Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.
One key business lesson from the pandemic is the need for a radical upgrade of company assessment of social, political and environmental risks. Good ESG policies are an essential part of building this awareness.
There is much being written about the impact of coronavirus on economies and pathways to economic recovery. Some reports discuss ways in which this recovery might provide the opportunity to address some of the long-standing challenges of sustainable development such as inequality and climate change.
In this article, we look more particularly at companies, and the ways in which this pandemic may drive business to take a more comprehensive approach to environmental and social issues.
HSBC has released evidence that greener stocks’ relatively impressive performance is largely holding true throughout the coronavirus crisis.¹ This finding was reinforced by Bloomberg which has observed that the ten largest ESG-focused U.S. mutual funds have declined less as stock prices tumbled in March. ²
Lessons from the pandemic
What are the key lessons from the tragic events hitting lives, health, jobs and livelihoods across the world?
- As investors become more demanding of ESG products, they will increasingly realize that there are currently many unspoken gaps in ESG data and in product design. Consequently, there will be more market pressure on regulatory authorities to require companies to put in place better measurement and broader disclosure on ESG issues.
- “Black swans can land anywhere” appears to have become fact, not fiction. Certainly, there will be a heightened awareness of ESG issues as investors have witnessed the market’s fragility. Of course, the coronavirus was not entirely unforeseen. We were alerted to the risk of pandemics by scientists and forewarned by HIV/Aids, SARS, Ebola, and MERS. The lesson should be for businesses to build in better risk analysis and to monitor scientific findings and social developments more conscientiously.
- Out of the many sustainability issues, the one that will most resemble the pandemic is climate change. There is a strong case to be made that the impact of a pandemic is transient, with a duration of perhaps one or two years, while the impact of climate change on the economy is near permanent — only reversible after several generations. Hence it is foreseeable that climate resilience assessment and the disclosure of relevant board response will become a major compliance issue for most companies.
As our battered economies recover, we have a great chance to reconstruct a more sustainable, low-carbon economy which brings benefits to all – haves and have nots, today’s citizens and tomorrow’s citizens.
It is in this situation that social, environmental and political awareness becomes vital for companies intending to survive. Good sustainability awareness within a company is a major part of building sufficient corporate foresight and preparedness for far-reaching global events.
Five directions for the future
For any business that wishes to stay ahead in a post-pandemic environment, these five directions would likely constitute the minimum components it has to take into account in any decent company strategy:
- Resilience can be assessed in a root and branch manner, taking a systematic view of risk, including scenarios of multiple hazards hitting at the same time. Extreme weather, disease outbreaks and social unrest for example.
- New attention is given to issues of supply chain integrity and resilience, including the reassessment of complex, extended supply chains as well as just-in-time supply strategies. More thought will be needed about local sourcing and manufacture along with diversity in supply options.
- ESG Investors are moving to companies that manage non-financial risks related to such issues as climate change, board diversity or human rights issues in the supply chain. The pandemic has demonstrated the importance of other factors as well including disaster preparedness, continuity planning, employee security, wage disparity, and the adequacy of benefits such as paid sick leave. ³
- A rethink about charitable action. Tokenistic or opportunistic image boosting activity will be more likely to produce adverse reactions from a public that will become more critical and judgmental.
- Whether the slowdown caused by the pandemic provides the opportunity for business to decarbonize, retiring carbon-intensive assets.
The pandemic has shown how people can make drastic changes to their way of life during catastrophic events. This illustrates what we mean when we talk about the need for dramatic social change to solve existential problems. Business needs to show it can make similarly drastic changes to the way it operates in society.
Environmental and social awareness within the corporation has never been more important to navigate the unprecedented events unfolding around us and the uncharted path out of this tragedy.
¹ Murray, James. 2020. “HSBC: Companies focused on climate change ‘outperformed’ as virus spread. GreenBiz Webcasts. 2020.04006. https://www.greenbiz.com/article/hsbc-companies-focused-climate-change-outperformed-virus-spread
² Kishan, S and Chasan E. 2020. “ESG Funds Outperform ‘Sin Stocks’ in Slumping Global Markets” Bloomberg Green. 28 March 2020. https://www.bloomberg.com/news/articles/2020-03-27/esg-funds-outperform-vice-fund-in-global-market-slump
³ Broughton, K and Sardon, M. 2020. “Coronavirus Pandemic Could Elevate ESG Factors.” Wall Street Journal. 25 March 2020. https://www.wsj.com/articles/coronavirus-pandemic-could-elevate-esg-factors-11585167518 accessed 2020.04.07
This article first appeared in CCA’s client newsletter CCA Insight and was written by John Sayer, Director and Albert Lai, CEO at Carbon Care Asia.