Why COVID-19 could boost ESG performance and stakeholder capitalism

But as the world moves into the next phase of its response to the pandemic, and certainly in the longer term, what can be learned from this crisis and does it present an opportunity for businesses to rethink what they do and how they do it? When organizations discuss economic risk and significant megatrends, and when they consider specific risks such as climate change and pandemics, they tend to take decisive action only when they consider that those risks are likely to impact them in the short term. Now that one of those risks has become a reality, that may change. This could be a once-in-a-generation chance to press the reset button. 

So how might the COVID-19 crisis help to accelerate the move toward stakeholder capitalism? It’s helpful to consider the possible outcomes through the lens of the three central areas that investors continue to use to measure sustainability: environment, social and governance performance.

Environment: old economy or new economy?

Climate change remains the most pressing economic and environmental challenge globally. The problem here has always been inertia; before COVID-19, the economic model in many markets continued to derive shareholder value to public companies regardless of whether or not they were polluting the environment. Despite commitments made at both national and company levels, action has not been taken quickly enough to avert the climate crisis.

Now, though, as the financial ecosystem rebuilds, there is an opportunity to rethink the economy of the future and move toward more sustainable practices. As nations return to work, what should they focus on? 

Take Australia, where I live, as an example: should it keep developing emission-intensive energy export infrastructure, or could it instead become the largest exporter of renewable power in the world? The move to green hydrogen (a clean-burning fuel that can be used for long-term energy storage) and to renewable power will continue; Australia has plenty of those natural resources and the technological capability to exploit them.

So, if public and private investment is going to stimulate an economic rebuild, will it stick with the old economy that is declining, or will it instead stimulate the new economy that is needed in order to avoid catastrophic climate change?

These are the kinds of discussions that are doubtless taking place in government departments and boardrooms around the world. I hope that as the light switch is turned back on again, a low-to-zero-carbon economy will develop, because that’s how countries will leapfrog their rivals in terms of productivity and progress, and it’s the commitment nearly 200 of them made under the Paris Agreement of 2016.

At a company level, there are likely to be many that make these decisions independently. Others may need to be nudged in that direction. In cases where organizations are asking for government support, or looking to the capital markets for debt or equity to support them through this period, it is likely that those key stakeholders will demand more from them in terms of what they need to do over the long term.

An example of this “nudging” in action has already been seen in Europe, where one major company has recently received government funding that is conditional on it taking steps to reduce carbon emissions from its activities. The European Green Deal – the European Commission’s ambitious plan to transform the 27-country bloc from a high- to a low-carbon economy – will play an important role here, with the potential to act as a framework for a more sustainable recovery in Europe.

Social: the importance of purpose and values

The majority of organizations have prioritized the health and well-being of their employees and suppliers over short-term profitability during the COVID-19 crisis. Individuals will certainly have taken note of how their employers have treated them. This is a time of taking stock for everyone, and many people are doubtless rethinking their priorities in areas such as the amount of time they spend traveling for business and the flexibility (or otherwise) of their working arrangements.

More broadly, people would generally prefer not to work for a company that ignores its stated values. There have been some notable examples of companies that have a “purpose” that they abandoned the moment the economy started to dip. Such actions erode trust and damage the organization’s reputation, and will echo in the minds of employees for a long time. It’s likely that those companies that didn’t stand behind their values during the COVID-19 crisis will lose their best talent when the economy rebounds.

Governance: a focus on sustainability at board level

Sustainability functions in large organizations differ from other areas of governance in that they look beyond a five-year time horizon. They analyze megatrends and think about how they could impact on the business. They also view issues through a wider stakeholder lens than other functions, examining how the business impacts on the community and the environment, and vice versa.

The COVID-19 crisis has shown the importance of this kind of broader, long-term thinking. Either during or after the crisis, there is likely to be a renewed focus on sustainability at board level as non-executive directors in particular ask questions about whether companies’ governance frameworks were adequate to deal with the crisis, how they are thinking about megatrends, and how they are building that thinking into risk management processes and strategy. Boards will almost certainly be spending more time discussing sustainability issues than they ever did before.

The question for many will be whether the sustainability function was influential enough at a time of need. Few companies, if any, actually contemplated the scenarios identified by their sustainability teams as part of their megatrend analysis and considered how they would respond. How these teams better feed into the risk and strategy functions of the organizations they serve will be critical.