Why Responsible Business will shape the “New Normal”

Sustainability

Why Responsible Business will shape the “New Normal”

  • Why Responsible Business will shape the “New Normal” Responsible business matters today, during the crisis, and will be more important than ever, as companies struggle to cope with the long-term impact of COVID-19.
  • Date: May 04, 2020
  • Category: Sustainability
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Amidst the COVID-19 crisis, sustainable and responsible business - which integrates environmental, social, and governance (ESG) risks and opportunities into business strategy has moved up the agenda. Conversations with business leaders around the world during the past weeks, tell us that ESG matters today, during the crisis, and will be more important than ever as we build the “new normal.”

We entered this crisis with a near-unprecedented focus on sustainable and responsible business. 2020 started with Larry Fink, CEO of Blackrock, declaring a fundamental reshaping of finance and asserting they would hold companies accountable for managing climate risks. The World Economic Forum in Davos focused on stakeholder capitalism and climate change. At the same time, we witnessed a slew of net zero commitments from across industries. The debate had clearly shifted from “whether we should integrate ESG” to “how far and how fast can we integrate ESG”. In announcing plans to use its proxy power against companies “falling behind” on ESG, State Street asserted that “ESG is no longer an option for long-term strategy”.

But skeptics have long warned that ESG investing and stakeholder capitalism would be tested in a downturn. And in March 2020, we fell off a cliff. Former Unilever CEO Paul Polman viewed the COVID-19 crisis as “an acid test for stakeholder capitalism” and JUST Capital CEO Martin Whittaker asked, “Will we go back to 100 per cent of free cash flow going to dividends and buybacks?”. However, there is evidence that this won’t be the case. Sustainable and responsible business matters now, during the crisis, and will grow in importance as we build the “new normal.”

  1. Expectations for sustainable and responsible business are here to stay.

The relevance of ESG has been increasing over time, and expectations of businesses to do right by stakeholders, and to live out company missions and values, will only increase. This has been widely echoed in recent media. And a March 2020 global study from Edelman showed expanding expectations on businesses during the crisis, with 78% of people expecting businesses to act to protect employees and the local community.

  1. ESG funds have outperformed, or held steady, with their counterparts

We started the crisis with exponential growth in sustainable investing. In the United States, net flows into sustainable funds reached $20.6 billion in 2019, more than four times the previous annual record which was set in 2018. Investor relations teams, from Fortune 100 to midcap B2B companies, were increasingly focused on driving ESG conversations with investors and strengthening performance on ESG ratings and rankings. But skeptics continued to ask whether ESG funds, which rose in prominence only after the Great Recession, would survive a downturn.

The answer is an unequivocal yes.

More than half of ESG funds have outperformed the wider global stock index in the market downturn. 62 per cent of global ESG-focused large-cap equity funds outperformed the MSCI World stock index fell by 14.5 per cent in March 2020, according to data from Morningstar. “ESG funds tend [to lean] towards higher quality companies with a stronger balance sheet, companies that are run better and operate more efficiently,” said Hortense Bioy, director of passive strategies and sustainability research at Morningstar, speaking to the Financial Times. Similarly, S&P Global’s tracker through March 23 showed that the S&P 500 ESG Index and the S&P Global Large Midcap ESG Index outperformed their counterparts.

Blackrock has made clear that COVID-19 will not impede their plans to hold companies accountable for management of climate change and corporate governance. On April 2, they spelled out engagement priorities and KPIs for 2020, underscoring how they will hold directors accountable for progress on
sustainability

The pandemic we’re experiencing now highlights the fragility of the globalized world and the value of sustainable portfolios. When we emerge from this crisis, and investors rebalance portfolios, we have an opportunity to accelerate into a more sustainable world.”

Larry Fink, CEO of Blackrock

For companies, the implications are clear: expectations from investors to deliver on ESG remain relevant during this crisis. As investor scrutiny and sophistication toward ESG grows, Boards and C-Suites need to be ready to demonstrate clear evidence of ESG performance.

  1. In the short term – companies continue to allocate capital to ESG based on three factors.

During any crisis, business continuity, employee safety, and cash flow take precedence. Beyond that, corporate decisions to allocate capital to ESG are dependent on three factors.

First, where there is a business case, companies continue investing.

Where a carbon footprint results in tax credits or where a resource efficiency results in cost savings, the business case is clear. For example, it makes sense for agribusiness to invest in energy and water conservation to reap benefits for their bottom line.

Second, where ethical or reputational risks exist, companies invest.

Today, companies have to manage high expectations - paying staff, providing sick pay, guiding employees about COVID-19, and supporting communities – all while ensuring adequate cashflows for business viability. A recent Axios / Glover Park study shows that American voters expect big companies to step up: 82 per cent want them to offer sick pay to their staff and 81 per cent want them to keep paying staff, even if operations stop. Scrutiny from media, employees and the public put several companies in the spotlight for failing to do so. JUST Capital (which releases the annual JUST 100 ranking of America’s best corporate citizens with Forbes), is publicly tracking companies on sick pay, hazard pay, layoffs and community investment. And many companies have earned accolades for critical community support. Corporate Citizenship’s evolving COVID-19 timeline captures many of these actions.

