Post-pandemic, investors will look to ESG to Build Back Better
Those companies that have shown their resilience and ability to adapt during COVID-19 will be well placed to meet the greater ESG demands of investors.
Not one person, family, business, or institution has been shielded from some sort of impact from the COVID-19 crisis. While it has given me opportunity for moments of reflection and to reconnect with the introvert in me, it’s also a time of loss and worry.
The world of work has been full of revelation, stress and wonderment. As a sustainability professional that has worked and qualified across multiple disciplines, such as communications, reporting and strategy, the political sciences, investor relations and responsible investment, seeing the different, yet intensely collaborative responses from all of these disciplines has induced hope.
Without a doubt, the key priority for individuals, governments, businesses and investors is managing the impacts of COVID-19. However, what does this mean for environmental, social and governance (ESG) concerns?
In recent years, ESG considerations have been thrust into the spotlight; for example, controversial investments are being excluded from sustainable funds, and there is a growing concern over climate-related stranded assets. There is a stronger case than ever for ESG to be included in investment decisions. Evidence is also emerging on the value of high ESG performance in times of crisis, where for example, early indications suggest that ESG-focused funds are outperforming other types of funds during the pandemic. Strong ESG performance can translate to better run boards, better-cared-for employees and more resilient supply chains.
Strong ESG performance can translate to better run boards, better-cared-for employees and more resilient supply chains.
The current crisis has also brought to light how the interconnected nature of ESG risks has impacts which ripples throughout businesses and their stakeholders across the value chain. There is recognition that the coronavirus pandemic has been exacerbated by many of the conditions of our modern day world, such as globalisation, economic policy, role of government, thus, the stability of the financial markets has even been questioned.
Investors aligning COVID-recovery with ESG
ESG investing focuses on understanding how ESG risks and opportunities impact on long-term success, and takes into account externalities and the potential impact on performance.
These considerations have not disappeared as a result of COVID-19. In fact, there is growing recognition from the investment community that ESG is more important than ever. The United Nations-supported Principles for Responsible Investment (PRI) – the international network of investors with over 2500 signatories – has recognised that systemic recovery from the crisis is paramount, signalling that PRI signatories should be ‘supporting sustainable companies through this crisis – in the interests of public health and long-term economic performance – even if that limits short-term returns.’
The importance of social considerations to business performance has been reinforced. Worker health and safety is paramount and COVID-19 has exposed and highlighted corporate behaviour that has responded well, as well as those that have appeared to place profit over employee and community wellbeing.
Governance has been in the spotlight. A period of global and economic shock has highlighted how fair, honest and accountable leadership is able to steer management behaviour and adapt rapidly to evolving risks with robust risk management.
The Investment Association’s (IA) Executive remuneration guidance for UK listed companies has also warned of ‘significant reputational ramifications’ if executive remuneration is not reflective of pay and conditions of their employees.
Companies are also facing greater scrutiny around their governance practices – with, in a time of furloughing, redundancies, employee salary and budget cuts, investors calling for executive remuneration considerations if tax-payer support has been sought by businesses. The Investment Association’s (IA) Executive remuneration guidance for UK listed companies has also warned of ‘significant reputational ramifications’ if executive remuneration is not reflective of pay and conditions of their employees. Currently, only 37% of FTSE 100 companies have cut executive pay.
Opportunity for a green recovery
While a focus on issues such as climate change and biodiversity may appear to have temporarily shifted, the pandemic has also accelerated a move towards ‘Building Back Better’ and ensuring that our societies and environment is regenerative, resilient and fit for purpose. As the health of society steadies, efforts to address these systemic issues will be more critical than ever.
The investment community has wasted no time. PRI has coordinated two groups to develop thinking around what COVID-19 means to investors and how investors should respond. Short-term responses focus on ‘ensuring responsible ESG approaches remain at the forefront of investor activities’; and longer-term approaches focus on the ‘future economic recovery phase, considering the how the financial system should function to ensure sustainable outcomes’.
Large companies receiving emergency loans will be required to publish annual climate-related disclosure reports consistent with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD)
Governments around the world are also linking financial support to drive environmental outcomes. The French government has stated that Air France was not getting a ‘blank cheque’ and must meet certain conditions, such as including a 50% reduction in carbon emissions on domestic flights by 2024, as well as investing in more fuel-efficient planes. Canada’s Prime Minister, Justin Trudeau has also announced that large companies receiving emergency loans will be required to publish annual climate-related disclosure reports consistent with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), including how future operations will support national climate goals.
Adaptation, resilience and long-term performance
Coming out of the crisis, investor scrutiny will look to how businesses have responded to the pandemic. From understanding how they treated employees and have taken their consumers’ and wider community’s concerns into account, these assessments are inevitably intrinsically linked to understanding company culture and values in action.
Moving forward, companies will have to think about defining or redefining the purpose of business and how ESG factors have a material, financial impact on long-term value creation. We have already seen whole industries struggle as consumer attitudes change and what is ‘essential’ is reconsidered.
While there may have been a temporary refocus of attention to social and governance related issues, there are clear signals from governments, policy makers and investors which believe that a recovery which drives economic growth, creates jobs and empowers the workforce, and tackles climate change and inequality is an imperative.
No doubt challenges lie ahead, but investors will recognise that it is the businesses that display qualities of agility, adaptive-ness and innovation in their responses to the crisis, as those better placed to respond to the important ESG issues impacting us all. And these are the companies that will be able to deliver long-term performance through sustainable and resilient business.
If you would like to discuss the challenges around ESG or your ambitions for the future, get in contact at [email protected].