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The Coronavirus Market Crash Is an Opportunity for ESG Companies

By Bram Berkowitz – Updated Jul 26, 2020 at 7:16AM

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The coronavirus pandemic has shined a light on companies that have stepped up to do the right thing during the crisis -- and those that haven't.

Investment in companies that pay attention to environmental, social, and governance (ESG) issues has taken off in recent years. In 2018, ESG investment assets reached $30.7 trillion globally, up 34% from the two years prior, according to a report by the Global Sustainable Investment Alliance .

With that number expected to grow, the coronavirus pandemic has presented an opportunity for companies to make a case to ESG investors that their company belongs in investors' portfolios. Companies can use the pandemic to show that they not only do the right thing when times are good but also when the going gets tough. Because the pandemic is not likely to be forgotten anytime soon, and the general public is paying more attention to markets, how companies react in this unprecedented time could leave a lasting memory in the minds of investors. 

Sustainable investing

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A spotlight like never before

ESG investors pay close attention to details. They will not just read a press release about one good deed or donation and conclude the company is environmentally or socially conscious.

For instance, take America's largest bank, JPMorgan Chase (JPM -2.00%). On March 18, the company made a $50 million philanthropic donation to help combat the impact from coronavirus -- a tremendous donation . But investors were looking for more. At the company's annual investor day in May, shareholders nearly passed a resolution that would have called for JPMorgan, one of the top lenders in the oil industry, to provide more information about loans they have made to companies that accentuate climate change and global warming. This is just one example of how ESG investors are thinking holistically and long term.

But while ESG investors normally have to sift through the details, the coronavirus has made it easier to see which companies are acting in a socially conscious way. Companies are facing tough, highly-visible decisions every day. Additionally, the tragic killing of George Floyd and the subsequent nationwide protests of police brutality that followed have also shined a light on whether companies are really addressing racial inequality.

And consumers clearly care, crowd-sourcing tools like the website to essentially grade companies on their response to the crisis and how they have addressed other social and environmental causes. Users submit good and bad actions committed by companies during the pandemic.

Some companies have done well, some haven't

Plenty of companies have really stepped up in response to the virus. Shopify (SHOP -9.48%) gave each of its employees $1,000 to purchase equipment to make working at home more comfortable . Ally Financial (ALLY -3.93%) waived fees on overdrafts and other transactions for customers. Additionally, Ally provided a number of perks to its employees, such as paid leave to anyone who contracted the coronavirus and full coverage of telehealth appointments .

Now, a lot of these benefits cost money, and it's true that some companies, especially those struggling financially, simply may have not have the bandwidth to provide such generous responses. But there are other ways to pay it forward.

For instance, following the nationwide protests of the killing of Floyd, Wells Fargo (WFC -1.06%) CEO Charlie Scharf announced that executives' ability to increase diversity at the bank would play a direct role in determining their total compensation . Scharf also said within the next five years, the company plans to double the number of Black employees in the ranks of senior management. Wells Fargo has struggled with reputation issues in the past, but these are concrete ways the company can address racial inequality without spending a lot of money.

BY contrast, other companies have not stepped up as well. GameStop (GME -2.46%) kept stores open even in states that ordered lockdowns, claiming it was an essential business -- which seems like a bit of a stretch for a video game retailer. They also reportedly did not give their stores proper cleaning supplies when the virus first hit . 

It's up for debate whether supporting ESG issues directly correlates to increased profitability, but ESG companies have seen success during the pandemic. The insurtech company Lemonade (LMND -4.60%), a public benefit corporation (meaning the company commits to certain social or environmental issues in its actual charter) recently completed the largest IPO of the year . Shares, which were initially set to open slightly below $30 at the beginning of the month, are now trading around $80.

Additionally, sustainable exchange-traded funds (ETFs) saw record amounts of investment activity in the first quarter of the year, despite the plunge in the general market, according to Morningstar

Pandemic pushes morality to the forefront

As terrible as the coronavirus has been, the pandemic has brought people together. It has increased activism, volunteer work, donations, and in general, the importance of doing the right thing. It has also highlighted which companies want to be part of the solution, and many investors have taken notice. As social and environmental issues continue to become more important and gain in relevance, companies will want to be seen in this positive light by investors.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify. The Motley Fool has a disclosure policy.

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Stocks Mentioned

JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$105.98 (-2.00%) $-2.16
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$41.79 (-1.06%) $0.45
GameStop Corp. Stock Quote
GameStop Corp.
$25.35 (-2.46%) $0.64
Ally Financial Stock Quote
Ally Financial
$29.11 (-3.93%) $-1.19
Shopify Inc. Stock Quote
Shopify Inc.
$27.21 (-9.48%) $-2.85
Lemonade, Inc. Stock Quote
Lemonade, Inc.
$21.77 (-4.60%) $-1.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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