COVID-19 raises questions about impacts on ESG issues like worker health and safety, and systemic risks like income inequality. While the existential threat of climate change has dominated the agenda in recent years, the pandemic has renewed focus on social and governance issues.
How are companies responding as employers? What will they do to physically and financially protect workers in this dire situation? Will they accept sustainability objectives as conditions for government assistance? Could sustainability standards enter into a new “social compact”? Will we come out of this to the status quo ante virus or a “new” normal?
There are myriad opinions and anecdotes about these matters. Fortunately, rapid advances in artificial intelligence (AI) and computing power enable us to get behind the headlines for deeper, more systematic insights into what is really driving the market.
Looking back over the past two decades, market cycles – particularly crashes – offer an opportunity to evaluate the trajectory and influence of ESG investing.
In 2008, for example, the rapid, deep drop in the markets triggered concerns about decimation of global financial system. Most investors and policymakers were quick to jettison ESG because there were more “serious” issues to address.
With the COVID-19 global pandemic precipitating a market crash, we again have a chance to assess progress in ESG investing as a source for identifying risks and opportunities, and making sustainable, long-term investment decisions.
What has changed?
Today, it is axiomatic that integrating material ESG issues into investment decisions can improve financial and sustainability results. According to the World Economic Forum (WEF) report, “the combination of transparency and rising stakeholder influence…is driving this acceleration.”
In our highly interconnected world, social media and other communication channels give corporate stakeholders a voice on environmental, social and governance issues. Though corporations once principally controlled the narrative about their businesses, actors such as large asset owners, employees, suppliers and environmental advocates, now influence what is material for investors and have put sustainability on the agenda.
And stakeholders’ capacity to shape perceptions about companies can affect market valuations.
Analysing the pandemic in real time
In recent months, there has been a torrent of commentary about the social and economic impacts of the virus – health risks to workers, layoffs, the calamitous impact on the airline and hospitality industries, how video conferencing and food delivery companies will benefit, and so on.
Whereas much of this commentary is intuitive and anecdotal, technology now enables us to systematically identify and analyze this kind of information.
At the beginning of the year, more than half the small amount of information about COVID-19 mined from more that 100,000 sources around the globe was from Mandarin language sources, despite the Chinese government’s effort to suppress reporting on the topic.
At the end of February, COVID-related content was about 10% of total content. It peaked at 66% in late March and today it represents about 45%.
We can parse COVID-related content to discern which ESG issues are paramount in the context of the pandemic. While the virus is the impetus for the story, within it is a narrative about what is happening at companies that reveals insights about their culture and quality of management.
Five Sustainability Accounting Standards Board (SASB) categories represent the majority of the volume of information flow in COVID-related content.
Not surprisingly, the key issues are Employee Health and Safety, Labor Practices, Access and Affordability, Supply Chain Management, and Product Quality and Safety.
The lens of Dynamic MaterialityTM, the process determining which ESG issues matter most when the pace of change quickens, documents which issues matter most to companies and investors in today’s rapidly evolving world.
Currently, more than half of the COVID-related volume is attributable to Employee Health and Safety and Labor Practices, which along with Supply Chain Management had negligible data flow at the beginning of the period.
Recently, Customer Privacy and Management of the Legal and Regulatory Environment have emerged as issues, the former in the internet and software space and the latter in many industries as companies have sought bailout funding from governments.
The COVID-19 pandemic has put the social dimension of sustainability irrevocably on the agenda. As the virus spread, the data revealed the extent to which Social Impact and Economy have become the dominant issues for stakeholders of corporations.
This information is available on Truvalue Labs’ Coronavirus ESG Monitor.
The future of ESG after COVID-19? It will be different this time.
The social and technological conditions that gave rise to Dynamic Materiality signify that there is no turning back on sustainability. ESG investors and other stakeholders won’t allow the current economic downturn to be used as an excuse for abandoning their objectives – as if addressing employee health and safety, income inequality and climate change are luxuries.
The digital age has given corporate stakeholders the agency and tools to pursue a socially and environmentally sustainable world. The ESG genie cannot be put back in the bottle.
Thomas Kuh is an industry expert with decades of expertise in ESG indices and ESG research. As head of index at Truvalue Labs, he creates benchmarks for implementing ESG investment strategies and licensing indices for ETFs, mutual funds and institutional accounts.