The 2020 Edelman Trust Barometer Special Report: Institutional Investors found that investors say they and the companies they invest in are currently de-prioritizing ESG issues as investment criteria given the impact of COVID-19 on the economy.
Is the Pandemic an Excuse to De-prioritize ESG?
The eye-catching headline for directors in the 2020 Edelman Trust Barometer Special Report: Institutional Investors is the finding that investors say they and the companies they invest in are currently de-prioritizing environmental, social, and governance (ESG) issues as investment criteria given the impact of COVID-19 on the economy.
The 600 institutional investors surveyed between September 3 and October 9 of this year have all had ample time since the pandemic started in March to consider and adjust their investing strategies; after several months, an overwhelming majority of respondents—79 percent—said that ESG was not at the top of their priority lists.
Given the growth in popularity of ESG initiatives across the corporate landscape, and with institutional investors increasingly saying they give a premium value to companies that excel at ESG, it surprised Edelman as well as others that investors report they have de-prioritized ESG over the past few months.
Edelman recently gathered a panel of notable executives from some of the largest funds in the world to talk about the report’s findings. They unanimously said they have not seen ESG de-prioritization from their firms’ clients. In fact, they are seeing the opposite.
Donna Anderson, global head of corporate governance at T. Rowe Price Group, noted that this discrepancy is likely definitional.
Indeed, ESG may have outlived its usefulness as an initialism and perhaps no longer stands simply for “environmental, social, and governance.” As the movement grows increasingly serious, judging success requires measurement and understandable data, and there is no shortage of firms being hired to check disclosure compliance. A whole cottage industry of secretive raters and graders are muddling the point of ESG through the use of differing, and sometimes covert, metrics, rather than making it clearer. There is an overabundance of ESG frameworks from the Sustainability Accounting Standards Board, the Global Reporting Initiative, and more, which is a huge problem, the panelists agreed.
That said, the COVID-19 pandemic has been the perfect call to action for ESG. The pandemic was created by a virus jumping from animals to humans (environmental), there’s been no time in history during which companies faced a more serious and widespread dilemma of how to protect the health and safety of their employees (social), and with company survival top of mind for many organizations, boards are facing all sorts of difficult decisions that check the governance box, too.
Similarly, according to the survey, most investors say that companies with reportedly strong ESG performance are perceived as better at surviving a crisis. This means that, although investors report de-prioritizing ESG issues as direct investment criteria, in reality investors are depending on ESG more than ever to determine which companies have the best chance of weathering current and future storms.
By many accounts, including the Edelman survey, social concerns in particular have risen to the top of the ESG agenda for investors and the companies in which they invest. In the United States in 2020, it rose to the first-place ESG concern from the third-place concern in last year’s survey. Investors say that they trust companies that treat their people well by maintaining a healthy culture, prioritizing safety and health, being compassionate and transparent about furloughs, and demonstrating improvement in diversity and inclusion.
Moreover, almost 100 percent of investors say that despite de-prioritizing the bigger category of ESG, they are likely to engage with boards of directors on workplace culture, including in the realms of human capital management, employee health, corporate culture, and safety. Companies that did not properly protect and provide for their workers through the pandemic—including meatpacking plants and nursing homes, for example—had to shut down entirely. But the social element has also found renewed emphasis on the heels of the murder of George Floyd earlier this year and accompanying protests against racial injustice. Accordingly, strong diversity and inclusion metrics have a positive impact on a company’s share price, said 92 percent of investor respondents.
Standing back to look at the bigger picture of COVID-19, it is, in fact, all about ESG. Despite the discrepancy between what investors report that they’re de-prioritizing and what they’re actually prioritizing, the Edelman survey shows that once COVID-19 passes, investors say ESG will consciously be back at the top of their lists of investment criteria. Directors should keep their eyes on what is ahead.
Laurie Hays is managing director, special situations at Edelman.