Considering ESG Indicators is Even More Critical

Written by: John Streur | Calvert 

Washington - Calvert, as well as other Responsible Investing firms, considers environmental, social and governance (ESG) indicators in addition to traditional financial metrics in investment research and decision-making. It has long been clear to us that nonfinancial issues can affect investors and the markets, and that a company's environmental policies can protect its own operations along with the planet.

If there was any doubt about the need to make those calculations before, there shouldn't be now. The COVID-19 global pandemic is a clear indication of how a nonfinancial issue can quickly impact asset values and income production. As we prepare to celebrate the 50th anniversary of Earth Day, it is a warning that investors should take a closer look at climate change and other issues critical to the future of the planet when making investment decisions because, while this particular event caught companies unprepared, other ESG risks are much easier to spot - and pivotal for which to prepare.

The strong continue to shine

Thus far, leading companies with solid ESG practices have generally reacted responsibly to the pandemic. While they may not have planned for a pandemic in particular, they have been able to adjust to the current environment, consider their customers and employees, and create a reasonable response. We believe that these actions will continue to benefit these companies once the pandemic has receded and the business environment opens up again.

As we think about restarting the economy and businesses debate how they will handle this, we should give additional consideration to ESG factors to fully take into consideration the risks that we have all witnessed firsthand. Companies should analyze what new risks emerged as a result of the pandemic, and whether their governance allowed them to respond effectively.

More to the point, companies and investors should take into account what is being done to mitigate the damage resulting from climate change risks that loom in the coming years. The evidence of global warming is overwhelming, and leading companies are planning to reduce their dependence on fossil fuels, manage their water risk and protect their local environments, among other measures. Others will need to follow suit or risk being left behind as both consumers and the planet become less forgiving. Investors must hold companies accountable for making these changes - for the planet as well as for their portfolios.

What comes next

When the pandemic took hold in 2020, Calvert started to monitor company responses. We gauged a company's readiness based on how it performed in other ESG areas — such as human-capital and supply-chain management — as well as the regulatory disclosures it filed regarding suspending earnings guidance. We found that only a couple of companies put out disclosures with specific information, and even now, we are still looking to companies to provide some transparency and disclosure around decision-making during this period.

Moving forward, Calvert is developing a proprietary C-19 Preparedness Factor that will allow us to rank companies based on how well they prepared for the pandemic. In some cases, companies have responded to the virus in the same way they've responded to climate change risks, and this may also be an indicator of how they might deal with future crises.

Bottom line: None of us know when the pandemic will end and when the economy will begin to open again. But it is likely that when we come back, more of us will be asking about other nonfinancial issues that might pose a risk in the future, and environmental risks should be at the forefront of that conversation.

Related: What Investors Want to Know About Sustainable Investing