Jun 17, 2020

Performance on ESG metrics during pandemic may be key differentiator

Author: Alison Schneider, Director of Responsible Investment

COVID-19 is a classic systemic risk with far-reaching environmental, social, governance (ESG) and societal impacts. COVID-19 was declared a pandemic on March 11, 2020, and continues to threaten global health and welfare. At the time of writing, several countries are navigating the delicate balance between ‘flattening the curve’ and re-opening their economies. Scientists are in a race to find a vaccine, a keen reminder that healthcare is fundamental to a country's critical infrastructure, essential for quality of life and economic growth.  

From a responsible investment perspective, firms’ performance on ESG metrics during the pandemic can be viewed as a key differentiator, revealing valuable insights into corporate culture, values and philosophy. COVID-19 has profound implications for how we will conduct business in the future. Many of our investee companies are dealing with work stoppages, layoffs, supply chain interruptions, worker safety, liquidity issues, diminished revenues and mounting debt. Some are in a fight for survival. However, companies that put a higher priority on health, safety and human capital management are likely to be rewarded.   

The investor community pays close attention to company performance on material ESG metrics in the search for resilient companies that can ride out the COVID-19 downturn — such as how companies treat their employees (S), their stance on executive compensation, dividends and buybacks, how they communicate with shareholders and uphold shareholder rights (G) and their ongoing commitment to environmental management and disclosure (E).  

AIMCo’s recent engagements with companies have focused on how investee companies are managing during the COVID-19 crisis. Most companies are adjusting reasonably well to the realities of a large percentage of the workforce working from home, and have shared their business continuity plans, how they are addressing employee health and safety, the role of essential workers on the job site and potential long-term impacts on the business anticipated from COVID-19.  

On the corporate governance front, we have witnessed a trend of companies moving to virtual AGMs or postponing them. Shareholders are voicing concerns regarding limits to dialogue and impediments to shareholder rights at virtual AGMs.  Companies that project a business-as-usual approach to executive pay may face reputational risk where employees are laid off, pay is cut and shareholder returns suffer. Many savvy issuers hit hard by the crisis took early and decisive action, with CEOs taking major salary cuts across various industries and sectors.  

More companies have cut or cancelled their dividends in 2020 than in the previous 10 years combined. Ordinarily, if a company cuts its dividend the markets interpret it as a signal that the company is in financial distress. However, during COVID-19, many companies need to cut costs and/or shore up liquidity, so halting dividends may better position the firm over the long run. Similarly, since March, share buyback programs have been suspended at firms across many sectors and industries.    

There have also been environmental impacts and implications from COVID-19. The reduction in air and ground traffic has lowered pollution levels globally, by as much as 25% in large cities in China. Societal shifts in telecommuting could have a sustained impact on reducing carbon emissions. In Canada, the federal government has announced funding for large employers and is tying relief funds with a requirement for Taskforce on Climate-related Financial Disclosures (TCFD) aligned reporting. The federal government has committed funding up to $1.7 billion to the Alberta Orphan Well Association, Saskatchewan and B.C. to clean up orphan wells, a promising sign. Closer to home, the province of Alberta has suspended environmental reporting, but not emissions monitoring requirements. 

A few months ago, Larry Fink, the CEO of BlackRock, wrote a letter to CEOs asking them to consider the ‘social purpose’ of their organizations. He said, “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society…to their stakeholders…and the communities in which they operate.”  Several months into the pandemic, there are numerous inspirational examples of companies that have stepped up — re-tooling to produce much needed medical and protective equipment, funding research, taking pay cuts or extending services for free.   

The last three months serve to remind us that our health and safety are paramount, and that together governments, companies and citizens can respond valiantly to crises. No country or province can defeat the pandemic on its own — we are globally interconnected and solutions must be multifaceted as governments, companies, scientists and academic institutions work together to combat COVID-19.