[Viewpoint] COVID-19 Crisis and ESG Management

The novel coronavirus infection (COVID-19) situation shows little sign of calming down. Even in South Korea, which is regarded as a model country for quarantine, about 50 confirmed cases occur daily, raising ongoing concerns about when another large-scale outbreak might happen. For this unprecedented COVID-19 crisis to subside, the development of treatments or vaccines is essential, but even under the most optimistic scenarios, this is expected to be possible only by early next year, indicating that the COVID-19 situation will likely persist for a considerable period. This crisis has completely overturned our daily lives. Routine activities such as attending school and gathering with relatives have now become special events. This goes beyond mere inconvenience and has escalated into a serious situation threatening many people's livelihoods as economic activities come to a halt.

Experiencing this crisis, corporate management and investor behavior have also faced significant changes. ESG (Environmental, Social, and Governance) management is defined as establishing corporate management strategies and pursuing sustainable management by considering the environment, society, and governance under the recognition that a company's survival and development cannot be achieved without the development of the society it belongs to. Meanwhile, ESG investment can be understood as encouraging sustainable corporate management through communication and capital supply to companies, thereby enhancing investment performance in a multifaceted manner. ESG management and investment are closely related, like two sides of the same coin. The importance of ESG management and investment has become even more pronounced amid the COVID-19 crisis.

Looking at the results since the beginning of the COVID-19 outbreak, it is confirmed that companies with excellent ESG performance have superior management results and ESG investment outcomes compared to those without. According to BlackRock, the world's largest asset management company, 88% of ESG-related index funds worldwide have achieved higher returns than general index funds since the COVID-19 outbreak. A paper analyzing the first quarter stock returns of 6,000 companies across 56 countries, during which stock prices plummeted, shows that companies with excellent ESG management performance experienced smaller stock price declines compared to others.

A study by the Korea Corporate Governance Service analyzing Korean companies found that during the same period, companies with superior governance experienced statistically significantly smaller stock price declines than other companies, confirming their strong stock price defense capabilities in crisis situations. These results align with findings from the 2008 financial crisis, where companies with excellent corporate governance and overall ESG performance had smaller stock price declines, indicating that companies pursuing ESG management exhibit overall management stability and experience less severe stock price drops during crises.

Why do companies that incorporate ESG management have superior crisis response capabilities? According to research by State Street and Harvard Business School, these companies closely monitor employee welfare, relationships with partners, and community relations, reflecting these factors in their management strategy formulation and daily decision-making. Furthermore, excellent governance functions to ensure that the company's overall decision-making system operates efficiently and rationally. When unexpected crises like COVID-19 occur, these companies' response capabilities are superior to others, minimizing the negative impact on management performance.

Many experts warn that the root cause of the COVID-19 crisis lies in environmental destruction and that similar crises may always arise in the future. The Financial Times recently emphasized in a column that this crisis is the optimal time for companies to improve employee welfare, including wages, and that such improvements will contribute to long-term corporate value enhancement rather than merely increasing costs. In this unprecedented crisis where everyone is facing difficulties, companies must once again reflect on their position and role in our society.

Jinyoung Shin, President of Korea Corporate Governance Service and Professor at Yonsei University Business School