Why ESG Is Even More Important In A Crisis Like COVID-19

Why ESG Is Even More Important In A Crisis Like COVID-19
Environmental, Social and Governance Insights

01 of 02

This insight is part 01 of 02 in this Collection.

May 6, 2020 8 mins

Why ESG Is Even More Important In A Crisis Like COVID-19

Why ESG Is Even More Important In A Crisis Like COVID-19 Hero Image

ESG practices are a crucial metric for investors. Studies suggest that companies with strong ESG programs  are more resilient.

Key Takeaways
  1. Investing in companies with a strong ESG framework may lead to better financial performance.
  2. There is no one-size-fits-all ESG strategy. Companies need to identify the issues and develop a tailored approach.
  3. ESG involves looking at nonfinancial information to spot potential risks and rewards associated with how the company deals with a range of issues.

Overview

How a business manages financial and nonfinancial risks has become an increasingly important factor in the decisions made by institutional investors, and an organization’s environmental, social and governance (ESG) practices provide a vital metric for investment dollars.

Over the 12 months through January 2020, ESG equity funds took in $70 billion in assets, while traditional equity funds experienced nearly $200 billion in outflows, industry analysis has found. Meanwhile, as the first three months of 2020 handed Wall Street its worst quarter since 2008, ESG funds bucked this trend: 44 percent of “sustainable” mutual funds posted top-quartile returns while only 11 percent landed in the bottom quartile of their peers. This may indicate that investing in companies with a strong ESG framework isn’t just a feel-good measure: they may perform better.

“There are more than 2,000 studies that show that companies with strong ESG practices – meaning that companies identify, address and mitigate these risks successfully – produce better corporate financial performance,” says Meredith Jones, partner and global ESG practice lead at Aon. “Looking at historic bankruptcy and stock volatility data, there is also strong evidence that those firms may also be more resilient.”
As a result, the global outbreak of COVID-19 isn’t likely to decrease investors’ focus on ESG practices and outcomes. If anything, Jones adds, ESG issues that leapt to the fore during the pandemic may heighten investor scrutiny.

“A resilient business understands that ESG issues and the operating environment are dynamic and changing: it watches and adapts accordingly,” observes Greg Lowe, global head of sustainability and resilience at Aon. “COVID-19 is teaching us that no matter how foreseeable a risk may be, the impact an event has on society and business hinges on our ability to plan for significant disruption and changes in the operating environment.”

In Depth

ESG investing involves looking at nonfinancial information associated with an investment to identify potential risks and rewards associated with how the company deals with environmental, social and governance issues.
“ESG began as a way of accounting for risks that were not typically measured or disclosed, but has emerged more as ‘pre-financial’ risks in the operating environment,” says Lowe.

As interest in ESG grows, many misperceptions remain.

Myth #1: There’s one tried and true “recipe” for ESG

Counter to this misperception, an ESG strategy isn’t something that can be replicated from peers.
“I think that’s a significant struggle for companies of all sizes,” notes Laura Wanlass, partner and global head of corporate governance at Aon.“They’re having a hard time figuring out what ESG means, and they want a simple checklist to follow. But it’s about determining what issues are material for your own company and industry, and that can look very different from company to company.”


Some companies – especially small to mid-level enterprises that may not have dedicated investor relations teams may take a piecemeal approach, relying on templates such as sample disclosures for proxy filings. “We’re at a tipping point where ESG is becoming more mainstream,” says Jones. “But there’s still a knowledge gap. Board members and executives are learning as they go along. The lack of standardization among investors and data providers in this still-growing area doesn’t help. Many firms are just now starting to embrace the value of setting a strategy.”

Myth #2: In times of crisis, ESG should take a back seat to profitability

According to this school of thought, when the financial chips are down, companies and shareholders care only about profitability. “I think that’s an unlikely scenario,” says Jones. “Crises like COVID-19 highlight where these nonfinancial risks exist within companies and how damaging they can be to the bottom line.”

