‘Putting the ‘S’ into ESG

The social ‘S’ in ESG has dominated the headlines in the first few weeks of the COVID-19 crisis. Those investors and companies who were struggling to understand where it fitted into the sustainability agenda have been left in no doubt; safeguarding the health and safety of employees and providing assistance to vulnerable suppliers and customers has been a top priority, alongside preserving financial strength.

Given the speed with which this pandemic has locked down businesses and caused stock market corrections, corporate executives have had to be equally swift at making key decisions. While everyone is liable to make genuine mistakes under such pressure, the quality of the underlying outcomes has varied enormously. This is providing all stakeholders with a unique insight into the corporate culture of organisations and, given the nature of the crisis (the actual loss of life), many of these observations will live long in the memory. The ability of such perceptions to affect the long-term prospects of an organisation, both good and bad, is thus significant.

In essence though, ESG has always been about prioritising the long term ahead of the short term, and COVID-19 has shone a bright light on that. It is also helping the ‘E’ agenda, as although it might appear that environmental issues have been temporarily side-lined, this enforced slowdown and its positive impact on air quality and other environmental metrics will only add to the arguments for more positive action on climate change when things return to normal.

Finally there is an overlap with social, financial and also governance objectives in this debate. It comes in the areas of executive pay, dividends and capital raising. Executives are expected to share whatever pain the company is suffering with their employees and the governments providing them support. Dividend payments can be delayed or cancelled if they are likely to put the future of the company in jeopardy, and likewise lines of credit and new equity are levers that can be sensibly pulled if needed. However, those companies who with hindsight get what is a difficult balancing act wrong, are likely to be punished as severely as those that fail on the direct social issues. Capital stockpiled like toilet rolls for a rainy day, depriving others that are more deserving, will do just as much damage as making thousands of workers redundant or having them work in environments that put their health at risk.

So, not surprising really that a humanitarian crisis has led to further questioning of the corporate model of value creation. Hopefully its major legacy will be a rebalanced capitalism that works more sustainably for all stakeholders.’