COVID-19: Impact on ESG Investing and Social Policies

Increasingly, investors are applying environmental, social, and governance (ESG) factors as important determinants for investing in a specific company. ESG principles may deliver better returns, lower risk, or simply demonstrate that the companies have better or good management principles. COVID-19 has drawn these principles into sharper focus. To discuss the impact of the novel coronavirus on ESG, GLG sat down with Tony Pipa, GLG Network Member and Senior Fellow in Global Economy and Development at the Brookings Institution and former CSO at USAID. The interview has been condensed and edited for clarity.

Can you provide a little policy and market background perspective on the impact of COVID-19 on ESG?

There’s clearly an immediate focus of policymakers worldwide on just stopping the disease and saving lives. From a policy perspective, there are phases of the crisis: relief, reopening, and recovery, hopefully leading to greater resilience and potentially even transformation of systems to support improved societal well-being.

Global cooperation is crucial. No one is safe anywhere until everyone is safe everywhere. And as COVID-19 ripples through the developing world, it could certainly come back to the developed world. The problem is that global cooperation has been minimal thus far. Most countries and policymakers have focused on what’s happening within their own borders. And of course, as the economic disruption deepens, there’s pressure on policymakers to act quickly and get resources into the hands of businesses and citizens. You see this in the U.S. with the CARES Act, a $2.2 trillion relief package, with a subsequent relief package already passed by the Senate and now before the House.

It’s unclear the extent to which ESG is a strong consideration for policymakers as they create these packages. There was some movement, at least on the Democratic side, to incorporate ESG considerations, but it was unsuccessful. But as governments develop subsequent packages focused on medium- and long-term recovery, using things like infrastructure to stimulate economic activity, there will likely be more attention on driving companies to manage ESG issues and incorporate sustainability and equity.

This crisis has brought a lot of attention to the interconnectedness of multiple societal issues – how important health is for the economy, for example. Before COVID-19 hit, we were thinking of the second round of ESG focused on sustainability and using frameworks like the Sustainable Development Goals (SDG) to elevate key parts of societal impact as we move from the shareholder value to stakeholder value.

You’ll likely see governments try and solve multiple societal problems at once with their policy and resource interventions. Investors will seek to manage their risks; they will regard ESG as a risk management framework and may want to double down on their focus on sustainability during the COVID-19 recovery phase.

As we start to finally move from response to recovery, you’ll probably see a tie between the climate agenda and economic agenda to drive economic recovery. It’s an opportune time to combine them both to improve the outcomes for those most vulnerable and most impacted economically. At the same time, I think you’ll see a lot of pressure for policymakers to move quickly and try to get quick results on the economic front. This will cause tension around issues with sustainability and climate. It’s too early to tell which side will win out as we balance that tension.

What role do societal well-being and human and social development concerns play in ESG? And how might that shift due to COVID-19?

 While the focus is still predominantly on stopping the virus, the UN secretary general is consistently elevating sustainable development and the SDG as the blueprint for recovery. The crisis is showing that the principles of sustainable development – the interconnectedness of issues such as health, economic well-being, issues of inequality – have implications when a shock or a stress occurs.

From the policymaking perspective, you’ll probably see more interest in the principles of sustainable development. I think you’ll also see consumers looking at these things. They’ll be looking for companies that are trying to provide beneficial outcomes for society. It’s already started. There’s a mantra that’s trending, already with hashtags: “building back better.”

Policymakers will be under pressure to move quickly and allocate resources to help businesses and employees whose lives have been disrupted. But ensuring that sustainability is built into the policy response takes time and investment, which may slow things down. Political divisions may even deepen, especially if uncertainty lingers and continues to slow economic reopening.

Up to now, we’ve put a little bit of a pause on the climate emergency and the implications of climate change, but it will come back full force, especially as we see how quickly we’ve been able to reduce emissions. We’ll probably see studies and research that highlights how impacts from biodiversity degradation and climate change enable the type of virus spread and increase the risk of crises like these.

Regarding the allocation of resources, and the changing investor pressures and governance, how do you see public versus private dollars being allocated across various industries?

 There’ll be a lot of interest in certain industries being protected with public dollars. We’re seeing that in the U.S. with the airline industry, the tourism industry. I think you’ll see the services industry and things like restaurants, even the food systems writ large, seek a lot of public investment to tide them over. The crisis is going to put companies under the microscope as to how companies and industries use these public resources.

 So, you’re seeing things like Shake Shack – a restaurant chain in the U.S. – returning its government loan because it found $10 million in the credit markets. Shake Shack has received positive reputational approval for this move, versus something like Ruth’s Chris Steak House. Because of how Ruth’s is structured, it got two loans. This meant $20 million, despite having thousands of employees and a well-compensated CEO. In principle, the money was meant to go to small- and medium-sized enterprises. Because of that hit to their reputation, coupled with the fact that they’re a steak house, they’ll feel significant and unwelcome pressure.

 Do you see healthcare becoming an integral aspect to ESG investing as a result of COVID-19?

 Investors will start to see healthcare as part of the risk management embedded in ESG. You’ll want to see how workers and how businesses themselves have plans in place for health safety, health security, and continuity of operations in a crisis like this.

 What it’s doing to the healthcare industry is interesting. In the U.S., for example, doctors’ businesses are under extreme pressure. Their revenues are falling between 50% to 90%. About 20% of the primary care practices might need to temporarily close. There’s a lot of possible consolidation in the market.

 There’s a large policy question around societal safety and healthcare and the extent to which people have health insurance and the ability to access healthcare. It’s not just now something that’s about individual well-being – it’s also about the well-being of businesses and their ability to operate, as well as the safety of society at large. As much as we think of our military as keeping us safe from conflict, we’ll also have to think of our health system as keeping us safe from these types of viruses and the epidemics and new health threats.

 I think you’ll see a move to look at healthcare in a different way. Hospitals, insurance companies, and investors will start looking for opportunities as the market potentially consolidates. This will become a major issue. Policymakers will face the question of how healthcare integrates with the recovery from the economic dislocation that people and businesses are feeling.

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About Tony Pipa

Tony Pipa is currently a Senior Fellow in Global Economy and Development at the Brookings Institution. Prior to this, Tony was Chief Strategy Officer at the United States Agency for International Development. He also led the U.S. delegation at the UN to negotiate and adopt the Sustainable Development Goals.

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This article is adapted from the April 21 GLG teleconference “COVID-19 – Impact on ESG Investing and Social Policies.” If you would like access to this teleconference or would like to speak with Tony Pipa or any of our more than 700,000 experts, contact us.

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