ESG resolutions. Expect more investor requests for disclosure on workforce and supply chain. And be ready to tell your story.
• ESG is a good framework for resilience: Companies that have invested in ESG have put thought and planning into how they manage risks, both internal and external. This fosters resilience, making a company ready for any type of situation and giving it a chance to create a template and infrastructure for responding. How your company responds in a crisis can be an excellent indication of how your business is run day-to-day, so be ready to show how ESG contributed to your resilience — companies truly focused on the well-being of their workers and customers are likely able to make the right decisions more quickly in a major crisis.
• ESG can promote innovation and help companies realize value: A proactive strategy for pursuing both sustainable business growth and positive social and environmental impact can be a source of innovation and value creation. Many companies, and even entire sectors, are identifying new places to lead and transform their businesses. Constraints can force new and — potentially more valuable or efficient — ways of working. It will be important to monitor implications of emerging macro trends for your business and sector and to be intentional about creating shared value for employees, customers, suppliers and other stakeholders.

The one certainty we must all embrace is continued uncertainty — around the trajectory of the virus, when and how our lives will return to “normal,” and how this will shape business and society as a whole. But the fundamentals always apply, especially, if not even more so, in a crisis. ESG performance coupled with a commitment to purpose will be key for companies to navigate — and ultimately thrive — in our new world order.