Public companies may find that their human-capital decisions in response to COVID-19 have an impact on the way shareholders vote and engage. “In the last economic downturn, shareholder activists used compensation, governance and human-capital decisions as ways to win board seats or bring about corporate change,” notes Wanlass. “So ESG becomes increasingly important in any type of downturn.” 

$70B

The amount in assets taken by ESG equity funds —  while traditional equity funds experienced nearly $200 billion in outflows

Quote icon

[Companies are] having a hard time figuring out what ESG means, and they want a simple checklist to follow.

Laura Wanlass
Partner and Practice Leader, Global Corporate Governance and ESG Advisory
Myth #3: ESG is really about the “E.”

Companies have gotten comfortable with governance – the “G” – says Wanlass. Increasingly, the environmental “E” in ESG is what gets a lot of press and shareholder attention – particularly in the face of growing concern about climate change. Larry Fink, CEO of investment giant BlackRock, this year indicated that the firm has put sustainability and climate change at the heart ot its investment activities.

As companies deal with COVID-19, however, the social considerations of ESG – the “S” – come to the fore.
How companies deal with employees, engage with customers and manage supply chains are all areas that fall under ESG, according to Jones. For example, the COVID-19 outbreak underscored the value of having a robust remote-working infrastructure, including strong networks and cybersecurity practices, in place when the crisis hit. For companies that had to develop those capabilities on the fly, this lack of ESG planning proved problematic.

In addition, companies with sound employee sick-leave policies were better positioned to deal with COVID-19 than companies that scrambled to develop policies to respond to the pandemic. And nonessential businesses that refused to close or stagger shifts to reduce employee exposure, or failed to provide additional cleaning or protective equipment, all fell short of the mark on social issues, Jones points out. “From a deliverable standpoint, not to mention negative PR, that can cause a lot of revenue pain.”

Myth #4: ESG is about being a “nice company”

“It’s important to distinguish between the things that can have a real positive – or negative – impact on your business and the things that just make you look like a ‘nice’ corporation,” says Jones.

As important as charitable activity and volunteerism might be, that work isn’t necessarily focused on mitigating business risks, she says. For example, employees reading to disadvantaged students to increase literacy is a worthy cause. But for a company facing challenges with diversity in its workforce, ESG activities with a potentially greater impact might include building recruitment relationships with women and minority students in high schools and colleges, establishing a "Rooney Rule" for hiring and promotions or building a more inclusive corporate culture.

Myth #5: ESG brings value only to shareholders

ESG practices can yield stronger company performance. But shareholders aren’t the only benefactors.
“There are many reasons to focus on ESG that go beyond shareholders,” posits Jones. “It’s about creating a sustainable and resilient business over time that takes into consideration risks not easily identified in a spreadsheet, so employees have jobs and customers get products and services. Done well, ESG creates a virtuous cycle for all stakeholders of a firm.”

What’s more, sustainable companies are where people want to work.

“The market for top talent will always be competitive, perhaps even more so now as companies look to create their workforce of the future,” says Jim Hoff, senior partner, strategic communication advisory at Aon. “Effective and visible ESG practices are increasingly important to an employer’s brand. The best people seek out employers with demonstrated resilience and sustainability as key components of the employment value proposition.”

“Studies have shown that companies with strong ESG practices can minimize employee turnover and maximize productivity,” adds Wanlass.

COVID-19 Will Underscore ESG’s Value

The COVID-19 pandemic has cast ESG practices into the spotlight. Companies will be able to examine how the crisis affected them, see where they responded well and where they fell short, and identify opportunities to enhance ESG practices going forward.

“People will pay attention to how businesses manage risks associated with human capital, communities and the environment, because ESG isn’t just a three-letter buzzword: it’s about resilience and sustainability,” says Jones. “So companies should be prepared for investors to encourage ESG best practice with their dollars and their feet, as well as with the proxy votes going forward.”

“Risks can be very abrupt, like the COVID-19 pandemic,” Jones continues, “or they can be longer-term, like the potential for climate change to disrupt business. Either way, the most resilient and sustainable businesses think about those risks and manage them before they cause revenue or reputational losses.”

