May 29, 2020

When it comes to ESG factors (Environmental, Social and Governance), the balance of power has never been equal. Environmental impacts and corporate governance and have traditionally garnered the most attention. But now the COVID-19 pandemic is shining the spotlight on the importance of addressing social risks.

Way back in 2016 – an eternity in the world of Responsible Investing (RI) – we surveyed investors and advisors on their knowledge of and attitudes towards responsible investment goals and practices. Across the board we found their knowledge levels to be low and the overwhelming consensus was that RI is all about the ‘E’. They saw Responsible Investing almost exclusively as an Environmental play.

Fast forward to the spring of 2020 and we have a very different story. Not only are knowledge levels of RI significantly higher (four in five investors want their financial services provider to inform them of RI solutions1 and in one survey 60% of investment advisors said they proactively raise RI with their clients2, up from less than 15% in 20183), but the ‘E’ in ESG is no longer the dominant risk category.

The ‘S’ has suddenly taken on increased prominence – primarily through company responses to the safety and economic stability of their employees during the pandemic. It’s a key expansion beyond philanthropic and community support initiatives to encompass broader social considerations.

A number of companies have chosen to enhance – or protect – the income of their employees as a result of the economic impact of the crisis, or in response to the increased risks those employees are facing in performing their jobs.

Grocery store employees are a prime example. Almost immediately after the health risks of COVID-19 had been processed, the three largest grocery chains in Canada – Sobeys, Loblaw and Metro – announced plans to provide temporary pay increases and introduce protection measure like plexiglass checkout shields.

Many chains in the U.S. had similar responses, including #20 on the Fortune 500 ranking of the largest U.S. corporations by total revenue, Kroger. Their initial response was a $2 per hour ‘hero bonus’ for frontline store employees, but it’s how they followed it up that’s important.

Despite the crisis not having abated, with the attendant risks to employees still in place, Kroger made the decision to end the hero bonus and claw back wages to pre-COVID levels. This was despite the fact that at least five Kroger employees in Michigan had died from the virus. To make matters worse it came out that CEO Rodney McMullen’s annual compensation package exceeded $21M. Documents filed with the SEC highlighted his compensation as part of a multi-million dollar pay package for all of Kroger’s executives.

With the median Kroger employee earning $26,790 in 2019, that meant the ratio of CEO compensation to median employee pay was 789 to 1 – over three times the U.S. average. Red-faced from the predictable public backlash for allowing the original hero bonus to expire, Kroger then announced it would pay its workers a one-time $400 ‘thank you’ bonus for their work during the crisis.

So, what’s the moral here? Clearly, when it tried to scale back the wages of its frontline workers, Kroger ran into the hard ‘S’ in ESG. The growing importance of social risks – and the impact they can have on the reputation of a company – should not be lost on those corporations wondering if they need to fundamentally change. Lip service doesn’t cut it in times of such crisis. This consideration should be especially concerning to Kroger, which is just the thirteenth-most popular grocery store among a highly competitive group of American food retailers. It’s hard to imagine Kroger’s actions improving their score.

If investors have awakened to the powerful reality of social risks (as appears to be the case), companies that fail to do the right thing for all stakeholders – including their workers – will find it harder and harder to attract and retain customers and employees. Hardly a recipe for long-term sustainability.

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1 Responsible Investment Association, 2019 RIA Investor Opinion Survey

2 Investment Executive, 2020 Brokerage Report Card

3 Desjardins SOM Investor Survey, 2018