We discuss with MSCI’s XYZ on why COVID-19 has made ESG top of mind for issuers and investors alike.

September 14, 2020

The Coronavirus has accelerated existing trends in ESG and is shaping how companies manage during a crisis. We talked with MSCI’s Samantha Sue Ping, Vice President for ESG Issuer Communications in ESG Research to find out how companies have adapted their ESG strategies in response to this with a focus on social issues.

This is an interview with MSCI. NYSE presents the information for informational purposes, but does not endorse, represent or warrant the accuracy of the narrative, which relies solely on material provided by MSCI.

We’ve seen reports that indicate COVID-19 has made ESG factors more important than ever for investors – and reports that say the opposite. What is your take?

All pandemics are crises of society. They spill over into how companies are run, how they treat their employees and ensure their safety, and how companies might have to struggle just to survive, as communities shut down and workers stay home. In this regard, the COVID-19 pandemic has highlighted the importance of the “S” in ESG in ways that we may never before have seen.

But COVID-19 has also shown how companies’ resilience can be linked to their management of ESG risks. In recent research we found that companies with strong ESG characteristics suffered lower declines in value during the pandemic.¹ In a review of four indexes representing a range of ESG index construction approaches, we found that all four outperformed their parent index, the MSCI ACWI Index, in Q1 2020, with the MSCI Socially Responsible Investing Index performing best in all periods studied.² We also found that the global outperformance of these four ESG indexes during the current crisis was attributable mainly to equity style tilts, with ESG being the strongest contributor, followed by tilts toward lower beta, lower volatility and better quality. ³

According to MSCI’s 2020 ESG Trends to Watch, many companies across various industries are facing a human capital paradox, where they are challenged to balance layoffs and skills shortages at the same time, in response to advancements made in technology. How has the COVID-19 pandemic impacted this trend?

The human cost of the COVID-19 crisis has been immense, not only to individual health and life itself, but also to the livelihood of the millions of people who have been left without work. Our 2020 ESG Trends paper highlighted the shifts taking place in the skills profile of a company’s workforce, and not just in the expected industries like tech, healthcare and finance, but also among auto-makers, energy companies, and utilities. The pandemic could accelerate this trend. The immediate response to societal lockdowns by many businesses has been to close shop and lay-off or furlough hundreds or even thousands of employees. At the same time, however, some of these companies have also expanded their online presence and digital services, as customers, stuck at home, flock to purchase more goods online.4 E-commerce in the retail sector is nothing new, but during the pandemic it has become the main mode of operation for this industry in 2020, requiring new teams of software engineers, web designers, and IT security experts, in marked contrast to the front-line employees required by brick and mortar retailers.

Are there issues that investors were not focused on before that the pandemic could bring to the forefront?

If we stay on the human capital theme, in the context of COVID-19 what we consider a dangerous job, and how companies address health and safety in the workplace, has already begun to shift. In a recent post, our MSCI analysts acknowledged that traditional measures like jobsite fatalities do not properly account for the risks of working near co-workers and customers in a post-COVID-19 world.

The pandemic has also exacerbated social inequities based on those who can and cannot work from home. Many workers in lower-skilled jobs have had to face a choice between being laid off or working in close proximity with others, while higher skilled workers, on average, were able to work remotely without risk of infection, or the potential loss of their job.

We have also been tracking the vulnerability of industries with labor-intensive production concentrated in locations that were hardest hit by the pandemic. Should companies move to decentralize their operations geographically post-COVID-19, either in search of cheaper pools of labor or to simply expand and diversify their supply chains, the rush to open new facilities could have considerable implications for supply chain labor standards and practices.

And finally, the recent global protests against systemic racism that originated in the US have spilled over into the corporate sphere. These protests and the deep individual introspection they have caused, inspired and guided by the Black Lives Matter movement, have resulted in demands for change at the institutional level, and in the ways in which companies and investors approach and are accountable for diversity in the workplace. We don’t think this is something that is simply going to fade away once the hashtags are gone.

Should companies be thinking about disclosing additional information regarding their business continuity plan (BCP) practices, or preparedness for future pandemics?

The COVID-19 crisis forced many companies to adapt very quickly. Those that were able to establish an online presence were able to weather the storm much better than those, such as airlines, that required people to use their products in person. From what we have seen so far, some companies will continue to expand their ability to operate digitally while others will be pressed to innovate just to survive, in the considerably changed society in which we all now live.

Some of the most critical issues facing companies during the pandemic have been related to labor management, and to employee health and safety. Just as health and safety have risen in importance in industries not traditionally seen as “dangerous”, other industries already considered “dangerous” have had to deal with entirely new levels of operational health and safety risks.

But investor expectations were already high regarding companies’ labor policies and practices, as well as their health and safety measures, so from a pragmatic reporting standpoint it’s not so much about disclosing additional information specific to their BCPs or pandemic preparations as it is about better transparency on the issues already fundamental to their business. In terms of labor management and human capital this would include metrics on employee engagement, on compensation and other benefits, on workplace skills development, and on diversity measures, grievance mechanisms and turnover data, among other things. For health and safety issues, investors already expect companies to report on their governance oversight, their monitoring and audit procedures, and on certification and training, so this hasn’t really changed.

Looking more beyond COVID-19, for those companies that are in the earlier stages of developing their ESG programs, what are the top three things issuers should know or understand about how investors use ESG data and analysis?

First, investors use ESG data and analysis in a variety of ways, depending on their investment objectives, strategies or mandates. Common investor motivations when considering an ESG strategy include:
  • Values – to align investments with political or ethical beliefs;
  • Impact – investing with the intention of supporting positive social or environmental benefits, alongside financial returns;
  • Integration – investing based on a systematic and explicit inclusion of ESG risks and opportunities, with the intention of enhancing long-term risk-adjusted returns.

Some of the most critical issues facing companies during the pandemic have been related to labor management, and to employee health and safety. Just as health and safety have risen in importance in industries not traditionally seen as “dangerous”, other industries already considered “dangerous” have had to deal with entirely new levels of operational health and safety risks.

Second, for investors pursuing ESG integration, assessments of company ESG performance are based on only those issues that are financially relevant. The ESG risks and opportunities one industry faces may be different than another industry. For example, the ESG assessment of energy companies will be heavily focused on environmental issues like carbon emissions, biodiversity, community relations and health and safety. By contrast, a pharmaceutical company’s ESG performance would be measured by how it manages risks related to product quality and safety, or on the provision of access to healthcare in underserved markets.

And third, issuers should be aware that investors gain insights on company ESG performance from a rich ESG information landscape, which extends well beyond what companies report in their corporate social responsibility (CSR) or sustainability reports. While corporate disclosure is important, this is not the only source of information informing ESG investment decisions. At MSCI ESG Research we leverage many different data sources in making our assessments. In addition to corporate reporting we use specialized regulatory, government, academic and NGO data sets, and over 3,000 different global and local news sources. We are also exploring new alternative data sources such as social media and satellite imagery, in addition to our current use of natural language processing and machine learning techniques to extract information that may not be accessible through traditional means or sources.

For more on MSCI’s Covid-19 research, please see here and here.

¹Melas et al. 2020. “Five Lessons for Investors from the COVID-19 Crisis.” MSCI Research Insight. Read the blog here
²Nagy, Z. and Gises G. “MSCI ESG Indexes during the coronavirus crisis.” MSCI Blog, April 22, 2020. Performance over the period of March 31, 2015 to March 31, 2020.
³Op. cit., “MSCI ESG Indexes during the coronavirus crisis.”
4McKinsey and Co. June 5, 2020. “Consumer sentiment is evolving as countries around the world begin to reopen.”