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Understanding the S in ESG - Part II
Guidance for asset managers and investors in a Covid-19 paradigm and beyond
Mark Uhrynuk & Alexander Burdulia 11 May 2020

THERE is perhaps no greater evidence of the business community's growing attention to the social aspect of environmental, social and governance (ESG) analysis during the Covid-19 pandemic than a recent statement made by an initial group of 195 institutional investors representing over US$4.7 trillion in AUM.

In encouraging businesses to address the social consequences of the pandemic, they state that the "long-term viability of the companies in which we invest is inextricably tied to the welfare of their stakeholders, including their employees, suppliers, customers and the communities in which they operate."

Strikingly, the statement follows a letter released earlier in the same week by a different group of 176 investors representing over US$4.5 trillion in AUM calling for increased attention to human rights in due diligence processes.

To assist asset managers and investors in responding to this growing trend, we provided a framework for understanding and assessing social issues in all investment contexts in Part I of this article.

Here, we apply that framework and highlight specific points arising out of the Covid-19 pandemic to consider for asset managers and other market participants, with or without an ESG mandate.

Specifically, the following concerns may be relevant when analyzing the social performance of investments during the crisis:

Treatment of employees and other stakeholders with respect to:

Management engagement: Is management communicating with employees and other stakeholders, including around business continuity? Management engagement implicates rights to a safe working environment and health as employees must remain informed during this evolving situation. For investors with a broad ESG mandate, effective top‑down communication may indicate good governance.

Social distancing: Can employees work from home? If not, is there social distancing in the office? Social distancing reduces the risk of infection, and therefore implicates rights to a safe working environment and health. Further, if employees become sick at work, subsequent absences may create operational hurdles.

Compensation: Is there a "safety net", particularly for hourly and/or contract employees? Changes to compensation may implicate rights to non‑discrimination and equality. Investors have positively received efforts to guarantee pay for hourly employees and pay one-time bonuses.

Paid leave and other benefits: Do employees get paid leave? Are other benefits available (e.g. childcare)? Paid leave may be critical for employees to practise social distancing and seek medical care, and therefore implicates rights to access medical services and health. Investors have positively viewed efforts to offer emergency paid leave and expand existing benefits.

Termination: Are there terminations or layoffs related to the pandemic? Investors have positively viewed efforts to retain employees. If small-scale terminations are necessary, they should be non‑discriminatory. Larger-scale layoffs present significant, potentially long-lasting, reputational risks and must comply with applicable law (e.g. consultation and notice requirements).

Impact on company supply chains with respect to:

Health, safety and welfare: Are suppliers taking care of their workers in line with international and local laws? Companies should expect heightened scrutiny of their suppliers, particularly regarding health and safety practices. Companies should ensure suppliers protect their employees and promote better practices when possible.

Engagement: Does the company engage with its supply chain on ESG matters? Management can show initiative by proactively engaging with suppliers on ESG matters, including working conditions.

Monitoring: Does the company have an appropriate supply chain management system? Businesses should monitor changes in supply chains as travel is restricted. Existing systems should facilitate frequent and effective communication.

Resilience: Is a more resilient supply chain necessary? Investors may view businesses that have prepared for the crisis more favourably than those caught off guard. Management should consider whether to reassess existing supply chain models.

Impact on customer and client relationships with respect to:

Engagement: Is the company communicating with customers? Companies should communicate with customers regarding business continuity, maintain key relationships and efficiently address concerns, particularly around health and safety.

Social distancing: Is the company implementing social distancing in dealings with customers? Social distancing reduces the risk of infection for customers, too, and may implicate their right to health. Companies should monitor and implement local guidelines and regulations.

As the unprecedented changes brought by the Covid-19 pandemic continue, it is perhaps easy to forget that the global business community is in the midst of a historic transition toward a more sustainable capitalism.

In this context, proactive asset managers and investors can take this tumultuous time to better understand what that transition means for their portfolios.

As the pandemic has thrown a bright light upon the myriad risks hiding behind the "S" in ESG, it is now clearer than ever that market participants can better protect their investments and reputations by considering and actively addressing social factors in their various forms.

Mark Uhrynuk is corporate & securities partner, and Alexander Burdulia is a foreign registered lawyer, Mayer Brown.

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