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Why using ESG research in COVID-19 times is important

The Corona crisis presents companies with a variety of challenges. Investors who incorporate environmental, social and corporate governance (ESG) factors into their research can gain important insights into how companies are adapting to the situation – and how this could affect future potential returns. Companies that have already internalized strong ESG practices have coped well with the crisis.

Sharon Harris

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The COVID 19 crisis has made ESG analysis more important for investors. In the wake of the gigantic scale of the humanitarian and economic crisis, the protection of public health has now become a key factor in corporate policy. Management decisions regarding numerous ESG factors will have an impact on the profits of many companies. Incorporating ESG analysis into securities research processes will give investors a better understanding of how a company’s behavior during the pandemic will affect future earnings.

Investors who want to invest responsibly should focus on how companies respond to the corona crisis for two reasons: First, it is important to ensure that companies prove to be responsible corporate citizens. Second, investors need to gain a better understanding of the opportunities and threats that the pandemic poses to the business model.

Read more about the importance of incorporating the ESG analysis into the securities research processes and read the latest business news with the Born2Invest mobile app.

The Coronavirus crisis puts ESG engagement to the test

What types of ESG problems have been created for companies by the coronavirus? Many have had to make tough decisions about how best to protect employees while maintaining business operations. Measures ranged from giving employees time off work to paying severance and compensation or providing other types of assistance. Companies that sent their staff to the home office were faced with the need to develop an appropriate solution to ensure data protection and security standards.

Another issue was the behavior and remuneration of senior managers. Did management show willingness to accept a corresponding reduction in their remuneration at a time when profits were under considerable pressure from the demand shock? What was the situation regarding dividends and buy-back policies, especially in companies receiving state support? And once the current difficulties have been overcome, will companies still be prepared to invest in projects to reduce emissions or mitigate the effects of climate change during a recession or a period of heightened uncertainty about the business environment?

ESG awareness is particularly important in pandemic times

Often companies that have already internalized strong ESG practices have coped well with the crisis. Perhaps this is because ESG awareness is often a sign that a company is looking ahead and has already strategically considered how its business could continue under different scenarios. This can be an advantage when it comes to adapting technology and operations to the demands of remote working in the short term, while at the same time providing employees and the community with the support they need and continuing to provide products and services to customers.

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One example is Williams-Sonoma, a US manufacturer of kitchenware and household products. Even after its retail stores closed, the company continued to pay salaries and benefits to its employees and even used some of its store employees to provide virtual customer service. Management also showed responsibility towards the staff in the distribution centers by introducing additional health and safety measures and paying wage subsidies. In this way, Williams-Sonoma was able to meet the growing demand from online retailers, keep its employees on the job and attract loyal customers back to the stores as a result of the relaxation.

In the utilities sector, the Italian energy company Enel was extremely active in planning the transition to a low-carbon economy. The company has invested in renewable energy while adapting its infrastructure, tools and processes to a changing world.

The integrated ESG research model

This type of corporate behavior often has a direct impact on profits – and also on the performance of the shares. Perhaps this is why, during the downturn caused by the COVID-19 pandemic in the first quarter of 2020, stocks with strong ESG valuations outperformed the market.

However, it is not easy to find such ESG leaders. Third-party ratings are based on the past and usually do not take into account forward-looking changes in a company’s behavior that could indicate a future improvement in ESG policy. Investors benefit most from an integrated research model when analyzing these issues. Analysts who cover a company and have specific industry expertise are best placed to assess a company’s pandemic response and analyze how that response affects cash flows, the balance sheet and profits. This type of ESG integration into fundamental research is the best way to implement responsible investing in investment portfolios.

However, there are several points to consider. First, a long-term view of business strategy and the industry environment, especially when the short-term outlook is fraught with such high uncertainty. Second, a global approach – essential in a world where the pandemic has turned global trade and supply chains upside down. Thirdly, a dialogue with management to gain a real understanding of how the difficult strategic decisions are made to meet the needs of stakeholders, employees and customers.

Advantages of Big Data

New approaches to data can also provide insights into the recovery paths of companies. For example, in today’s environment, complex corporate supply chains, and even supplier supply chains, can be analyzed using big-data techniques, allowing investors to see how a company is coping with government-imposed lockdown measures.

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Assessments and employee sentiment on the Internet allow conclusions to be drawn about how well staff and management are coping with working from home. By analysing key figures on personal mobility, credit card purchases, restaurant bookings and pollution from factories, research can provide a better insight into the performance of companies in different sectors during times of crisis.

COVID-19 has presented companies and investors with new ESG challenges. Companies that take ESG factors into account responsibly during the crisis have a better chance of a successful recovery. The same applies to investors: those who incorporate ESG analysis as a central component of their securities research are well-positioned to find stocks and bonds from companies that both meet their social responsibility and offer long-term earnings potential.

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(Featured image by Bru-nO via Pixabay)

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First published in finanzen.net, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

Although we made reasonable efforts to provide accurate translations, some parts may be incorrect. Born2Invest assumes no responsibility for errors, omissions or ambiguities in the translations provided on this website. Any person or entity relying on translated content does so at their own risk. Born2Invest is not responsible for losses caused by such reliance on the accuracy or reliability of translated information. If you wish to report an error or inaccuracy in the translation, we encourage you to contact us.

Sharon Harris is a feminist and a part-time nomad. She reports about businesses primarily involved in tech, CBD, and crypto. She started her career as a product manager at a Silicon Valley startup but now enjoys a new life as a personal finance geek and writer. Her primary aim is to provide readers with a new perspective on the overlapping world of finance and technology.