Oliver Parry shares his views on the ESG implications of the COVID-19 pandemic

COVID-19: a watershed moment for responsible investing?

By Oliver Parry, Head of ESG Advisory at Citigate Dewe Rogerson

COVID-19 is an unprecedented global crisis which is affecting all aspects of life in ways which are hard to predict. Although countries are emerging from self-imposed isolation, many questions remain about COVID-19’s long term impact on society and of course the global economy.  There are also questions being raised about the pandemic’s long-term impact on environmental, social and governance (ESG) issues.

For well over a decade, investors and issuers have become increasingly more attuned to the importance of ESG issues.  In the last few years, increasing numbers of investment firms have not only ramped up their own engagement with listed companies, to ensure that companies adhere to higher ESG standards, but have also increased investment in their in-house stewardship resources, recruiting more people to support the day to day management of a responsible investment function. 

At Citigate Dewe Rogerson, we are seeing increasing numbers of clients approach us with questions about how they can more effectively communicate their ESG strategy to a much larger audience, whether that is the media or political stakeholders.

There is no doubt COVID-19 has had an immediate impact on responsible investing and may, over time, impact attitudes towards ESG in other ways.  The outbreak has not stopped the growth of ESG investing but the engagement priorities of investors have fundamentally shifted, at least for the remainder of 2020. 

From an ESG perspective, the pandemic has raised questions about the health and safety of workers as well as systemic issues around income inequality.  While climate change has been the focus of many investors over the last few years, it is perfectly clear that COVID-19 has fundamentally shifted the ESG paradigm and focus for now is on social and governance issues. 

This doesn’t mean that investors will cease engaging with boards about climate change or sustainability issues, it will still be an agenda item and companies will need to continue to invest in addressing the threat of climate change. But for now, and for as long as the pandemic continues to affect society, companies are going to have to prioritise COVID-19 and what they do to meet this ongoing threat will remain a priority for investors.  

COVID-19 will mean that many companies could miss short-term and long-term incentive plan targets because of current market and economic conditions. This will have significant implications for pay awards granted to senior executives, especially Chief Executives.   Many asset managers have been clear that they will not look favourably on senior executives who receive generous bonuses following a year where shareholders have lost out, even though the impact of the virus is of course outside companies’ control. 

The same principle will apply to those companies who have had to cut headcount, such as those operating in the hospitality, retail and travel industries. The investment industry sees almost everything through the prism of ESG, therefore cutting jobs and still paying senior executives’ large bonuses is unlikely to be palatable to the majority of investors.

While we hope that COVID-19 will continue to retreat, it will undoubtedly leave an indelible mark on both society and the economy for many years to come.  However, attitudes towards ESG will not change – the movement will march on and this is good news for all of us. In the short term, companies will be judged first and foremost on their response to the pandemic, the effects of which none of us still fully understand.

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