Pandemic highlights ESG importance, S&P Global Ratings says

The Covid-19 outbreak is highlighting the importance of ESG issues for companies, and those that take such issues seriously stand a better chance of coping with such unprecedented disruption, according to a new report.

S&P Global Ratings this week released the first paper in a two-part series assessing the ESG implications of Covid-19, using the firm’s ESG evaluation framework. Risk oversight is a key board responsibility, and the report focuses on the importance of companies looking at a wide variety of risks, including those related to ESG issues.

‘The pandemic has… brought to light the materiality of ESG-related risks and the deep linkages between businesses and their stakeholders,’ the report’s authors write. ‘In our view, social risks are the most acute factors right now; chief among them are health, safety and workforce dynamics… However, good governance during this troubling time is of critical importance, and environmental performance remains key.’

Despite this, the paper cautions that in some cases organizations may put off their strategic environmental priorities, which could lead to a worsening in ‘environmental performance.’

S&P Global Ratings’ ESG evaluation takes into account short-term measurable risks such as changing consumer behavior – for example, cancelling holidays and avoiding sporting events. It also considers other less tangible, reputational effects such as the goodwill a utility might gain by helping vulnerable customers with their payments or a manufacturer might generate by switching production to help with medical needs.

On the flip side, a company might generate negative sentiment by laying off employees or appearing to endanger its workers during the pandemic, the report notes.

‘With the unprecedented disruption being wrought by this pandemic, companies across the economy will be forced to closely manage their social and human capital and scrutinize their strategies as well as their readiness for black swan-type risks,’ the authors write. ‘However, even if this pandemic is without precedent, the fallout from it could precipitate a more acute focus on [ESG] factors and preparedness for attentive leadership teams.

‘In S&P Global’s view, strong ESG performers with stakeholder-focused and adaptive governance structures are likely to remain resilient amid these rapidly changing dynamics.’

The report states that stakeholder-focused governance is important for the following reasons:

• Companies that regularly assess longer-term and emerging risks such as pandemics – the threat of which has been known for many years – may be better prepared for those risks and better able to withstand them
• Sustainability risks such as social and health issues impact stakeholders ranging from customers and suppliers to governments and workers. Companies that engage with these parties may be better able to respond to a crisis and ‘defend their social license to operate.’

Among many other things, S&P Global Ratings’ ESG evaluation takes into account workforce and diversity issues. For example, the report notes that mismanagement during the current pandemic may influence retention rates, which in turn would require time and resources to be spent on hiring and training. Imposing deep workforce cuts could cause reputational damage and employee furloughs could lower workers’ goodwill, the authors explain, while offering wage protections, sick leave and job safety may have the opposite effect.

‘With skills shortages becoming an increasingly important business concern, any controversies related to workforce mismanagement could influence talent recruitment and thereby interfere with the execution of strategic priorities,’ they add.