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‘Social Washing’ and How COVID-19 Has Emphasized the ‘S’ in ESG

While ESG-savvy investors are most likely familiar with “greenwashing,” which refers to the misrepresentation of environmental impact, the term “social washing” has gained new prominence as the investment community evaluates corporations’ responses to the sudden challenges presented by the coronavirus. Social washing refers to statements or policies that make a company appear more socially responsible than it actually is.

(Estimated reading time: 2 min 34 sec)

As if investing using environmental, social, and governance (ESG) principles was not murky enough, institutional investors must now differentiate between policies that embody legitimate commitments to employees and communities, and policies that are merely social washing.

The COVID-19 pandemic and the impact of shelter-in-place orders has forced companies to make difficult decisions that can place the interests of their shareholders in conflict with those of their employees and communities. Investors should be mindful of “social washing” when evaluating how a company’s response impacts its ESG profile.

In August 2019, the Business Roundtable announced a new Statement on the Purpose of a Corporation, which included a commitment by 181 CEOs of America’s largest corporations to “lead their companies for the benefits of all stakeholders—customers, employees, suppliers, communities, and shareholders.” While the possibility of a global pandemic bringing societies and economies to a halt was likely not anticipated, the response to the coronavirus from American corporations, including many signatories to the Business Roundtable’s statement, has been a telling indicator of how deeply they are committed to the social element of ESG.

Institutional investors should use this opportunity to evaluate a company’s true adherence to social principles. Is it ensuring workers stay safe despite a hit to the bottom line? How is it treating customers affected by the pandemic-induced economic shutdown? If forced to reduce pay, how is it handling the reductions, and are they being equitably shared by top management and rank-and-file workers? Answers to these and similar questions can provide valuable insight into a company’s social commitment.

Some corporations have performed poorly on this test. But countless companies are paying their employees and contractors even as physical locations remain closed, have expanded sick pay and other benefits, are redirecting resources and shifting manufacturing to essential items, and have suspended dividend and share-buyback programs.

The “S” in ESG has long taken a back seat to environmental issues such as climate change as well as corporate governance, partially due to the difficulty of measuring social impact when compared to carbon footprint and energy usage or executive compensation and board diversity. Companies could easily resort to social washing and hide behind a broad policy or public statement to enhance their social responsibility credentials.

However, COVID-19 has provided investors the rare opportunity to evaluate the legitimacy of a company’s prior commitments to social good, and assess that company’s priorities when faced with a sudden and dramatic test. And this is important to evaluate not only from a societal level, but from a financial level. Some companies will come out of this pandemic with positive long-term economic prospects based on their actions in supporting their employees and communities, while others will likely suffer lasting reputational and financial effects.