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COVID-19 and Implications for ESG Investing

Gary Low | June 1, 2020

This global pandemic has exposed business vulnerabilities and recalibrated material Environmental Social and Governance (“ESG”) factors for investors. As the world manages around the ‘new normal’, we have reviewed existing data on how the pandemic is shifting the ESG paradigm.

Based on our research, we would like to highlight the following 5 key focus areas as it relates to ESG and implications for investors.


While strong governance and systemic environmental factors like climate change remain important to investors, social sustainability issues have been thrust into focus as the COVID-19 pandemic continues to unravel. Some of the key social issues that investors are now focused on include:

Employee Health, Welfare and Safety: An increasing chorus of investors are pushing companies to prioritize employee welfare.

  • International Corporate Governance Network (“ICGN”): With $54 trillion in assets under management, ICGN called on corporate leaders to re-prioritize governance and stewardship during this pandemic to include employee safety and welfare. In addition, business leaders should adopt a holistic approach in capital allocation that balances workforce, stakeholders and capital providers.
  • Investor Alliance for Human Rights (“IAHR”): With member firms holding $5 trillion of managed assets, IAHR called for governments to enforce mandatory human rights risk management measures to protect employees in performing work activities and published a new Investor Toolkit on Human Rights for asset owners and managers to address risks to people posed by their investments.

Why does this matter? Corporate behavior in a time of crisis can have implications to stakeholders according to Jessica Alsford, Head of Sustainability Research at Morgan Stanley. For investors, these factors can impact long-term performance and returns of the investments.

Engagement practices with employees also matter. A study by Gallup suggests that the top quartile of engaged employees outperform the bottom quartile in customer relations, higher productivity, better retention, lower accident rates and 21% higher profitability. Engaged workers also report better health outcomes. A 2017 study by Optimy showed 60% of customers were willing to pay more for products from companies with reputable brands and good values. In addition, 71% of millennials said they would choose to work for a company that has demonstrated community involvement.

Restructuring often offers a necessary but temporary solution to COVID-19 disruptions. A study published by Sucher and Gupta in the Harvard Business Review found that following layoffs, the remaining employees saw a 41% decline in job satisfaction, 36% decline in organizational commitment and 20% decline in job performance. Accordingly, the total cost of replacing lost employees when the economy recovers, can be up to double their annual salary. The training time and cost should also be factored into lost productivity of new hires. In short, responsible corporate actions during a crisis can encourage employee loyalty, increase employee satisfaction and enhance a company’s reputation. For example, we noted select retailers that have announced temporary store closures have also committed to continued pay.


ESG COVID Supply Chain

The coronavirus pandemic also exposed vulnerability in company supply chains in managing logistics disruptions and employer-controlled working conditions that contribute to the spread of the virus. Many multinational corporations reportedly only have a high-level intelligence of their supply chains and associated risks with lower tiers .
Prior to this pandemic, the compliance rate of reporting under the UK Modern Slavery Act for over 13,000 companies was only 23%. France and the Netherlands have already passed legislation for companies to undertake human rights due diligence.

Cramped living conditions for migrant workers have already led to an outbreak of COVID-19 clusters , and led to operational disruptions . In 2018, US Department of Labor investigations exposed unhygienic employer-provided housing for migrant farmworkers that often lacked clean drinking water . US federal guidelines only require dormitories for foreign workers at 40 square feet per person compared to the Centers for Disease Control and Prevention social distancing recommendation of six feet apart. Vulnerability to the work force is also a risk for companies dependent on ‘gig workers’ without normal worker protections and access to healthcare insurance.

The pandemic has once again highlighted the global interconnectedness and dependencies in supply chains and the inherent disruption risk that this entails. Going forward, some companies might consider localizing supply chains to minimize operational disruptions. The Sustainalytics’ Supply Chain Management indicator provides insight on corporate supply chain strategies. Sustainalytics noted most sectors average about 15% in terms of supply chain management effectiveness . While localization is one option, the availability of local resources challenges the cost structure especially for those that rely on outsourcing to emerging markets like China and India. A diverse regionalized supply chain could potentially serve as a mitigant against regional or global disruptions in the future.


As the pandemic continues to disrupt business activity, many firms have been forced to quickly adapt to working remotely. The use of potentially vulnerable services, such as virtual private networks (VPNs), amplified the cyberthreat to both individuals and organizations. Both the United States Department of Homeland Security (DHS) Cybersecurity and Infrastructure Security Agency (CISA) and the United Kingdom’s National Cyber Security Centre (NCSC) warned against an increase in COVID-19-related malicious cyberattacks in early April 2020.

