Aftermath of coronavirus seen to radically change ESG focus

While climate change dominated many annual shareholder meetings so far this year, issues raised by the coronavirus pandemic, such as the treatment of workers and corporate boards' responses to the crisis, are expected to feature prominently in 2021.

"We are learning things from COVID that are going to be applied to all of business," said Andrew Behar, CEO of As You Sow, a non-profit organization promoting environmental and social corporate responsibility through shareholder advocacy and coalitions. He predicts a shift toward more fact-based business decisions, whether they're addressing greenhouse gas emissions or income inequality.

"If there is anything to learn from COVID, it is to make your decisions based on science and data," he said.

Shareholder activists also will be watching closely at next year's meetings to see how BlackRock Inc. and other large asset managers implement the Business Roundtable's new approach to defining a corporation's purpose, shifting from a sole focus on shareholders to one that considers all stakeholders, including employees, customers, suppliers and communities, he said.

Announced in August 2019 by the non-profit group made up of CEOs of leading companies, the change represents a marked departure from a policy in place since 1997 that corporations exist principally to serve shareholders.

"This is the biggest change in business in 100 years," Mr. Behar said. His organization's resolution at BlackRock's annual meeting May 21 called for the company to report on how it will implement the change and earned enough votes to be brought to BlackRock shareholders in 2021.

"This is not going to be an overnight transition but it's one that is going to change companies in so many ways. We have a whole year to discuss and debate," Mr. Behar said.

Martin Whittaker, CEO of JUST Capital, an independent non-profit that tracks company performance on multiple stakeholder issues, said that, given the immediate demands on companies caused by the crisis, the timing for gathering data and tracking issues like hazard pay "is not great, but next year it will be."

Ahead of the 2021 proxy season, JUST Capital will track what happens over the coming months to both executive and worker wages, and the gap between the two. JUST Capital's latest CEO pay analysis found that only one-third of companies have announced executive compensation cuts, while more than two-thirds of those companies have announced furloughs or layoffs. However, 73% of adults responding to a JUST Capital survey conducted with The Harris Poll April 29-30 say companies should sacrifice short-term profits before letting employees go.

"In our polling, we hear less about executive pay as a number and more about the relative degree of compensation, and if companies have done well (during the crisis) but not taken that capital and invested in their workforce," Mr. Whittaker said. "Our sense from the data is that companies that do in fact invest in their workers perform better. We are entering a period where all of that matters a lot more. It's game time," he said. Rising unemployment "is a big deal and we are going see a minimum of 15% to 25% of people unemployed. That changes the balance between employees and employers. That's something we need to press companies on," said Cheryl I. Smith, managing partner, economist and portfolio manager with Trillium Asset Management LLC in Boston, with $2.8 billion in assets under management.

"Worker health and safety and pay are going to be big issues next year. Executive pay is one end of the scale. The other end of the scale is worker pay and working conditions," Ms. Smith said.

Still, "climate change will continue to be a big issue because we are continuing to see climate change and we are continuing to see higher temperatures. I think we are seeing more companies taking it seriously," Ms. Smith said.

Shareholders will be watching to see how companies respond to the coronavirus crisis in terms of worker relations, executive compensation and shareholder rights, said Matt Christensen, global head of responsible investment for AXA Investment Managers in Paris, with $569 billion in ESG-integrated funds by the end of 2019. "All those views will be on the table for next season," he said. "It's not just letter writing; it means discussions with companies. These are things we consider important to resilience."

AXA IM has dedicated analysts looking at key performance indicators such as corporate training budgets. "The other piece will be, how do we better understand this inequality gap that is happening? It looks like the continuing carve out of a middle class. It is going to pose a lot of questions about the way to ensure a successful company. It's a question that investors have been asking but now more investors are going to be asking," Mr. Christensen said.

Even classic governance topics such as board diversity and tenures "are going to be thought about in a different way," said Jonathan Bailey, managing director and head of ESG investing for Neuberger Berman Group LLC in New York. The employee-owned investment manager, with $330 billion under management, has a new advance proxy vote disclosure initiative to explain its voting rationale at key annual shareholder meetings.

One issue that has "come into very sharp focus" as companies try to manage through the crisis is overboarding, where corporate directors serve on too many boards, potentially straining their ability to provide adequate guidance.

"The expectations we have of board members have gone up. How you are managing short-term needs this year makes it likely that going into next season, (those expectations) will see more focus," Mr. Bailey said.

He also expects more investor engagement over corporate board elections. "It may be a channel to signal our support for executive teams to do the right thing. We need to wait until this time next year to see how that plays out. We want to make sure we give companies and boards time to react and adapt to the situation," Mr. Bailey said.

"Companies are making choices about which stakeholders to take care of all the time. We are interested in seeing what is going to change about how they made those decisions," he said. "The coronavirus crisis has forced companies to show that."