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Pandemic implications for ESG

Pandemic implications for ESG

By David Sheasby
9 minute read

The “social” aspect of ESG has often been overshadowed by “environment” and “governance” concerns, but the COVID-19 crisis has brought it to the forefront.

The last month has clearly been dominated by the impact of the spread of the COVID-19 virus, as investors reflect on the potential impacts on global supply chains, the global economy and corporates. The pandemic has had implications across many aspects of ESG analysis.

Social – emphasising the ‘S’ in ESG

The “social” aspect of ESG has generally been in the shadows of environment and governance, which are often given greater prominence, but the COVID-19 crisis has brought it very much to the fore.


Companies are working hard to navigate near-term challenges presented by the current crisis. The decisions being taken now that affect a company’s human capital, customers, and the communities in which it operates can have lasting implications, both positive and negative. Decisions around human capital management will vary materially across different sectors, dictated by a range of factors, including changes in product demand, government-mandated shutdowns, liquidity, type of workforce (hourly vs. salaried) and employees’ ability to work remotely.

Employees are the key resource for almost all companies and actions taken proactively to support them throughout the crisis could play a key role in employee loyalty and satisfaction over time. A recent example in Europe was French hospitality company Accor, which suspended its dividend. However, of that suspended dividend 25 per cent will now be paid into a fund to help support employees and their families pay for COVID-19 treatment. The CEO has also given up 25 per cent of his salary to top up the same fund. Accor’s support for employees also comes alongside 2,000 hotel rooms, which the company has allocated to health workers.

In the US, large US retailers have ramped up benefits to employees and most have also committed to continue paying their employees during the initial period of closure. Meanwhile, in Australia, the telecom operator Telstra has introduced its global epidemic and pandemic leave policy, to respond to the ongoing COVID-19 situation. The policy is designed to provide permanent, fixed-term and casual team members with access to additional paid leave should they need to take time off work.

The crisis will, however, widen some of the existing social inequalities. For example, in the US, the Bureau of Labor Statistics, has indicated that while half of college-educated workers can work from home, only 13 per cent of workers with a high school diploma can do the same. Low-income households (especially in developing economies) are also likely to be disproportionately affected by the burden of COVID-19, with the impact of quarantine, or the main breadwinner losing their job, having a negative impact on the household overall.

Alongside the effect on human capital, there are also broader societal impacts. It is interesting to see those companies, which are adaptable and flexible enough to be able to support those in need. There are numerous examples of support being offered – for example the leveraging of engineers to build ventilator capabilities, companies like LVMH and L’Oréal using their factories to produce hydroalcoholic gel and Unilever providing €500 million of cash flow relief across its extended value chain.

These moves, alongside fostering a healthy corporate culture, can drive positive brand recognition among customers, stronger employee satisfaction and engagement over time and are likely to be remembered post-event.


Many of these social issues overlap with governance and culture, and how companies are managing themselves through the crisis, but the pandemic also presents some specific issues – in particular some challenges for the upcoming annual general meeting (AGM) season, which is fast-approaching in Europe and the US. While the short-term corporate governance implications are delays to AGMs, and changes in capital allocation, the long-term impacts will focus on corporate resilience.

With large gatherings discouraged or banned across many countries, the AGM season could prove difficult to navigate. Most companies are required to hold these meetings once a year and vote on certain company-related issues such as accounts, director elections, executive remuneration and capital raising powers. While there has been a trend to allow virtual meetings in some markets, this is not uniformly the case. Regulations in Germany, for example, specify that a physical shareholder meeting has to take place – which prevents virtual-only meetings. AGMs are also usually where the annual accounts for a company are approved, as well as being a trigger to pay its dividend.

Regulators have been stepping in to provide guidance. For example, the UK’s Financial Reporting Council, Financial Conduct Authority and Prudential Regulation Authority, issued a joint statement providing companies an additional two months to produce audited results. Additional guidance was also aimed at corporate boards and auditors, focusing on forward-looking statements and audit opinion. The banking regulators in many countries have also provided specific guidance on stopping dividend payments and payment of executive bonuses. While dividend cuts represent a clear risk for yield-focused investors, there are, on the other hand, also financial and reputational risks associated with unchanged distributions to shareholders (dividends or share repurchases) in the context of an undermined economic outlook.

