ESG Communication in a COVID-19 World
Updated: Apr 8, 2020
With the COVID-19 pandemic expected to impact the markets for much of 2020 and potentially beyond, engagement between investors and companies on ESG topics will inevitably change for the foreseeable future. In response to this crisis, investors are calling on companies to prioritize the needs of their employees, contractors, and suppliers over immediate returns to shareholders.
By George Bennett, Chris Plath, Heather Keough and Miguel Santisteve at Leaders Arena
Engagements more likely to focus on social and governance factors
Communication between investors and companies, like all current business activity, is certainly outside the realms of “business as usual”. With COVID-19 expected to stick around for much of the foreseeable future, communication must evolve to ensure that companies are still engaging with their investors.
Whilst environment and sustainability issues such as climate change remain formidable challenges in the long run, short-term priorities are changing due to the complexity of the COVID-19 crisis affecting near-term business operations. As a result, investors are focusing on immediate issues such as human capital management, capital allocation and executive compensation (See figure 1). Similarly, other long-term priorities will have less focus during this crisis. These will include long-term ESG and environmental targets among other topics less pressing than COVID-19. These conventional ESG engagement topics will certainly continue to be key focal points once the COVID-19 crisis subsides.
Figure 1: Likely Rebalance of Investor ESG Engagement Priorities During the Crisis
To communicate effectively in a time where human contact is minimal, in-person meetings are restricted, and there are pressing short-term concerns, companies will have to adopt a different approach. With the likely cancellation of most conferences and roadshows this year, companies can take advantage of digital communication such as video calls, virtual presentations, and webcasts to interact with shareholders. This can also involve the use of virtual annual general meetings (AGMs).
Disclosures are also an important component of sustainability communication. Companies can provide statement releases, investor presentations, and regular updates for shareholders about how they are dealing with the crisis and how they prepare for the aftermath. The recent growing demands of some of the largest investors for increased company disclosures reflects this importance. Two of the largest equity Investors, BlackRock and State Street, sharpened their focus on ESG, demanding companies to improve sustainability disclosures, throwing their support for the Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD).
Investor groups call for action
Despite the turmoil, COVID-19 is not deterring some investors from putting pressure on companies on ESG factors related to the pandemic and focused on the long term. ‘The Investor Statement on Coronavirus Response’ was recently formed calling on companies to protect employees, customers and suppliers throughout the COVID-19 crisis. This statement, signed by over 251 institutional investors with over $6.4tn in assets under management, has called for their portfolio companies to provide paid leave, prioritize health and safety, financial prudence, maintain employment and supplier/customer relationships.
Figure 2: PRI COVID-19 action plan
The UN Principles for Responsible Investors (PRI) has outlined how they expect signatories to engage with their portfolio companies during the crisis. This action plan, as seen in figure 2, highlights the need to focus on their ESG performance issues related to the crisis and try to maintain a long-term focus in investment decision making. They also suggest companies prioritize the needs of employees, contractors and suppliers over less pressing ESG topics. They recommend responsible investors deprioritize engagement topics unrelated to COVID-19 to allow companies to focus on crisis management. This response has been echoed by the likes of Legal & General IM and Hermes EOS who have indicated that they will ease pressure somewhat on ESG factors unrelated to COVID-19 in 2020.
BlackRock is believed to be continuing to focus priorities tied to climate change and executive pay for the fast-approaching corporate annual meeting season, albeit this approach may evolve along with the COVID-19 situation. In addition, State Street has announced that their company engagements will focus on employee health, customers and supply chains. Companies will want to have an input from their investors for their COVID-19 response and many other tough decisions laying ahead.
Recommended actions for companies to take now
The actions taken by companies now are important because investors will review management decisions during this period more favourably if companies maintain a high level of commitment to ESG and transparency. This quiet business period for many may provide a perfect opportunity for companies to plan their SASB and TFCD disclosures. Additionally, companies should explore how to leverage technology to maintain and improve communications with their investors.
COVID-19 has created unimaginable challenges for companies and investors, however, those open to embracing innovations and new practices could be rewarded with a more productive dialogue going forward. Companies wishing to improve their ESG communications, disclosures and investor relationships should get in touch with Leaders Arena and see how we can help you through this difficult time with our flexible support.