 

Aon's Better Being Podcast

Our Better Being podcast series, hosted by Aon Chief Wellbeing Officer Rachel Fellowes, explores wellbeing strategies and resilience. This season we cover human sustainability, kindness in the workplace, how to measure wellbeing, managing grief and more.

Aon Insights Series Asia

Expert Views on Today's Risk Capital and Human Capital Issues

Aon Insights Series Pacific

Expert Views on Today's Risk Capital and Human Capital Issues

Aon Insights Series UK

Expert Views on Today's Risk Capital and Human Capital Issues

Construction and Infrastructure

The construction industry is under pressure from interconnected risks and notable macroeconomic developments. Learn how your organization can benefit from construction insurance and risk management.

Cyber Labs

Stay in the loop on today's most pressing cyber security matters.

Cyber Resilience

Our Cyber Resilience collection gives you access to Aon’s latest insights on the evolving landscape of cyber threats and risk mitigation measures. Reach out to our experts to discuss how to make the right decisions to strengthen your organization’s cyber resilience.

Employee Wellbeing

Our Employee Wellbeing collection gives you access to the latest insights from Aon's human capital team. You can also reach out to the team at any time for assistance with your employee wellbeing needs.

Environmental, Social and Governance Insights

Explore Aon's latest environmental social and governance (ESG) insights.

Q4 2023 Global Insurance Market Insights

Our Global Insurance Market Insights highlight insurance market trends across pricing, capacity, underwriting, limits, deductibles and coverages.

Regional Results

How do the top risks on business leaders’ minds differ by region and how can these risks be mitigated? Explore the regional results to learn more.

Human Capital Analytics

Our Human Capital Analytics collection gives you access to the latest insights from Aon's human capital team. Contact us to learn how Aon’s analytics capabilities helps organizations make better workforce decisions.

Insights for HR

Explore our hand-picked insights for human resources professionals.

Workforce

Our Workforce Collection provides access to the latest insights from Aon’s Human Capital team on topics ranging from health and benefits, retirement and talent practices. You can reach out to our team at any time to learn how we can help address emerging workforce challenges.

Mergers and Acquisitions

Our Mergers and Acquisitions (M&A) collection gives you access to the latest insights from Aon's thought leaders to help dealmakers make better decisions. Explore our latest insights and reach out to the team at any time for assistance with transaction challenges and opportunities.

Navigating Volatility

How do businesses navigate their way through new forms of volatility and make decisions that protect and grow their organizations?

Parametric Insurance

Our Parametric Insurance Collection provides ways your organization can benefit from this simple, straightforward and fast-paying risk transfer solution. Reach out to learn how we can help you make better decisions to manage your catastrophe exposures and near-term volatility.

Pay Transparency and Equity

Our Pay Transparency and Equity collection gives you access to the latest insights from Aon's human capital team on topics ranging from pay equity to diversity, equity and inclusion. Contact us to learn how we can help your organization address these issues.

Property Risk Management

Forecasters are predicting an extremely active 2024 Atlantic hurricane season. Take measures to build resilience to mitigate risk for hurricane-prone properties.

Technology

Our Technology Collection provides access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities of technology. Reach out to the team to learn how we can help you use technology to make better decisions for the future.

Top 10 Global Risks

Trade, technology, weather and workforce stability are the central forces in today’s risk landscape.

Trade

Our Trade Collection gives you access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities for international business. Reach out to our team to understand how to make better decisions around macro trends and why they matter to businesses.

Weather

With a changing climate, organizations in all sectors will need to protect their people and physical assets, reduce their carbon footprint, and invest in new solutions to thrive. Our Weather Collection provides you with critical insights to be prepared.

Workforce Resilience

Our Workforce Resilience collection gives you access to the latest insights from Aon's Human Capital team. You can reach out to the team at any time for questions about how we can assess gaps and help build a more resilience workforce.

More Like This

View All