Comment: ESG and the corporate response to covid-19

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The covid-19 pandemic is creating crises on many fronts, with deep and far-reaching implications. Writing exclusively for II, John Streur considers how ESG priorities are shaping how companies should respond.

As of today, we have seen a wide range of responses across governments and corporations that have worked to either instill or diminish confidence and trust. Calvert Research and Management is studying companies carefully to evaluate their actions relative to what their corporate policies and statements have led us to expect.

In times of crisis, companies and governments have an opportunity to take major steps forward in the eyes of their key stakeholders and establish or deepen a relationship built on trust. Those that perform well right now, serving their customers, employees and communities, will benefit in the long term, winning customer support and loyalty. Those that perform poorly, on the other hand, are likely to find that customers have long memories of crisis-era actions.

We believe that how companies respond to stakeholders during covid-19 is likely to affect their reputations and drive long-term value for years to come."

In response to the pandemic, Calvert's research team is examining corporate responses, resiliency and preparedness through the lens of companies' employees, customers, communities and suppliers. We are developing a proprietary C-19 Preparedness and Response Factor that will allow us to rank companies based on how well they prepared for, and responded to, the pandemic. In some cases, companies have reacted to the virus in the same way they've addressed climate change risks, and this may also be an indicator of how they might deal with future crises.

The strong step up
We are generally encouraged by many of the corporate responses we have seen to covid-19. We saw several big-box stores move quickly to raise minimum wages and create a safe physical space for employees, and a number of firms suspended dividends and buybacks. Some appear to have taken lessons from Hurricane Katrina, adjusting their priorities and corporate culture. We believe these responses are partly due to the environmental, social and governance (ESG) advocacy efforts of responsible investment firms over past five years, as well as companies' own recognition of the materiality of ESG factors to their businesses and profitability.

In our initial analysis, Calvert found that many companies with lower scores for their financially material ESG policies and performance were ones that subsequently found it difficult to respond effectively to covid-19. This is consistent with our expectations; companies that have not managed their material environmental risks, or built a strong human capital management approach, are not likely to suddenly change for the better in the teeth of a crisis.

However, our analysts have also seen that many companies with average ESG metrics have performed well during the crisis, and our early research shows that a company in the middle of the pack on ESG scores is just as likely to have had a constructive early response to the crisis as those with top scores. It appears that many companies have improved their ESG policies over the past five or six years, which may indicate that these companies have the governance structure to adapt to changing circumstances and respond with agility.

It appears that companies that have operationalized the identification, measurement and management of their material environmental and social risk exposures are likely to have the skill and culture to respond to other risks, including the pandemic. As we look forward to the business and economic recovery, we believe these companies will improve their competitive position, drive long-term value for investors and play a critical role in building a more resilient and just future.

We believe that how companies respond to stakeholders during covid-19 is likely to affect their reputations and drive long-term value for years to come. Calvert is closely monitoring company responses to this crisis as a key indicator of how resilient, prepared and accountable they might be in facing future risks.

John Streur is CEO and president of Calvert Research and Management

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