By Andrew Cohen
Over the past decade, investors have successfully prodded companies to make positive environmental, social, and governance (ESG) contributions in addition to maximizing profits. But as the coronavirus ravages America’s economy, will such efforts outlast the pandemic?
While the ethos of “doing well by doing good” seemed to thrive during the bull market, ESG commitment faces a stern test as corporations face layoffs and budget shortfalls.
“There’s a lot of debate about whether the bear market will expose that ESG was just bull, or will it expose the true value ESG has in mitigating risk and navigating crisis,” Berkeley Law faculty member Amelia Miazad ’02 said during a recent online presentation with Professor Stavros Gadinis.
Part of the Executive Education program’s Berkeley Boosts Shorts series, the presentation examined ESG’s rapid rise—and its uncertain future amid the coronavirus. Gadinis teaches Business Associations and studies the relationship between government regulators and the financial industry. Miazad, founding director of the law school’s Business in Society Institute, teaches and conducts research on corporate governance and sustainability.
Initially, the ESG movement involved environmental and social causes advanced by religious groups and environmental activists.
“It has grown today into a huge area,” said Gadinis, adding that “ESG investing has taken the world by storm. Before the recent crisis, 70 percent of this season’s proxy proposals were about ESG topics. What’s going to happen to all this interest in ESG now that the world is facing a huge recession, or at least a big decrease in economic activity?”
Gadinis and Miazad pointed to hopeful early signs that the market continues to value companies committed to ESG measures more than those that aren’t. Still, they caution that it remains to be seen how things will play out.
Gadinis acknowledged that in today’s reality of plummeting revenues, ESG can sound “like a luxury item.” He said “when companies have to fire employees and cut budgets and stop paying rent,” decisions that affect the environment may seem less important than before.
“If this is ESG’s real function, then what we should expect is ESG to be sidelined by other pressing priorities,” Gadinis said. “However, that’s not the way we see ESG. It has grown into a way of managing social and environmental risk … it invites feedback from stakeholders about a company’s operations and provides information that boards didn’t have until recently.”
While corporate law puts boards at the center of its power structure, that clout is premised on boards being well-informed. “There was a gap,” Gadinis says, “and we argue that gap is filled by ESG.” He and Miazad expound on the topic in Corporate Law and Social Risk, a forthcoming article in the Vanderbilt Law Review.
They expect companies that had a robust ESG profile before the pandemic to be better positioned to deal with its impact. They also anticipate that more investors will apply pressure on companies to think about ESG issues more actively.
Expanding the tent
The current economic crisis has elevated issues of wealth disparity and executive compensation, and some CEOs have recently taken voluntary pay cuts.
Gadinis and Miazad foresee an increased focus on sound asset management, with companies looking at ESG more through a risk mitigation lens than a doing-well-by-doing-good prism. Gadinis noted that with growing interest in employment and management issues, essential workers will likely demand pay increases going forward.
“There’s a need for companies benefitting from government funding to be more stakeholder-oriented,” Miazad said. “We don’t want to make the same mistakes as the last financial crisis—which did give Professor Gadinis a lot to write about.”
As for the practices of companies prioritizing social good in their decisions during and beyond the coronavirus, the jury is still out.
“We’re at a really interesting crossroads, and the future of ESG hangs in peril,” Miazad said. “We think that it’ll be appreciated by the investment community as a sound process for mitigating risk, but that is still to be determined.”