Opinion - Investing

Op-ed: Investors will reward companies that take care of others in the coronavirus pandemic

Key Points
  •  Acts of charity, compassion, and creative generosity may resonate with investors increasingly drawn to socially responsible investing.
  • Corporate efforts should not be overlooked by the many organizations that measure socially responsible investing criteria, which are used by mutual, index, and exchange-traded funds as well as institutional and individual investors.
  • Financial fragility threatens a firm's ability to withstand a crisis and renders it difficult to maintain sometimes costly programs considered desirable to socially responsible investing.
Wall Street and much of the Financial District stands empty as the coronavirus keeps financial markets and businesses mostly closed on April 20, 2020 in New York City.
Spencer Platt | Getty Images

Here's a test:  What do workplace safety, labor relations, executive compensation, and community development have in common? 

They are all measures used in ESG rating systems that guide socially responsible investing with a focus on environmental, social and governance criteria. 

While the COVID-19 pandemic and efforts to control it decimate much of the U.S. and world economies, the varied acts of charity, compassion, and creative generosity may resonate with investors increasingly drawn to socially responsible investing now and for years after this crisis passes. 

U.S. corporations are raising the bar for "good citizenship" as manufacturers deploy excess capacity for ventilators, masks, and face shields, tech giants offer software for healthcare monitoring and data analysis and CEO's cut their salaries.  

We learned that Proctor & Gamble has shifted production at Gillette intended for razors, rendered less essential by remote working, to face shields that are being donated to local hospitals. LVMH has traded the assembly lines of expensive perfume for hand sanitizer that it donates to the French government. Jack Dorsey, CEO of Twitter and Square gave $1 billion to the effort, Ford and GM are making ventilators, Hewlett Packard is making 3D hand-free door openers, and hundreds of other tech, industrial, consumer and industrial firms are innovatively contributing to the COVID-19 battle.    

These efforts should not be overlooked by the many organizations that measure ESG criteria which are used by mutual, index, and exchange-traded funds, as well as institutional and individual investors. The most recent data suggest that over $30 trillion, or more than one third, of global equity assets use some form of ESG screening in their investing practices. 

This growth has continued despite a lack of standardization in metrics, with wide variations in both the weights assigned to different criteria and the scoring for the same companies. 

MSCI,  one of the largest rating players in the ESG field, uses a system that applies a complex matrix across hundreds of sub-industry groups, based on how each company manages specific weighted risks and opportunities within sleeves of the broad environmental, social, and governance pillars. 

In considering how a firm's response to the COVID-19 crisis might affect its ESG score, the agencies will hopefully assess the key factors of "labor management" and "health and safety" under the social category, as well as, "business ethics" and "financial system instability" under governance.

ESG rankings take into account both negative or harmful actions as well as proactive solutions and positive actions to move scores up and down. For example, Hilton, upon suddenly finding itself with no customers for its rooms, helped place furloughed workers at employers such as Amazon  who are hiring during this period. The hotel company should receive positive recognition for its labor practices within the ESG rating system.  

Retail chains that are labelled "essential" can be graded on choices to keep their workplaces safe. How carefully corporations manage health risks, one of the factors in ESG metrics, is a current focus of attention that will remain in the spotlight post-pandemic.

Under the governance umbrella, both business ethics and financial system instability can falter or rise during a crisis.

Grocery chain Kroger sent all store employees a bonus check of $300 for full time and $150 for part time and gave them a fourteen-day additional sick leave with pay should they contract COVID-19. While not a huge amount of money nor many more added sick days, it was symbolic as a gesture of good will.

Additionally, Rob Katz, the CEO of Vail Resorts, donated $2.5 million to support employees and communities around the company's ski resorts.  

Financial fragility threatens a firm's ability to withstand a crisis and renders it difficult to maintain sometimes costly programs considered desirable to socially responsible investing. These include day care facilities on premises, energy and environmental sustainability, and solid health care benefits.  

Corporate responses to the coronavirus pandemic will trigger revisions to ESG ratings which will be meaningful to managements and shareholders, given the impact on trading of assets using ESG among its investment criterion. 

Sustainalytics, another ESG rating agency, believes that they may soon include more metrics about "preparedness" for unforeseen disruptions. They urge companies to fully describe their crisis management policies and for shareholders to study resilience of their holdings as a regular component of the investing process.

Cynicism aside, I have no doubt that P&G's decision to pivot underutilized capacity at a razor blade plant toward face shields arose from an awareness of its potential contribution and desire to give during a crisis. However, in a world increasingly looking at how businesses treat and value their communities, environment, and employees, these good deeds, rather than being overlooked or even backfiring, are likely to be rewarded, at the very least, through a higher ESG score.  

Karen Firestone is chairman, CEO, and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.