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21st century governance challenge

ESG in a Post-COVID World

By June 5, 2020July 12th, 2021No Comments

The COVID-19 crisis marks an inflection point in the evolution of ESG. On the one hand, it has provided proof once and for all that ESG is here to stay, as investors pour money into ESG funds that are significantly outperforming their peers in the market downturn. On the other, it has heightened public scrutiny of companies and expectations for their social performance.

What does this mean for ESG?  It means moving beyond a model of ESG that is still focused primarily on minimizing harm and what Unilever CEO Alan Jope refers to as “seductive incrementalism” – creating change on the periphery and fostering a sense of progress without driving transformative change in business models and practices.

The COVID-19 crisis is sharpening our insight into this reality as the differences in corporate responses to the crisis become apparent. Companies that lead are finding creative ways to keep their workforce engaged, prioritize their employees and customers and partner with governments and others to support communities. Organizations like Just Capital are profiling the companies that are adjusting their business models to meet their commitment to stakeholders, while media outlets like the Financial Times (Moral Money’s “Saints and Sinners”) are shining a light on those that are not.

After a tsunami of bailout funds, the public will continue to look to business and capital markets to partner with government not only to restart the economy but to address the social issues and inadequacies the crisis has revealed. A March poll showed that 49% of employees trust that their employers are prepared to manage COVID-19, versus 43% who trusted their government, with 45% of respondents looking to the private and public sectors to fight the virus together, more than double the number who trust government alone.

In a post-COVID world, corporate valuations by large institutional investors will increasingly be measured by how well firms are meeting these expectations and ensuring their license to operate. Larry Fink, CEO of BlackRock, the world’s largest institutional investor, noted in his 2018 letter to companies, “Stakeholders are pushing companies to wade into sensitive social and political issues – especially as they see governments failing to do so effectively…Companies cannot solve every issue of public importance, but there are many – from retirement to infrastructure to preparing workers for the jobs of the future – that cannot be solved without corporate leadership.” After the pandemic, we can expect the pressure on business to continue to strengthen, particularly as governments struggle under a mountain of debt.

Meeting these expectations will not be easy for business as it struggles to right balance sheets shredded by the virus but the pressure for business to do more will keep ESG performance at the top of C-suite agendas. Among the challenges to be addressed in managing ESG going forward are:

Collaboration to support systemic change

The global pandemic has made it clear that systemic challenges like COVID-19, global warming and inequality are interconnected and addressing them requires a coordinated approach by all sectors. As we come out of this crisis, it will be important to integrate this into ESG strategy and engage the firms in systemic change initiatives where the impact of individual actions can be seen in the context of the broader impact of business and other stakeholders on them  The Paris Agreement on climate change was an important step in this direction. The UN Sustainable Development Goals (SDGs) are another. These provide not only important opportunities for collaboration with other stakeholders but also a platform for rethinking how business strategy can incorporate the opportunities for innovation and new markets that these systemic challenges represent.

Self-regulation and engagement with civil regulatory initiatives

The COVID crisis has highlighted the increasing fragility of global governance institutions and global regulatory standards. Coming out of the crisis, we can expect this may worsen as government struggles, countries turn inward and protectionism rises, while public expectations of business continue to grow. In the absence of a clear global regulatory legal framework of “hard” law, “self-regulation” and engagement with industry-level private and civil regulatory initiatives will be increasingly important components in managing stakeholder expectations and safeguarding license to operate. In the post-COVID era, these forms of “self-regulation” will be an increasingly important vehicle for large corporations to assure diverse stakeholders that they are living up to their stakeholder obligations, particularly in regions of the world where the rule of law is weak.

Strengthening Corporate Governance

Before the crisis, the boards of large firms found themselves increasingly a target for institutional investors wanting assurance that the board had oversight of the firm’s ESG strategy. Coming out of this crisis, we can expect this pressure from investors to accelerate as they look to see how boards are handling the business continuity and resilience issues exposed by the COVID crisis and rising social expectations. Meeting this challenge will requires robust corporate governance, with boards who have both the time and competencies to do more than simply compliance and monitoring but equally engage in strategy and help the firm navigate an increasingly complex environment of competing stakeholder expectations.

Public Policy Alignment

In a post-COVID world, we can expect more focus on the alignment between firms’ ESG activities and their corporate advocacy with government, often done indirectly through industry associations. Activist investor groups like Climate Action 100+ can be expected to push firms to disclose their policy positions in intermediary groups and dissociate from those that conflict with stated ESG positions at the corporate level, as we saw recently with Shell.

The positive news through this crisis is that ESG/sustainability leaders in both the corporate and financial firms we collaborate with report greater engagement with the C-suite and boards as they work to respond to the crisis, and the learnings from this may help corporate leaders address the challenges above.

The silver lining to the COVID-19 pandemic and inequality crises we are in is the opportunity to seize the awareness created by these crises to redefine the role of business in society, as a social as well as economic institution that works alongside and with government in a 21st century social contract that can ensure continued economic and social progress for all.