Will the ESG focus shift post COVID-19?

Hope you are doing well and staying safe. Welcome back to our brief thoughts on ESG. This week I want to touch on what may be the focus within ESG post COVID-19. In particular, are materiality matrices going to change? Is there any evidence of this in the materials for the upcoming proxy season?

On the first question, our answer is undoubtedly yes. Materiality matrices are the basis to define what are the most material topics a company should work on for the future. They show the priorities of both internal and external stakeholders. It is unlikely companies and their stakeholders had a pandemic in mind when they worked on their most recent materiality assessment. But clearly, as we are going through this, the consequences from extreme adverse events are very visible. Issues in risk management and response protocols become impossible to ignore. Concerns related to topics that were not top of mind like biodiversity loss become more relevant.

At the same time, it is likely that for many stakeholders one of the key things they want to see in a company or investment vehicle is a robust risk-response framework. Therefore, as we look ahead and imagine a world post-COVID, we think many materiality matrices will change. New items will appear as material, and some material issues will lose relevance. The world has changed, and so will stakeholders’ priorities.

As for evidence, we think Nuveen’s 2020 Proxy Season Preview has some interesting insights. One of the introductory remarks says: “While many aspects of the current outbreak are certainly beyond issuer control, strong company ESG management plays an important role in mitigating downside risk and preserving long-term value. Conversely, poor ESG management could lead to greater negative impacts and a longer road to market recovery.” And then, their prediction is that “during the 2020 proxy season, we expect corporations who fail to adequately address E&S issues to face additional scrutiny from stakeholders. We also expect climate change and board and workforce diversity to remain top priorities.”

According to Nuveen, so far proxy proposals have a heavier component of environmental and social items than previous years (66% vs 34% for governance items, vs 55%/45% last year). Environmental proposals so far are 77% focused on climate change and 66% are action oriented, as disclosure doesn’t seem enough now. Shareholders want emission targets with time horizons.

Another interesting insight from this analysis is that shareholders seem to be interested in tying executives’ compensation packages to ESG performance, as evidence on how well governed companies outperform over time mounts. This seems unsurprising to us as within the crisis we all face now globally, clearly the sense of a well governed company provides comfort.

It will be very interesting to see how companies and stakeholders adapt to the new reality. We believe the negative impact from this crisis will be smaller for those that are more agile and change their paradigm faster. Those that insist on applying the exact same business strategy going forward are likely to suffer. How much? It’s difficult to say. But as with many issues, we believe it is not only better but also easier to be ahead of the curve and make the changes at your own pace and not because the world is making you do it.

It’s also worth noting that in Mexico many public companies have announced their COVID-19 response strategies by now. Most of this press releases talk about actions towards several stakeholders, with a clear emphasis in safeguarding the health and safety of both employees and customers (this can be seen across sectors, from real estate to consumer companies, industrial companies, etc). Companies also mention their strategies to support their respective communities (particulary in cases where this support is more logical, like hotels providing rooms for health workers, industrial real estate companies donating space for governmental response strategies, retailers committing to providing uninterrupted access to the food chain while creating protocols to avoid unnecessary risks for employees, etc.). Furthermore, virtual offices have become the norm in all the industries where this is a possibility.

Finally, we also believe that entities that honor (as far as they can) their agreements with other stakeholders over time will see the benefits. Not only in terms of reputation, but also in the loyalty this will generate and the business impact this loyalty will carry. A great example of this is the pledge that many Mexican VC players have signed. In an industry where reputation matters a lot, the way these funds are promising to honor their commitments creates both a sense of stability and integrity. We think over time, responsible initiatives will pay off.

Hope this was of use. As usual, if there is anything we can help you with, please reach out. Also, don’t forget to recommend any ESG subject matter that you would like us to research and put in a forthcoming weekly.

Regards,

Marimar

Partner, Miranda ESG

This week’s recommended reading

• COVID-19: Five things better boards are doing now
• 2020 Global 100 ranking of most sustainable corporations
• Here’s What ESG Investors Want to See From Companies During a Crisis
• Falling Stock Prices Aren’t Hurting ESG Companies Amid Coronavirus Outbreak
• ESG Is Increasingly Important in Credit Ratings, Moody’s Says