Many executives will be seeing a hit, at least in the short-term, on the current value of their stock-based compensation, but these are often tied to a number of different performance metrics, and also often based on relative returns, so it is likely some executives will continue to receive high payouts. At a time when many employees are facing lay-offs or salary cuts, there will be a responsibility for the board and remuneration committees to show leadership in how they approach this.


Clearly the huge drop-off in economic activity (and particularly in travel), has resulted in lower emissions and pollution, evident in maps of nitrogen dioxide concentrations in many cities around the world. However, the lower emissions from reduced industrial activity are temporary and there is no specific structural change necessarily taking place – merely a pause. Once industrial activity resumes, emissions are likely to spike back up. The need to address the issues associated with emissions and climate change has not gone away.

One casualty of the current crisis is the key COP26 climate talks, which were due to take place in Glasgow in November this year. These have now been postponed and are now likely to be held in May next year. The postponement may look initially like a setback but with huge amounts of preparation required in advance of the talks and some concerns about the lack of preparation for the existing timetable, there may now be an opportunity to make these talks more effective.

In the context of the environment, it has also been interesting to monitor the policy evolution in different regions. In the European Union, despite short-term delays due to operational risks, the Green Deal will go ahead and policymakers remain committed to a green stimulus. The situation is very different in the US, where the COVID-19 crisis seems to have been a catalyst to accelerate the rollback of environmental standards. Any delays in action will, however, clearly present a bigger challenge for the extent of future policy change required.

Huge stimulus packages have been announced by governments around the world, in order to address the effects of the current crisis. As part of these stimulus measures there is clearly an opportunity to promote the building of infrastructure that will accelerate the move to a lower-carbon economy – we will need to see to what extent governments are prepared to make this commitment.

Stewardship and ESG work has remained front and centre in our analysis during this period. The PRI returns which are due every March have once again been completed and submitted. This reporting always requires a lot of work and thought and we will publish the public version of the report on our website.

In addition, we are in the process of producing the Stewardship Annual Report, which will be ready to publish in the next few weeks. This is an opportunity to showcase some of the work which took place during 2019 and report on its outcomes. One aim of the report this year will be to meet the requirements of the updated UK Stewardship Code, as well as the reporting required under SRD II. These are both focused on outcomes rather than policy and process, and as such the structure of reporting is aligned well to these requirements.

As we approach the proxy season, the engagement with companies is also picking up. Given the nature and impact of the COVID-19 crisis, it is likely the nature of these conversations will change over the course of the coming months.

In Europe, we have been engaging with a Swiss company on its remuneration structure, where we have had concerns about the extent to which it is aligned with performance and how challenging the targets are. In our exchanges with the company it has been able to set out more clearly its thinking as it stands – which has led us to change our views on the structure.

In early March, we met the sustainability team at National Australia Bank (NAB). NAB has been considering engagement with the regulators to formalise the use of a materiality test by companies for how they frame their exposures to sustainability issues. The aim is to have a standard that all companies can attest and be measured against. The bank is also lobbying the country’s federal government to set up a Clean Energy Finance Fund for Sustainable Agriculture. NAB has also signed up to the UN Principles for Responsible Banking, and as part of this is focused on embedding a rating system for sustainability into the risk evaluation for loans.

More recently, much of the engagement with companies has been focused on their adaptability and flexibility with regards to the impact of the current crisis. These conversations are centred on, for example, dividends, cash flows and capital allocation.

In terms of other work, I am continuing to trial a new service offered by MSCI which looks at climate Value at Risk (VaR) in more detail. This could be an interesting complement to the work that we already carry out in this area. MSCI will also be providing access for a trial to some of its ESG metrics – a broader dataset that could also be interesting.

We have also been doing some work mapping the UN Sustainable Development Goals (SDGs) in greater detail with our global emerging markets team. This has involved going through the underlying targets to identify which are most relevant and then mapping the individual names in the portfolios across to the targets. This work should be completed in the next couple of weeks.

David Sheasby, head of stewardship and ESG, Martin Currie, a Legg Mason affiliate manager

Pandemic implications for ESG

The “social” aspect of ESG has often been overshadowed by “environment” and “governance” concerns, but the COVID-19 crisis has brought it to the forefront.

Pandemic implications for ESG
Pandemic implications for ESG
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