And third, to build long-term business resilience, companies invest.

They invest in the management of material ESG risks and opportunities because these are essential to creating and sustaining long-term value.

Looking long-term, what ESG aspects will be most important? What is top of mind for business leaders, as they plan for the “new normal” during these early days of the crisis?

  1. All sustainable and responsible businesses begin with purpose, mission and values. That won’t change.

    Business purposes are being tested through COVID-19. During this crisis, we see companies stepping up to help during the pandemic, separating those who talk the talk, from those who deliver through purpose-driven action. For example, in Singapore, ride-hailing company Grab introduced GrabResponse to ferry healthcare workers to and from hospitals, while supermarket chain FairPrice launched a ‘store on wheels’ initiative to bring groceries closer to the elderly. Similar stories can be found around the world. Going forward, all ESG strategies should be grounded in who you are as a company and why you exist.

  2. If companies have expressed commitment to care for their employees, now is the time for them to put promises into action.

    The pandemic is now forcing companies to address questions relating to employee benefits that have typically received little attention in the past. Stakeholders will be watching closely to see if management makes bold decisions that sacrifices short-term profitability for the sake of employee welfare. Moreover, as the pandemic catapults us to a future of flexible, remote work, driven by technology, all parties must deliver innovation responsibly. Companies will be split into two camps: those who treated staff and others well, and those who tried to take advantage.

  3. Companies are placing a renewed focus on resilient business strategies.

    Whether it is an increased focus on cash reserves, or shoring up risk and crisis management capabilities, to rethinking global supply chains - resilience is top of mind. Within this context, a focus on ESG naturally orientates businesses to a more proactive and strategic stance when it comes to dealing with both the expected as well as the unexpected. This may result in companies having to face a manageable disruption as opposed to an existential crisis.

  4. Data privacy and cybersecurity are front and centre, and will continue to rise in importance – with digital ethics around AI and data becoming more critical in the long term.

    COVID-19’s push for white-collar workers to remote work has only served to broaden and heighten these risks. Internal crisis teams are ramping up measures as cybersecurity and data privacy risks are magnified through this crisis. Zoom, the videoconferencing service which grew from 10 million users in December 2019 to 200 million in March 2020, faced unwanted guests crashing users’ video chats and accusations of unethically sharing personal data. The company earned rare praise for responding transparently.

  5. Innovation capabilities are the difference between crisis “winners” and “losers”. Responsible innovation will separate those who deliver long-term value from temporary winners.

    Healthcare innovators are driving towards the testing, treatment and development of a vaccine for COVID-19. Diversified healthcare leader Abbott launched two COVID-19 diagnostic tests, including their rapid ID Now test that can detect the coronavirus in as little as 5 minutes. The company is focused on ramping up production to meet urgent needs in outbreak hotspots, prioritizing frontline workers and first responders. And Johnson and Johnson recently announced that its COVID-19 vaccine (in development and targeted for human testing in September) would be available on a not-for-profit basis. Outside of healthcare, many companies are pivoting to support needs during COVID-19, including automotive factories producing medical ventilators; apparel and textile companies building protective wear for healthcare providers; and alcohol distilleries producing hand sanitizer.

  6. Post-COVID 19, climate change poses the next greatest threat to our way of life – and we have the information and resources to act now.

    Climate risks are increasingly urgent, and scrutiny from investors, employees, and customers about how companies manage these risks will rise significantly in the coming decade.For a growing number of firms, the physical reality of rising sea levels and increasing storms, floods and other natural disasters has become undeniable. As noted above, Blackrock and many other investors are keeping the pressure on companies to demonstrate effective climate risk management as a key indicator of the health of the firm. And regulation is in place in Europe through the European Action Plan, which incorporates recommendations from the Task force on Climate Related Financial Disclosures (TCFD), a market-driven initiative to develop voluntary and consistent climate-related financial risk disclosures in mainstream company financial reporting. For North America, the question is when, not if, TCFD will shape regulation.

  7. And finally – business leaders are investing in ESG to shape the new normal.

    The Great Recession significantly decreased already-teetering trust in businesses. Out of this came the rise of ESG investing and higher expectations of businesses to deliver value to all stakeholders

    1. Talent, driven by Millennials and Gen Z who want to work for sustainable companies;
    2. Consumers, who increasingly make purchasing decisions based on alignment with values; and
    3. The public, who expect brands to take a political stand – especially where governments leave voids on human rights, equality, and climate change.

These trends won’t reverse as we recover from this crisis, but leaders have varying views on the “new normal”. Are we building toward a “new New Deal”? A new “social contract” between business, governance and society? A full embrace of stakeholder capitalism? Or even wholly mission-driven business such as B Corps (achieving the twin objectives of profit and societal benefit)?

However, this much is clear: a business strategy that embeds material ESG risks and opportunities is the only way forward. Business leaders have a unique opportunity, in this moment, to build a “new normal”. Those who answer the call to deliver the future responsibly and sustainably, delivering value to priority stakeholders rather than solely to shareholders, will thrive, and we will all be better for it.

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