Partner & Associate Director
Related Expertise: コーポレートファイナンス＆ストラテジー, プリンシパル・インベスター、プライベート・エクイティ, サステナブル・ファイナンス
With the economy taking a hammering from the COVID-19 pandemic, sustainable finance advocates have been following investors and asking a critical question: Will the commitments they made to ESG in the past year be maintained or abandoned?
Not surprisingly, BCG’s COVID-19 Investor Pulse Check has found that many investors are giving companies leeway to let some of their sustainability targets slip in the interest of financial survival or the building of capabilities they will need coming out of the crisis. Most recently, just 51% of investors said they considered it important to fully pursue their ESG agenda and priorities as they navigate the crisis.
While to some this might indicate that investors are pulling back from their sustainable investment commitments, ESG investing is in fact weathering the pandemic surprisingly well. And in the marketplace, ESG-focused mutual funds and ETFs have performed better than their traditional counterparts, while seeing significantly higher (net) inflows of capital.
Our biweekly pulse checks are intended to provide perspective on investor sentiment as the crisis unfolds, and specifically on how investor expectations are changing given developments in public health, shifts in the economy, and continuing market volatility. Faced with a crisis of this magnitude, investors see two things as paramount.
First, they believe that in order to survive in the short term, companies must focus on preserving their liquidity and protecting their financial health. Second, and perhaps more important, they want companies to take a through-cycle view and make investments that will help them win in the medium to long term. That could mean continuing to spend on research and development, putting in place a winning team, and even making selective acquisitions during the downturn.
In the six surveys we have conducted to date, the average share of investors who believe it’s important for healthy companies to maintain their ESG goals—even if this means sacrificing some short-term financial performance—has consistently been around 50%. (See Exhibit 1.) In other words, for many of them, ESG is not currently a top priority. In contrast, 75% of investors want firms to prioritize securing liquidity and preserving financial health, and 90% want them to invest in the long-term capabilities needed for survival and competitive advantage.
This is understandable. After all, the most ambitious commitments to sustainability will be worthless if a company ends up going out of business or finds itself struggling even after the crisis recedes. Still, looking at the numbers in the context of the overall demands that investors make on companies during a crisis, we believe the investment community continues to see ESG as central to building robust portfolios with the potential for growth.
In assessing where investors really stand on ESG, it’s important to look at the tradeoffs they’re prepared to make. For example, when 90% say they would prioritize investing to build business capabilities, they are weighing this not just against ESG commitments but also against such things as maintaining earnings per share guidance or delivering against consensus estimates. In fact, our surveys indicate that investors are less likely to ease up on companies when it comes to ESG commitments than they are when it comes to other factors, such as dividend payments, profit margins, and earnings per share.
For example, over 80% of investors want companies to prioritize the health and safety of their employees over their financial performance as the economy reopens. And only about a third agree that it's important for healthy companies to prioritize maintaining margin levels (such as gross margins and operating margin), even at the expense of investing to deliver advantage for the business. In normal times, investors would likely not see these goals as mutually exclusive.
Similarly, in normal times, investors would consider dividends a nonnegotiable commitment, which is why companies that cut dividends usually see their stocks drop significantly on the announcement. Yet right now, only about a third of investors say that healthy companies need to maintain their dividend no matter what. This highlights how different these times are from an investment perspective.
For context, it’s useful to compare investors’ current sentiments with those expressed in our annual investor survey in late 2019. Back then, just under 50% of investors said that when making investment decisions, they actively considered ESG factors as a means of delivering stronger long-term performance (and over 60% said that companies needed to better integrate their ESG and business strategies).
So the fact that almost half of investors, in the midst of the most severe economic crisis of their lifetime, still think it’s important for a company to maintain its ESG commitments—even at the expense of short-term financial performance—is a strong indication of just how mainstream sustainability has become in the world of professional investment.
All of this implies that—as part of a through-cycle focus—ESG may have become more important to investors than shorter-term financial targets. Investors are saying that once a company is financially stable, it should focus on mid- to long-term performance and building for the future. Of course, existing challenges to ESG adoption are not going away and will need to be addressed. This includes the data and information gap that many investors still face. (See Exhibit 2.)
In our view, this longer-term focus is the main reason why even during the current crisis, investment houses are putting more emphasis on sustainable investing strategies. Many investors are recognizing that ESG factors—from climate impacts to employee and customer resiliency—are becoming increasingly relevant financially. This shift aligns with insights from BCG’s earlier work on Total Societal Impact. In a quantitative analysis of more than 300 organizations across five industries, we found that nonfinancial performance in certain ESG areas had a statistically significant positive effect on valuations and margins.
The current economic headwinds may result in the curtailment of ambitious sustainability spending, at least for the remainder of this year. But in the mid- to longer term, this doesn’t change what makes great companies and great stocks—and investors believe that’s highly dependent on the way they manage risks and opportunities through their ESG strategies.