Washington - The global COVID-19 pandemic is having a notable effect on consumer retail, as physical storefronts close, more shopping shifts from bricks-and-mortar to online, and unemployment or job insecurity limits discretionary spending for an increasing number of people. The pandemic is also highlighting the real financial impact social factors can have on companies, bringing the "S" component of environmental, social and governance (ESG) investing to the fore.
The social pillar looks at financially material matters such as fair wages, supply chain management, and the health and safety of employees and customers. While the "E" and "G" pillars continue to be important factors in ESG performance, COVID-19 has elevated investors' focus on "S" factors that can have a significant impact on companies' resiliency through the crisis.
At Calvert, the importance of social factors for consumer retail companies always has been and continues to be emphasized. How companies perform on these factors is important because it will likely help or hurt them in maintaining and attracting customers, employees and suppliers, and, consequently, in creating long-term value for shareholders. In particular, how companies respond during this period may be a blueprint for how they would likely deal with future crises.
It helps to break down company responses by short-, medium and long-term time horizons. In the short term, we have analyzed and continue to analyze how companies are reacting to government directives to maintain social distancing. In the medium term, we are starting to examine how companies intend to or are handling the easing of those restrictions. Lastly, in the long term, we will scrutinize companies as they enter into a more normalized operating environment; specifically, which of the COVID-19 trends stick and what impact they will have.
For the retail industry in phase one, we have focused on the three social issues: employees, customers and suppliers.
- Employees classified as essential workers in the retail sector are paid low wages, and some have no health care benefits or paid sick leave. We were pleased to see some companies respond with incentives such as bonuses, temporary wage increases, PPE and increased health benefits. Companies whose business models are temporarily untenable are keeping workers on the payroll as long as possible and moving more of their operations online. We have also seen more workers furloughed as compared to the global financial crisis, when most companies laid off their workers.
- To continue servicing customers, companies that had an online presence ramped up their online offerings, while some store operations instituted contactless curbside pickups. The curbside pickup, once a popular perk, is now s a public health necessity.
- Global supply chains have been beaten down by the twin supply-demand shock. Factory workers have lost employment and operators have had to deal with canceled orders. Some retailers paid their suppliers early for goods already delivered to mitigate the situation. On the other hand, retailers have found themselves with excessive inventory due to store closures. Governments across the world called on manufacturers to help make products that were running low. In response, companies with the capacity to retool their manufacturing processes stepped up to produce needed medical supplies such as surgical masks, medical gowns and hand sanitizers.
In phase two, our focus is on the treatment of employees during a partial reopening and how companies will balance safety with increased demand.
Questions abound: Will the temporary wage increases be extended further? For those going back to work, will employers institute health and safety measures and will testing and PPE be provided? Will furloughed employees still technically retain their jobs when retailers start to reopen? For supply chain workers, will there be economic relief offered by the operating and sourcing companies?
We will also be watching to see if these measures result in employee and customer loyalty, and, consequently, improving retention and top-line growth.
In Phase 3, our focus will be on the effects of long-term trends on society and the lasting impacts on the retail industry. By the time operations become normalized, we may have better clarity on whether some trends will become sticky and what their long-term ESG effects will be. In the retail space, some of the trends that we are currently monitoring are the acceleration in e-commerce, the shift in supply chains, and automation both in the warehouse and in brick-and-mortar. We will be watching to see which companies are able to adapt to the changing landscape.
Bottom line: In the consumer retail sector, the social pillar is typically the most important and carries the highest weight in our models. So far, we have observed that retail companies with a robust social profile generally have been able to better manage challenges in this environment.