Cynics might expect environmental, social and governance (ESG) metrics to take a back seat as investors and companies grapple with business issues caused by the coronavirus pandemic. Although ESG investment has grown strongly in recent years, it is less clear how it may fare in times of economic uncertainty. Will investors ditch ESG as focus shifts to the short-term and prioritises economic survival above all else?
A headline in the Financial Times last week, Investors row back on ethical principles, research shows (FT, 7 May 2020) appeared to support this view, followed as it was by a statement that "nine out of 10 investors would prioritise a company's economic recovery over its ethical principles" (derived from a survey of professional investors carried out by management consultants Boston Consulting Group). However, reading on, the article presents a more nuanced picture. For example, whilst investors indicated they were prepared in the short term to sacrifice their ESG commitments, they indicated they were much less likely to compromise on ESG than on other factors, such as dividend payments. And those investors who did prioritise ESG pre-pandemic continue to regard it as "very important".
A subsequent FT article on ESG investing took a different stance, focusing on the views of those working in ESG. Whilst observing wryly that anyone working in ESG investing is naturally keen to justify their job, the article nonetheless points to a number of factors that underpin the continued relevance of ESG. The first relates to the importance of the S – investors are increasingly watching how companies handle social issues. Secondly, the systemic health risk posed by the pandemic is likely to spark more public concern about other systemic risks, such as the environment. Thirdly, there is data showing that corporate bonds and equities with high ESG ratings have outperformed the market recently. In addition, many commentators suggest that green economy recovery packages for the coronavirus pandemic can stimulate the global economy as well as tackling climate change. This is supported by a recent study from Oxford University that found that projects which cut greenhouse gas emissions as well as stimulating economic growth deliver higher returns on government spending in both the short term and in the longer term than conventional stimulus spending.
So, whilst investors may be prepared to let companies off their ESG commitments in the short term if by doing so those companies can bounce back faster from the crisis, the underlying message is nevertheless that ESG metrics are here to stay. One could argue that they may become more important, given the impact of the coronavirus crisis – because the risks associated with climate change may carry an even greater threat to companies and societies which are not sustainable.