One of the many upheavals caused by the COVID-19 crisis has been some reordering of environmental, social and governance priorities for institutional investors.

While climate change and other environmental issues “were almost synonymous with ESG, the pandemic forced us to shift, and forced owners of capital to think about the other letters in ESG,” said Nathan S. Shetty, Chicago-based head of multiasset portfolio management for Nuveen LLC, the money management arm of TIAA-CREF.

The global health crisis plus renewed attention on racial justice issues has spurred a closer look at corporate practices. “The pandemic has taught us that if businesses are to defend against future shocks, protect workers and ultimately support long-term growth, the social element within ESG should be considered just as critical as environmental and governance factors,” said Naim Abou-Jaoude, London-based CEO of sustainable investing manager Candriam Investors Group and chairman of New York Life Investment Management International.

To Illinois Treasurer Michael W. Frerichs, the catalyst behind the novel Illinois Sustainable Investing Act requiring public funds to consider sustainability factors in investment decisions, “COVID is the big game changer here. We engage a lot more on human capital issues,” he said.

“This just reaffirms that the nature of companies has changed. The vast majority of the Dow today is built on brand or reputation, and these are things that matter” to investors and others, Mr. Frerichs said.

For the $54.8 billion Maryland State Retirement & Pension System, Baltimore, climate change and diversity are two aspects of ESG that deserve special attention, given the system’s mission to support public employees. “Getting diversity right can make us better at what we do,” said Chief Investment Officer Andrew C. Palmer. Efforts to get there include evaluating their internal hiring practices and asking more questions of external managers — practices endorsed by many other asset owners.

One manager takes action

Apollo Global Management Inc. is one manager that has taken action. The spotlight on systemic racial injustice “has prompted Apollo, our investors, and portfolio companies to listen, think and act with a much greater sense of urgency on meaningful initiatives for a more inclusive, diverse and equitable workplace,” said Robert Esposito, ESG counsel at Apollo in New York, in an email. “Both within portfolio companies and across the alternatives industry, there is a great deal of emphasis on workforce diversity data with respect to gender, ethnicity, age, how it relates to compensation, and how it can be measured,” said Mr. Esposito, who expects to see social data measured in more a standardized way to drive progress.

One recent indicator of the rise of “S” in ESG investing was a significant spike in the issuance of social bonds. According to AXA Investment Managers, social bonds that accounted for just 5% of global bonds issued at the end of 2019 now account for 30%, with much of that attributed to bonds related to COVID-19.

According to S&P Global Inc., the rapid growth in green bonds favored by investors focused on climate change has recently flipped to social bonds raising money for projects like affordable housing, health care and education. In 2020, social bond issuance totaled $11.6 billion by May 31 and is on track to eclipse 2019’s total of $16.7 billion, while green bond issuance has dipped, down to $53.5 billion as of May 31, compared with $84.1 billion in the same period of 2019.

To Anne Walsh, CIO for fixed income at Guggenheim Investments in New York, with $185 billion in fixed-income assets under management, the COVID-19 crisis highlights ESG investing as classic risk management. “Most people probably would believe that in the time of coronavirus, people would have adjusted their behavior in a way that ESG doesn’t matter, but it is really only continuing to accelerate. ESG is a way to think about risk. Through this COVID lens, that’s becoming a lot more clear to investors in terms of managing those risks. As rates continue to drop, the search for yield becomes even more of a challenge, and investors are embracing risk metrics and sustainability factors,” Ms. Walsh said.

Still, said Andrew Siwo, director of sustainable investments and climate solutions at the $194.3 billion New York State Common Retirement Fund, Albany: “I don’t think climate change is going to be taking a back seat. There’s no other planet for us to run to.”

As renewable energy costs come down and advances are made, “there will be more options for addressing climate change,” Mr. Siwo said. “We do see a lot of opportunity in this space, across all asset classes. What COVID has done more broadly is … highlighted the risks and opportunities,” he said.

Adam Gillett, head of sustainable investment at Willis Towers Watson PLC in London, agrees. “COVID has not fixed our climate crisis, the biodiversity crisis, or other social issues, but it has shown that we can make pretty drastic changes to personal behavior if we see something we can do. I think it has shown what is possible,” he said.

Alison Loat, managing director for sustainable investing and innovation for OPTrust, which manages assets of the C$22 billion ($16.4 billion) Ontario Public Service Employees Union Pension Plan, Toronto, is also an optimist. “COVID has underscored where we all knew we were vulnerable, and we can see some companies doing well,” she said. “Social issues have always been one of the top priorities for us, as a labor organization. There have been numerous examples over the past three months of companies not taking it seriously,” and engagement with them “I anticipate will accelerate,” she said.

“Overall, I feel that this might provide an opportunity to accelerate some of the good work that ESG investors are doing,” Ms. Loat said.

Better disclosure

The COVID-19 crisis is also putting pressure on companies to improve their disclosure of management practices that pose operational and reputational risks, and on the Securities and Exchange Commission to require it. “Most institutional investors find current company financial disclosures limited in their usefulness,” said Sen. Mark Warner, D-Va., a member of the Senate Banking Committee and a sponsor of bicameral legislation that would require public companies to disclose basic human capital metrics such as workforce turnover rates, training, health and safety, and compensation statistics.

Interviews with public pension funds and money management firms conducted by the Government Accountability Office at Mr. Warner’s request found corporate disclosures incomplete or inconsistent, with board accountability and workforce diversity the most reported topics, and human rights the least reported. Frustrated with SEC inaction since a 2016 concept release on ESG disclosure, Mr. Warner is now pushing the agency to form an ESG task force to improve disclosure of information relevant to investors.

The 2021 proxy season could be quite revealing, said Ms. Loat of OPTrust. Along with the logistical component of holding annual shareholder meetings, there could be more pressure on companies to show what they have done to improve diversity on boards and in workforces, among other issues that gained attention in 2020.

“You are seeing an acceleration of requiring companies to disclose. It is such a fascinating time to be doing this,” she said.

Source: Pensions & Investments