ESG COVID Cyber Security

Some of the identified threats include :

  • Phishing, using the subject of coronavirus or COVID-19 as subject matter
  • Malware distribution, using coronavirus or COVID-19
  • New domain names containing content related to coronavirus or COVID-19, and
  • Attacks against deployed remote access and teleworking infrastructure

Employee data privacy is also another ESG area of concern. Baker McKenzie provided regional legal guidance on this matter. Accordingly, in most countries, an employer can conduct temperature checks on employees and visitors in its premises. These checks must be as non-invasive as reasonably possible such as using temporal scanners. Employers may also choose to recommend that employees check their own temperature before coming to work or once arriving at work.

On disclosure of employee identity that tested positive, an employer is not permitted to do so to other co-workers in the US. In the EU, there are country specific nuances in addition to GDPR. If disclosed electronically, this would violate GDPR as this would qualify as processing sensitive data with no apparent legal basis. However, if disclosed orally in a face-to-face meeting, an argument can be made that the GDPR does not apply (cf. Art. 2(1) GDPR) according to Baker. In Germany, note that an employer is allowed to disclose the identity to contact persons of this individual if the disclosure of the identity is necessary for preventative measures.


The novel coronavirus pandemic also highlighted the concept of dynamic ESG materiality as opposed to static indicators. Truvalue Labs, a leading provider of AI-driven ESG data, introduced the Dynamic Materiality concept, indicating that every company, industry and sector has a unique materiality signature that changes over time. Secular drivers like emerging technologies and new regulations drive this dynamic evolution.

Based on the company’s research , entitled Dynamic MaterialityTM: Measuring What Matters, using real-time ESG factors, Truvalue found that materiality is dynamically driven by stakeholders’ perspectives in addition to sector factors as a whole. Analyzing millions of sustainability data for companies in the Russell 3000 Index over the past 12 years, their research found that the data was predictive of the Sustainability Accounting Standards Board’s (SASB) Materiality Map. These findings suggest that Truvalue Labs’ data could serve as a proxy and leading indicator for materiality.

For investors to better capture the dynamic materiality of ESG KPIs, a shift in assigned weightings to each indicator might be warranted in light of the pandemic. The recent proxy season also highlights emerging material social factors. We recommend that investors consider these as a rough benchmark for establishing relative ESG risk ratings.



While political activity and climate change continue to dominate the US shareholders proxy season, accounting for 18% and 15% respectively, emerging areas of focus are in the social realm. decent work (12%) and human rights (11%) are emerging categories within social issues from data gathered by Manhattan Institute’s Proxy Monitor .

While shareholder proposals were mostly filed before February, many companies adopted measures such as suspending buybacks and dividends while some boosted worker compensation. As proxy adviser ISS noted, discretionary capital allocation namely share buybacks and dividends, could result in liabilities for the fiduciary duty of board members.


The pandemic is temporarily impacting the use of fossil fuels, helping to temporarily reduce global greenhouse gas emissions and air pollution. However, it is also decreasing investments in clean energy, such as wind and solar power, and green bonds, according to Jessica Ground, Global Head of Stewardship at Schroders . In April, total issuance of ESG bonds increased by 272% annually and was double the total from March, reaching $48.5 billion, according to data from Morgan Stanley. For the first time, monthly issuance of sustainability bonds – financing tied to positive social or environmental outcomes – reached $19.4 billion compared to green bond issuance ($16.8 billion).

ESG COVID Sustainable

According to Moody’s, 76% of the total ESG issuance last month came from multilateral development banks, with the majority supporting COVID-19 relief initiatives. Some are concerned that the pandemic is pushing more companies to issue debt to enhance liquidity, and in the process of doing so, crowding out green investments.

While it is still preliminary to conclude if this trend will be secular, for now, analysts expect 2020 green bond volumes will miss the estimated $400 billion.


For more information on our ESG advisory services, please contact:

Gary Low, CFA
ESG Advisory Director
Disclaimer: All information contained in this report is provided solely for informational and discussion purposes only and does not represent investment opinion. In addition, the contents of this report may not be reproduced or used in whole or in part for any other purpose. Certain information (such as macro-economic and public market information) has been obtained from published sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. Opinions, estimates, and views expressed in this report represent our independent perspective based on current market data and that are subject to change without notice. The information contained herein should not be regarded as investment, legal, regulatory, accounting, tax, compensation or specialist advice.

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