COVID-19: putting more S and G into ESG

   3 min read

2020 was meant to be the year that environmental, social and governance (ESG) factors went truly mainstream.

Changes to laws as well as public attitudes towards things like climate change and fair pay have pushed ESG to the forefront, meaning many asset managers are now looking at these factors when making investment decisions.

Then along came Covid-19; however, rather than putting the brakes on the momentum built, the pandemic has perhaps given ESG a further angle for consideration.

The early days of ESG

The origins of ESG as we know it today trace back to the early work of the UN Global Compact initiative, followed by the creation of the United Nations-backed initiative the Principles for Responsible Investment in 2006.

However, people have been taking ESG factors into consideration in some form or another for centuries. Take the East India Company for example; for most of the 1600s and 1700s, the world’s most powerful company rose to prominence with the import of spices, fabrics and teas.

At one point, they accounted for more than half of the world’s trade – but a large part of their downfall stemmed from their involvement in the slave trade. At the time, a lot of their customers said that this was wrong and stopped buying products from them - an  early example of how an employer’s treatment of its employees, as well as its record in health and safety, directly impacted it’s bottom line.

In the centuries since, customers have continued to place pressure on companies when it comes to how they treat employees, wider society and the environment. Spearheaded by the global focus on climate change, today, business responses to environmental trends continue to be increasingly scrutinised, as do corporate governance factors.

ESG in the COVID-19 era

Corporate culture is particularly interesting in the context of how different businesses are responding to the pandemic, and is adding a new lens to ESG considerations.

Businesses such as Nationwide and Iceland announced very quickly that they’d be opening earlier in the day to support more elderly and vulnerable customers, and I dare say many more examples will follow. There have also been examples of businesses switching production to ventilators and other safety equipment. Brewdog has used its distillery to produce hand sanitiser and is distributing the product free for those who need it most.

On the flipside, Sports Direct and Wetherspoons have come in for widespread criticism for their initial reactions to the crisis. Sports Direct announced their intention to remain open based on believing they provided an essential service to society before reversing that decision. They were also accused of hiking their online prices.

Wetherspoons called for pubs to remain open with increased social distancing measures instead of closing and announced that no employee would be paid until the Government fulfilled its promise to cover 80% of the wages of workers affected whilst closed for business.

Over the coming weeks and months, I’m sure we’ll see more pressure to behave in a way which better benefits the overall society with corporate governance and social responsibility being scrutinised like nothing before and fuelling the momentum for ESG investing even further.

What does all this mean for my pension?

If a company is displaying strong ESG performance in the pandemic, this could signal that it’s more aligned to long-term thinking, which could result in better outcomes for you.

This is because research has shown that funds that have ESG integrated tend to rexperience a positive uplift in returns. It may seem odd saying this during a global health crisis, but I’d argue that ESG investing should be front of mind when it comes to investments – not only from a financial standpoint, but also because once this pandemic is over, ESG considerations are going to be more important than ever.

2020 may be remembered for the year we went into lockdown, but I also think it’ll be the year we look back at as a game-changer for ESG considerations.