COVID-19: A Litmus test for ESG Investing

While making an investment decision, there are many parameters to be considered. The two important parameters one should most certainly consider are Returns and Reputation .

One of the Founding Fathers of United States of America, Benjamin Franklin has rightly quoted that: It takes many good deeds to build a good reputation, and only one bad one to lose it.

COVID19 is a litmus test for companies to walk the talk. As the economic impact of the pandemic intensifies, more and more companies are under scrutiny for their decisions that will affect their employees, vendors, customers, society and other stakeholders. The corporate behaviour in times of crisis and uncertainty can have a permanent implication either positive or negative on the company’s reputation and eventually on its stock prices.

From the company’s point of view, these are never easy decisions. The act of balancing the needs of employees, vendors, customers, society and all stakeholders is exhausting and expensive. How companies work around the long period of uncertainties and ensure continuity of business irrespective of crisis is what investors should look at while evaluating companies based on Environmental, Social and Governance (ESG) practises. These factors are crucial for long term performance and sustainable returns.

When the survival of a company is at stake, it becomes imperative for the company to take harsh decisions with regards to its human capital. Decisions related to employee engagement, layoffs, pay cuts, termination of vendor contracts have a material impact on the company’s performance and set a tone for the broader culture of an organisation for the future.

The proactive actions taken by company’s management to ensure dialogue with employees especially given the stress and fear due to COVID-19 is an important driver for employees to remain loyal and satisfied over time. The awareness and comfort provided by the company to the employees of being in this together makes employees more sensitive and accommodative towards adjusting to the company’s decisions in future.

Contrary to this, temporary layoffs and permanent work force reduction has a devastating effect on a company’s reputation, on employees who lost their jobs and also on the remaining employees in the company. The fear and insecurity of losing the job weighs heavily on job performance and eventually adversely affects the company’s overall efficiency.

It is critical to evaluate how companies take different routes to protect the employees and continue to remain functional. It is often said that under extreme pressure, true character is revealed and it is no different for businesses. As a part of ESG evaluation, giving attention to whether executives are taking pay cuts along with their workforce is an important signal to assess the accountability of management.

The preparedness of a company in terms of maintaining sufficient cash reserves to ensure smooth payment of remunerations to employees is another positive in terms of safeguarding interests of the employees during times of crisis.

Another balance to strike is with suppliers and vendors. The company’s approach towards abusing its power or helping their suppliers and vendors during the COVID-19 crisis clearly reflects on the governance of the company. Under normal circumstances, company with shorter receivables days and longer payable days is considered a good thing. During the crisis, the company can prove its commitment to the ESG mandate by reversing the trend. Company may decide to shorten the payable days so that the small businesses can remain operational with quick payments. Similarly, to help customers conserve cash, companies may also consider relaxing payment terms and accommodate for longer receivables days to the extent feasible.

A latest global survey to recognise the changes in consumer behaviour by a leading digital marketing company, Influence Central, shows that 85% consumers were impressed by the brands that have shown a focus on consumer needs during this difficult and unprecedented time. 55% consumers valued the brands that have made changes in their policies to help consumers and communities. Post crisis, it is certain that consumers will reciprocate and be willing to pay for products offered by these brands.

To summarize, the social decisions taken by the company today are not going to go unnoticed. These decisions play an enormous role in shaping the future decisions of all their stakeholders. These decisions with an honest intent can help build long term loyalty, customer confidence and investors trust.

Before the COVID-19 outbreak, investors were looking at companies through the lens of ESG practises. Now with greater scrutiny, ESG will or has become a key metric of diligence while evaluating a company profile for investment. COVID-19 is an acid test for a company to prove its ESG credentials and to make or break its reputation in the market.