ESG Investing During a Global Crisis

Contributors

hether you are a traditional investor or have decided to invest your money in an environmentally responsible manner, the case for ESG investing during a global crisis is an interesting and worthwhile topic to explore. (For more information on ESG investing, click here to view a video and read a previous post.)

ESG investors have long since integrated factors such as business continuity planning, treatment of employees and customers, safety, culture, climate, and community engagement into their screening methodology. Now more than ever these issues are being brought to light as not only factors to consider but risks to mitigate and/or avoid altogether if companies are falling short of their own guiding principles or lack clear procedures.

Let’s take a look at safety for example. To be fair, nobody could anticipate the extent to which a global health pandemic such as the one we are facing today would affect global economies nor could anyone anticipate the timing of such an event.

We have faced pandemics before but COVID-19 and social distancing measures have created a unique set of circumstances and factors that we have not otherwise seen. We are literally experiencing an economic slowdown brought about in many ways because of the very factors that can often reignite an economy. And that is its consumers.

As a society, we are being told to stay home. This means less travel, less restaurant and store traffic, reduced entertainment and discretionary spending, and much more. This chapter has also forced companies to stretch their own capabilities to put the health and safety of their employees first, and in some cases force adaptation.

From a safety and health perspective, what ESG investors have historically looked at is how companies have previously dealt with challenging circumstances as well as how they have prepared to create a safe environment for their employees and customers. Currently, we are seeing many companies emerge as leaders in this area, taking necessary steps to put health and safety above profits and revenue. Grocery stores are allowing “seniors only” to shop during specific times and capping the number of shoppers in their stores, while many corporations around the country have shut down their offices altogether and instructed employees to work from home. We are seeing how companies are adapting, stepping up, and creating a safe environment for their own ecosystem as well as the general public.

The flipside is we are also seeing some companies fall short of the mark, thus creating risks for the public, their employee morale and safety as well as their own reputation for potentially short-term profits. Of course, not every company has the financial means and infrastructure to make it all happen and as investors, we should be cognizant of recognizing differences in how a company behaves or reacts based on their own unique set of circumstances. But it is how a company manages issues such as safety that will define their reputation for years to come.

It is also in how a business communicates with its employees and customers that often distinguishes strong leadership. During times of crisis, strong corporate governance is key. For an ESG investor, business continuity, transparency, disclosure and shareholder engagement are among the many factors that are included in the screening process. It is such governance factors that are important during times of prosperity and even more important when there is a problem.

Right now, the topic of corporate governance begs the question about the role corporations play in modern day. We are seeing more and more large companies emerge and support our ecosystem in powerful ways. Many companies have increased their minimum wage, hired more employees, waived late fees, reduced store traffic for safety concerns, purchased additional equipment to accommodate working from home, etc. We have seen and will likely continue to see corporations step up to support our mutually connected ecosystem. We may in fact also see a major shift in how we as a culture work. If companies are seeing productivity and revenue remain the same or improve, it is possible that we will see more of this style of employment, further altering the trajectory of our economy.

Take climate change and air pollution as one such example. If companies continue to let and encourage their employees work from home, there will be less traffic and a reduced need for commuting. This has the potential to drastically change air pollution and help combat climate change. We have seen how social distancing measures and staying at home has positively impacted the environment around the world. Thus, it is possible that this pandemic will lead to a long term shift in how we conduct business in general. As an ESG investor, this is exciting because it not only raises the profile of climate change and environmental issues, it has the potential to create opportunity as interest grows in this space.

Of course, many of our observations are just that, observations – and something to think about as we emerge from this pandemic. But regardless of what may or may not happen in the future because of this chapter, as an ESG investor, identifying the ingredients that will create a sustainable business model is inherently part of the screening process. Business continuity planning, safety, culture, engagement, etc. are all elements of longevity and sustainability. How a company handles themselves during times of crisis is often indicative of leadership and management – and this is at the very forefront of how ESG managers and investors analyze a company within their investable universe.

We believe that ESG factors will continue to play a major role within the investing universe. It is during times such as these where many investors look to non-financial factors such as ESG where we can possibly glean some additional insight into the character and fundamentals of a company in addition to their balance sheet.

If this style of investing is something you are interested in pursuing, we have created a platform for ESG and are happy to discuss how to accommodate your values and principles into your financial plan.