Covid-19: Putting the "S" in ESG

One consequence of the Covid-19 outbreak has been to shine the spotlight on the social element of ESG and what the value of targeting social performance might look like.

Historically, businesses have focused on embedding environmental and governance factors into their frameworks, with social factors receiving less attention. Covid-19 has thrown social factors into the spotlight, with the following in particular receiving an outsized share of media and public attention:

• health and safety – relating to a return to the workplace or supporting workforces who are now operating remotely;
• employee relations – furlough and redundancy or restructuring decisions and communications;
• treatment of suppliers – through unilateral extensions to payment terms or conversely through proactively supporting vulnerable suppliers;
• gender inequality – by informally factoring in assumed care responsibilities into making furlough decisions, and the suspension of mandatory pay gap reporting;
• reliance on government assistance ahead of other funding sources; and
• remuneration of executives – particularly when other cost cutting ventures are hitting vulnerable parties like frontline employees or small suppliers or where government assistance is being relied on.

Flash in the pan or wider shift?

In the short term, poor performance has seen reputational damage done, investors step out of holdings and governments step in to revise the conditions of public assistance in favour of socially responsible corporate behaviour.

In the long term, we see Covid-19 providing a wealth of data on what has historically been the toughest ESG branch to define, measure and report against. Businesses are taking stances, governments are trialling economic and regulatory levers and we are all seeing the results in real time.

ESG as an investment approach continues to rate highly on both retail and high-net-worth investor surveys. Institutions are tentatively predicting that socially positive decision-making will correlate with financial performance in the Covid-19 recovery phase. If so, possible regulatory developments to lock-in any social and financial gains coupled with growing investor demand will provide a strong case for investment managers to consider.