Investors Emphasize Sustainability Amid COVID-19 Outbreak (April 4, 2020)

Investors Emphasize Sustainability Amid COVID-19 Outbreak (April 4, 2020)

Board Lens

Investors Emphasize Sustainability Amid COVID-19 Outbreak (April 4, 2020) 

Business leaders and board members the world over have been consumed by responding to the Coronavirus Disease 2019 (COVID-19) pandemic. Even so, institutional investors are doubling down on their scrutiny of governance practices. Specifically, BlackRock CEO Larry Fink this week reaffirmed that the world’s largest asset manager will continue its focus on corporate sustainability and will hold boards accountable for sustainability oversight. “The pandemic we’re experiencing now highlights the fragility of the globalized world and the value of sustainable portfolios,” Fink wrote in a letter to shareholders published on the BlackRock website.

“We’ve seen sustainable portfolios deliver stronger performance than traditional portfolios during this period. When we emerge from this crisis, and investors rebalance portfolios, we have an opportunity to accelerate into a more sustainable world.”

BlackRock expects boards to remain focused on long-term executive pay incentives, the quality of the board itself, and risks related to environmental, social, and governance (ESG) issues. “We are looking at these [issues] long term. These are not new issues,” Michele Edkins, global head of BlackRock’s investment stewardship team, told the Financial Times. “Companies can still demonstrate that they have effective leadership. In times of crisis that becomes more apparent, not less apparent.”

BlackRock is not alone in emphasizing the long-term importance of sustainability concerns in evaluating companies. State Street Global Advisors president and CEO Cyrus Taraporevala issued a letter to board members on March 31 that acknowledged the need to focus on short-term resiliency while also emphasizing that actions—and risks—taken in the here and now should not be at the expense of the long-term health and sustainability of the company. He writes, “[W]e continue to believe that material ESG issues must be part of the bigger picture and clearly articulated as part of your company’s overall business strategy.” 

Implications for Boards: While institutional investors may be empathetic to the immediate need for directors to intensely focus on the day-to-day demands of overseeing the coronavirus crisis, they will continue to assess board effectiveness based on the board’s ability to keep the company’s long-term sustainability top of mind. In addition to evaluating potential longer-term impacts of immediate crisis responses, investors will demand that attention be paid to issues such as board composition, executive pay practices, and climate risk.

Key Questions Directors Should Ask:

  • What areas of oversight have been sidelined since the COVID-19 outbreak? When was the last time the board examined issues such as sustainability, board composition, director effectiveness, and executive pay practices?
  • When considering short-term risk mitigation plans, does the board also consider how those plans promote—or hinder—the company’s long-term viability?
  • How is the current crisis influencing the company’s approach to ESG concerns? How are we communicating our ESG risk approach to investors? 

NACD Resources:

NACD’s COVID-19 Crisis Resource Center is updated daily to provide directors with essential tools and guidance that will help them understand and navigate unprecedented global disruption. Assessing Management’s Effectiveness in Responding to the COVID-19 Crisis: A Quick Checklist for Boards is designed to help directors pressure test management’s response to the crisis. The NACD BoardTalk blog post "COVID-19: SEC Filings Are a Communication Platform" explains the importance of utilizing financial filings as an element of an effective stakeholder engagement plan.