Article

Can businesses throw environmental, social and governance concerns (ESG) overboard when normality returns?

  • Business shouldn't junk the new found fervour for ESG in the pursuit of short term profit as soon as normality returns. Here's why.

  • Chuka Umunna

Before the COVID-19 pandemic took over captains of industry were queuing up to champion stakeholder capitalism. A growing and long overdue consensus was emerging that shareholder primacy is not the be-all and end-all, and business should take a more long term view, looking after other stakeholder interests too including those of customers, employees and local communities. 

Blackrock’s chief executive Larry Fink had just penned a second annual letter in January making this argument, following last August’s Business Roundtable statement by US CEOs declaring that shareholders and stakeholders long-term interests are “inseparable.”

WEF founder and Chair, Klaus Schwab, with US President Donald Trump at the 2020 Davos Summit
WEF founder and Chair, Klaus Schwab, with US President Donald Trump at the 2020 Davos Summit

If anything, the case for stakeholder capitalism has been given added urgency by the nightmare we are living through. This week, in what they describe as the “COVID era”, founder and chair of the World Economic Forum, Klaus Schwab, along with business leaders from Bank of America, IKEA, Maersk and Royal Dutch Shell reaffirmed their commitment to take account of these environmental, social and governance issues (ESG) pledging “to stand at society’s service, to help preserve and rebuild a viable society and economy, and to do all we can for our stakeholders.” Schwab said “the COVID-19 crisis is a litmus test that shows who has been ‘swimming naked’ while endorsing stakeholder capitalism”—he is right.

Commendably, a host of firms have met the challenge and pledged to not to axe jobs, at least for the moment, in the midst of the pandemic including Danone, Marsh McLennan, Morgan Stanley, Paypal, Starbucks and Visa. However, the longer lockdowns continue in different economies the harder it will be to maintain this stance, particularly if they are extended beyond three months. Redundancies might come to be seen as a necessity for business survival. On March 20, the U.K. finance minister, Rishi Sunak MP pledged to support firms by covering 80 percent of employees’ salaries for a period of three months—it is unclear the extent to which government measures such as this, that have helped fend off layoffs so far, will continue indefinitely. What will firms do if state support is withdrawn prematurely?

And when some semblance of normality returns, the pressures on CEOs to put ESG concerns to one side as they seek to meet expectations to speedily restore profitability in the near term, after investors have faced a prolonged period of dividend cancellations and a huge drop in share prices, cannot be overstated. However, there are reasons why they should not throw their new found fervour for ESG overboard–three in particular.

First, there is growing body of evidence that their customers and the public in general will punish them if they do so. Stakeholders are watching carefully to see whether companies make good on all the promises that have been made to look out for others in the current climate. Up until now the environmental—“E”—part of ESG has attracted most attention; COVID-19 has brought the “S” part under the spotlight like never before. 

Edelman, the world’s largest independent communications firm

Edelman, the global communications, has just published a 12-market study on the critical role brands are expected to play by the public during the pandemic. They interviewed 12,000 people including in Brazil, China, Germany, India, South Africa, South Korea, the U.K. and U.S. 52% of respondents said brands must do everything they can to protect the well-being and financial security of their employees and their suppliers, even if it means suffering big financial losses until the pandemic ends. Furthermore, a sizeable proportion said they had already punished companies they perceived to be doing the wrong thing, with a third saying they had convinced other people to stop using a brand they felt was not acting appropriately in response to the pandemic.

This suggests companies must clearly articulate what they are doing to help their employees, suppliers and local communities through the crisis. Firms making layoffs or salary cuts which subsequently announce big dividend payments, share buy-backs or generous executive compensation should expect to be given a very rough ride, particularly if they have taken advantage of state financial support. The sensitivities around such issues will linger long after any social restrictions have been lifted.

Secondly, there is a growing body of evidence that companies featuring on ESG indices and ESG funds have proved more resilient during this crisis. So the appetite to invest in companies that score well on ESG criteria will increase once the pandemic relents—the crisis has only added weight to the commercial case for ESG investing and for firms being conscious of ESG factors.

Tessa Walsh, ESG financing editor at financial data provider Refinitiv LPC, describes the direction of travel: “In the post-corona virus landscape, the appetite to invest in ESG products will go up because we are seeing data that suggests ESG fund performance has been better than other types of funds, which is quite a strong predictor. When the volatility hit, ESG funds did not see as heavy outflows.”

Walsh puts this down to the long term approach of firms in this space: “The fact ESG conscious companies tend to be more long term in their thinking and in their governance practices has meant they are more resilient and better able to account for long term risks as they are more prepared for upheaval on the scale we are experiencing. This is where the ‘G’ in ESG is coming to the fore.”

Data collated by Refintiv supports this, showing that Global green bond volumes are only 3% down on this quarter last year—$36.82 billion for the first quarter of 2020 compared to $38.06 billion for the same time last year. Likewise, so far this year 59% of U.S. ESG exchange traded funds are doing better than the S&P 500 Index while 60% of European ESG ETFs have beaten the MSCI Europe Index according to research by Bloomberg Intelligence.

Above all, if public pressure and the commercial imperative doesn’t convince business leaders to stick with their commitments on ESG, governments inevitably will demand more of business, resorting to legislation if needed. The quid pro quo for the unprecedented fiscal support given to companies by governments through the crisis will be an expectation that business step ups and makes good on the stakeholder agenda. The fact financial services failed to appreciate this in the wake of the global financial crash helped fuel political populism and extremism over the last decade. Surely it is better for business to take the lead and act, rather than being forced to so so. Being proactive will also help increase much needed trust in business – a win, win all round.