Why the Pandemic Could Be a Turning Point for ESG Investing

The Covid-19 crisis has ushered in new financial, health, and operational headwinds never before experienced by companies. Yet, it’s also placed a renewed spotlight on the importance of sustainability and resiliency, and how companies can do well even while they do good. This same emphasis on sustainability is now being seen in investing, with many saying the pandemic could be a major turning point for environmental, social, and governance issues—in short, ESG investing.

Simply put, ESG is a way for investors to apply non-financial measures when looking at the risks and growth opportunities of any given company. Environmental issues tie back to how a company addresses things like carbon emissions, air and water pollution, and waste management, for instance. The consideration of people and relationships falls under the “S” or social component, including gender and diversity issues, human rights, and labor standards, among many others. And finally, governance refers to the standards for how a company is run: board composition, bribery and corruption standards, executive compensation, and lobbying.

Given the impact that the pandemic has had on global economies in such a short amount of time, many investors are viewing the crisis as a wake-up call for how companies operate. The way an organization deals with its carbon footprint, energy and water use, diversity and inclusion practices, and supply chain are no longer issues that take a back seat to financial performance. They are alongside these measures, and investors—especially millennials—are increasingly valuing companies by these metrics.

A report by J.P. Morgan Research in July shows that investors are indeed taking note of ESG efforts. It polled investors from 50 global institutions, representing a total of $12.9 trillion in assets under management, and found that nearly three-quarters believe that the pandemic is increasing awareness and actions globally to tackle issues related to climate change and biodiversity losses. The authors of the report went on to say that they believe that “pandemics and environmental risks are viewed as similar in terms of impact, representing an important wake-up call for decision-makers.”

Simon MacMahon, head of ESG research at Sustainalytics, an ESG research and ratings firm, believes the lessons to come out of Covid-19 will be hard-won, but will lead to deeper resilience among companies and markets. The corporate governance crisis of the early 2000s and the financial crisis in 2008, “led to an increase in interest in responsible investing, and I think that will be true for the Covid crisis as well,” he says.

Among the reasons MacMahon cites: “There are fewer skeptics around this time because I think this crisis highlights the fragility of our global systems,” he adds. “The pandemic has demonstrated that there is a real cost to the lack of preparedness on the part of government and companies. So hopefully this crisis will give us a great deal more political will and momentum to deal with global issues like climate change.”

Individuals are on board as well. According to a survey by Voya Financial, 76% of respondents felt it was important for their employer to apply ESG principles to workplace benefits, and 60% would likely contribute more to an ESG-aligned retirement plan if it were available.

The pandemic has also widened the lens of ESG investing. Over the past decade or so, there’s been a huge focus on the “E” issues of climate change and carbon emissions. Covid is highlighting that there are critical social issues that need to be addressed as well, including how companies treat employees and the health and safety of their workers. Katherine Collins, head of sustainable investing at Putnam Investments, spoke at the recent 73^rd CFA Institute Annual Virtual Conference, and said that ESG metrics have been a fundamental part of every investment decision she makes.

In the midst of seismic changes brought about by the pandemic, these measures are becoming more meaningful and specific. “We’re starting to develop a shared understanding of what’s important for a software company versus what’s important for a mining company,” she said at the conference. “These should be very different conversations, very different metrics.”

And as companies continue to figure out the path forward for the rest of the year and beyond, how they manage ESG-related issues will take on greater importance. Collins used layoffs as an example, noting that during the early phase of the pandemic, some companies announced layoffs during conference calls, while others set up ways to help former employees find a new job. The impact on operating expenses was the same for both, but how these companies are perceived out in the market will differ greatly.

What Covid-19 is uncovering is that investors care about whether a company includes ESG issues as a fundamental part of their business or something they latch onto in times of crisis. “It’s always a little creepy to look for opportunity in the midst of turmoil,” Collins said at the CFA Institute conference. “And yet, to get past this phase of crisis, we really do need some new solutions to emerge and take root.”

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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