During the global financial crisis of 2008, Warren Buffett famously said: “You only find out who is swimming naked when the tide goes out.” So, it has been with the Covid-19 pandemic in relation to the rigour with which companies have engaged with environmental, social and governance (ESG) concerns.

Whether it takes the form of companies working with bad actors across supply chains, poor crisis and contingency preparedness, workforce layoffs, or even brand reputation management, the virus has indeed dragged the tide out, exposing businesses and sectors where the ESG emperor is wearing no clothes. The good news is that as the global economy starts to emerge from this worldwide crisis, opportunities will abound for companies across all sectors to recommit to rigorous environmental and social programmes and sustainable practices.

Societal and health emergency

What we are witnessing is no mere economic recession. At its heart, the pandemic is a societal and health emergency that will leave deep scars that will linger for a generation or more. During the current crisis, investors, as well as our broader society, need to be vigilant against the potential outcome that would see existing, entrenched interests reinforced, rather than reversed, which would run counter to the hopes of society. We are currently seeing the best of many individuals and companies in the battle against the disease, but with trillions of dollars flooding the global system, the potential for misappropriation of the recovery by vested self-interests runs high.

If optimism exists, it is because prior to the pandemic’s arrival, the conversation in boardrooms had increasingly turned to “corporate purpose” and the end of the primacy of shareholder value in favour of a multi-stakeholder approach to business. Indeed, last August, US senior management association Business Roundtable (BRT) came up with a letter trumpeting the new world order of multi-stakeholder capitalism. Little did the signatories know how quickly that hypothesis would be tested! Now is the time for companies to turn those words into tangible action, and for shareholders to hold them to account if the rhetoric is to be more than empty words.

Companies as social enterprises

Every company, by definition, is a social enterprise that has an implicit social contract with its workers, the communities it serves, and the environment in which it operates – something explicitly recognized in the BRT statement. So far, the leadership and management teams of many companies have demonstrated empathy, compassion and ingenuity to go beyond profits to help communities in crisis. (Manufacturers making ventilators, retailers producing protective garments, and certain alcohol companies shifting production to hand sanitizer are all good examples.) For others, however, mercenary behaviours have been laid bare and rightly exposed to public opprobrium. That’s where active engagement by shareholders provides an opportunity to have real dialogue about salient issues that go beyond traditional financial measures. And, when dialogue refuses to yield results, executives and boards can ultimately be held to account through the power of proxy voting, a central part of securities ownership.

Now is the time for companies to rebalance expectations away from maximizing short-term returns – the use of excessive debt and extended supply chains to reduce labour costs – towards the quality of those returns. In short, we have an opportunity to re-examine notions of efficiency in favour of resiliency. A stirring example of this kind of thinking is the city of Amsterdam, which has officially embraced a sustainable development model as a way of emerging with purpose from the Covid-19 crisis to balance needs without harming the environment.

Watershed moment

The US Securities and Exchange Commission’s (SEC) announcement that it has asked companies to release “robust, forward-looking disclosures” about the impact of Covid-19 on their businesses is another landmark moment. Extrapolating this further, it may mark a watershed opportunity to disclose broader sustainability information concerning long-term risks to which companies are exposed. On climate change, for example, the new disclosures should allow US companies to provide scenario-planning information recommended by the United Nations-supported Task Force on Climate-related Financial Disclosures (TCFD), which many thought was prohibited up until now. Fuller, more transparent disclosure of the material risks that companies face is needed for investors to better understand the strategy for delivering resilience in the face of future uncertainty.

Never before has there been so much interest in corporate sustainability. Despite the current crisis, ESG and sustainability-labelled equity funds set inflow records in the first quarter of 2020. The growing demand for such products provides an opportunity for companies to demonstrate that ESG is not a handy marketing acronym for asset managers, but an integral part of how a company takes its corporate purpose seriously to generate value for all stakeholders.

Greenwashing is an accusation directed at companies, not just asset managers keen to virtue signal. ESG should never be just about what a company is disclosing, but what it is actually doing. Created in buoyant economic times, the BRT corporate purpose statement now provides a ready-made template for companies to navigate their way out of the crisis, and it recognizes potential contribution towards delivering a vibrant and healthy world for all.

Finance 101

Our Covid-19 moment presents us with the opportunity to retire the ESG label in favour of recognizing that what we’re really talking about is “Finance 101”:  the management of issues that are self-evident and influence good long-term corporate financial outcomes. Companies with poor ESG records may ultimately deflate shareholder value – and are likely to be held accountable if their behavior falls short as the trauma engulfing the economy unfolds. I won’t be the last to say that our present time has been challenging, unprecedented, and even surreal. If corporations and investors alike remain vigilant, when the coronavirus tide finally recedes, it just might unearth a better, more purposeful world.

Andrew Parry is the head of sustainable investment at Newton Investment Management