COVID crisis unmasks the need for ESG principles to ‘build back better’

July 2020 | SPOTLIGHT | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

July 2020 Issue

As COVID-19 sweeps viciously across the globe, the world has come to learn the weaknesses of our economic systems and societal structures, and the price for having not paid attention to them in the past. Hospitals have been overwhelmed, the global death toll is staggering, and markets and economies are in freefall.

Fortunately, just as the pandemic is showing us the stark differences in people’s experience, there is a strong feeling that we really are in it together. It may not yet be more than skin deep, but our society has begun to change.

As with other great challenges, most notably the second world war, the present crisis has given rise to more neighbourliness, sociability and a desire to take care of each other. It has illuminated with unerring clarity that in order to chart a path forward and to ensure that we are prepared to weather future shocks in an age of such chaos, we need to think carefully about our social and economic systems.

In his 1958 essay on war and social policy, the pioneering researcher Richard Titmuss said that because “the cooperation of the masses was… essential [to the war effort], inequalities had to be reduced and the pyramid of social stratification… flattened”.

But there is a serious risk that, with eyes firmly fixed on a return to ‘business as usual’ beyond the current situation, companies looking to improve and maintain stakeholder relations cannot afford to sit on their hands. Levels of scrutiny are higher than ever, and those firms that do not communicate or act appropriately, may suffer a reputational wound that will be tricky to heal quickly.

In recent weeks, we have seen some companies get it right and some get it very wrong. In each case, companies face the prospect of stakeholders with long memories. There will be consequences, both positive and negative, for reputation.

That is not to suggest that the results of the pandemic are somehow balanced between good and bad. But clearly, to navigate this new reality, it is important to keep the bigger picture in mind, because as we look ahead to the day when COVID-19 is no longer consistently front-page news, companies must expect a higher level of scrutiny. Businesses will be judged by ‘what they did during the war’, how they treated their employees, suppliers and customers, by who shared and who hoarded.

However, with a lot of volatility and a lot of big questions unanswered, how can companies focused on survival go about gauging ‘goodness’ and building back better?

Arguably, the bottom line is clear: with more stakeholders caring about how companies are treating their workers and judging them on how they perform in this crisis, it is time for organisations to take environmental, social and governance (ESG) measures seriously.

The great levelling

Before the COVID-19 outbreak, ESG criteria factors were gaining traction, with the ‘E’ and ‘G’ dominating ESG deliberations – investors identified most readily with the ‘G’ and most of us could easily identify with the ‘E’. However, sustainable investing is more than being environmentally conscious and it is during this unfolding crisis that we are seeing the true importance of the ‘S’ factor coming to the fore.

The pandemic has both amplified and accelerated the push for social issues as an economic reality, driving forth the evolution from the ‘S’ as a values-based question to the ‘S’ as a material business question.

Preliminary indications are that the pandemic has, if anything, increased investor attention on corporate ESG management. Notably, investors have been even more vocal about their expectations on issues such as employee health and safety, workforce policies, job security and business operational and strategic resilience. Front and centre are investor concerns about responsible corporate governance, specifically related to COVID-19 response.

According to a recent Morgan Stanley report, “With the disruption caused by the COVID-19 crisis, ‘social’ considerations are back at the forefront of ESG”. The report also noted that “Corporate decisions affecting workers and communities for investors have become increasingly important as a wider array of investors have begun looking at companies through an ESG lens”.

The Wall Street Journal also envisions that the pandemic could elevate ESG factors in investment decisions, characterising remarks opined by British investment bank Barclays: “Companies should expect more investors to ask questions about resilience and contingency planning, viewing the issues in light of the pandemic as relevant to a company’s long-term performance. Down the line, those conversations could evolve to broader ESG discussions.”

And elsewhere, data from Federated Hermes, a responsible investing-focused asset manager, showed that 85 percent of the independent financial advisers it surveyed had seen a rise in client requests to allocate capital to ESG-integrated funds since the start of the outbreak. And data from MSCI shows that corporate bonds and equities with high ESG ratings have recently markedly outperformed the index.

Eyes wide shut

Getting companies to focus on anything other than their own survival might sound optimistic right now, but the stark reality is that businesses need to accelerate the shift toward a more ‘sustainable’ risk framework in order to create a resilient recovery. After all, COVID-19 has taught us that we cannot afford to ignore what is happening in the rest of the world. Some challenges do not respect national borders, such as pandemics, fraud, modern slavery and climate change, to name but a few.

So, as the world assesses the challenges and rebuilds, and invests the capital to do so, it is likely to be guided by the imperative to ‘build back better’ with a more just and sustainable economy. Companies will be evaluated by how they address those challenges across their operations and being part of global solutions will be both a competitive and an ESG differentiator.

Therefore, post-COVID-19, those companies that are more strategically and operationally resilient and treat their workforces better will likely be more attractive to all stakeholders. In the short term, that means companies should increase efforts to integrate ESG investor expectations, ratings and perspectives as part of sustainability initiatives, stakeholder engagement and business resilience strategies.

Longer-term, COVID-19’s effects and the responses may also become a testbed for ESG analysis that helps create a new understanding of ESG impacts on business. For example, many investors have struggled with how to model and quantify the ‘S’ aspect of ESG, and this may improve understandings of the financial impacts of major social disruptions. If this happens, firms should expect to see an increase in the quality of ESG investor expectations for corporate reporting.

International pundit on governance, risk management and compliance (GRC), Michael Rasmussen, foresees companies and their investors rapidly increasing their use of ESG analysis to enhance risk management and setting out comprehensive plans to become resilient while focusing business development on opportunities in the sustainable economy. “The increased investor focus on risk management likely to arise after COVID-19 will need to include ESG issues and consider the short-term in dire situations. Low-probability, high-impact events demonstrate that ESG is not purely a long-term risk. Anything can happen from quarter-to-quarter,” he said.

Road to recovery

Unfortunately, it is still too soon to tell when things will return to some form of normality, with scientists and officials offering differing opinions as the outbreak rages on. But what is certain is that the emergence and effects of the virus are a wake-up call for us all, demonstrating the exponential nature of some risks and how fragile our way of life is. Life as we know it, how we now truly understand it, is a delicate balance: it takes only one black swan event to put everything in jeopardy.

This will not be the last cross-border crisis that the world will face, but it should be treated as a dress rehearsal for what could be a far worse crisis triggered by climate change. So, we need to take the opportunity unfolding in front of us to strengthen our multilateral institutions and our global relations, so that, when the next crisis comes, the global community will be ready. This means that ‘building back better’ must be more than just a slogan. This is not about returning to normality. We must do better than that. And we can.

The pandemic has radically reconfigured concepts of sustainability, reinforcing long-held beliefs that investment and value creation must deliver more than just strong financial returns. We cannot, therefore, go back to business as usual and lock in old habits, pollution, spending and infrastructure that will inflict further harm on our people, communities and economies.

The crisis has demonstrated that embracing ESG is not a vague distant goal, but something that immediately strengthens the resilience of our societies and businesses. Performance will be measured in purpose as well as profit, because COVID-19 provided perspective.

Bree Goodall-Beer is managing director at Untaptd. She can be contacted on +44 (0)7896 834 837 or by email: bree.goodall-beer@untaptd.com.

Bree Goodall-Beer

Untaptd