WSJ: Coronavirus Pandemic Could Elevate ESG Factors

Published March, 2020

By Kristin Broughton

Investors are asking more questions about employee benefits, supply-chain management and other environmental, social and governance priorities, analysts say.

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The recent volatility in financial markets due to the coronavirus pandemic could provide investors with more of an incentive to grill companies on nonfinancial risks.

Environmental, social and governance investing was growing in popularity before the virus began to circulate, as investors flocked to companies that have taken steps to manage nonfinancial risks related to matters such as climate change, board diversity or human rights issues in the supply chain.

But the pandemic has demonstrated on a large scale the importance of other factors that are paramount to ESG investors. Among them: disaster preparedness, continuity planning and employee treatment through benefits such as paid sick leave as companies direct employees to work from home.

A group of 300 mutual funds that integrate ESG factors into their investment decisions attracted $21.4 billion in new money in 2019, compared with $5.4 billion a year earlier, according to data from Morningstar Inc.

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, according to Jeff Meli, global head of research at British investment bank Barclays PLC. Down the line, those conversations could evolve to broader ESG discussions, including topics such as whether telecommuting could reduce a company’s carbon footprint, he said in an interview Tuesday.

“There is obviously a lot of volatility and a lot of big open questions just in the very near term that need to get answered,” Mr. Meli said. “…Over the long term, I think if anything this would likely accelerate the focus on ESG from an investor standpoint.”

Barclays on Tuesday said it would begin providing ESG assessments for each of the companies that it covers.

Citigroup Inc., meanwhile, in a note to clients said investors are asking more questions about issues such as employee benefits and mortgage relief, with the goal of identifying corporate strategies to limit the economic damage from the pandemic.

The bank said it expects the pandemic to affect priorities in ESG, as well as conversations on the pros and cons of having temporary workers and stock buybacks to become the new focus for corporate governance.

The corporate response to the pandemic—for instance, the decision by car maker Ford Motor Co. and other companies to manufacture medical supplies—could highlight for some investors the role that private companies play in addressing social problems, according to George Serafeim, a professor of business administration at Harvard Business School who focuses on sustainability.

“More and more people are understanding that companies are part of the solution,” Mr. Serafeim said, describing the impact of corporate strategies on issues such as climate change.

Some investors agree, and note the pandemic’s impact on markets is a reminder that environmental and social problems are financial risks they need to manage appropriately.

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