“Build Back Better”: COVID-19 Brings the “S” From ESG Into Focus

Dislocations resulting from the pandemic shine a light on environmental, social and governance (ESG) issues, which can be used as an additional tool to identify leading companies from the laggards, according to Franklin Templeton’s Global Head of ESG, Julie Moret. She explains why she believes the pandemic has propelled “S” issues to the forefront, and how this environment could cultivate a fertile backdrop for active management.

We’re still in the early stages of understanding the longer-term impact the COVID-19 pandemic will have on the real economy. That said, the immediate impact on people’s lives and the dislocation of markets is evident.

While the crisis has no doubt emphasized how critical balance sheet resilience is now for companies and their longer-term viability, it has also accelerated a number of environmental, social and governance (ESG) themes which existed before the crisis. Many investors and executives argue that now is the time to “build back better” and create a more sustainable corporate world.

Against this backdrop, we see three near-term implications for investors which we believe will be sustained over the longer term.

Wider Stakeholder-Oriented Models and Focus on StewardshipA Luxury or Necessity?

The crisis has both intensified and highlighted a range of societal issues, such as growing inequality and the fragility of customers and employees, especially in certain segments of the economy which have been left with little protection. It has also underscored the interconnectedness of people, the planet and profit.

These drivers will increasingly require us to reframe what a well-managed business looks like. It reflects the increased pressure all companies face to manage a wider group of stakeholders beyond just shareholders. What we’re advocating are the ingredients that go into capturing quality and incorporate wider attributes. The crisis shines a light on the growing relevancy to corporates of wider stakeholder-oriented models, which provide equitable returns not just to shareholders but to employees, customers and suppliers, as well as the effective management of environmental externalities. All these considerations ultimately earn a company’s social license.

This infers a focus on stewardship and active engagement by investors. As investors, we are responsible stewards of our clients’ capital, which is to say we look after the assets our clients have entrusted us, with a view of returning them in a better condition than which we acquired them in the first place. ESG information provides an assessment on how companies are managing these issues. As such, it becomes a tool not only to further differentiate between well-run businesses versus the laggards, but also identify companies that are making a positive societal impact.