The heart of the matter: ESG takes centre stage

23 Jul 2020

The heart of the matter: ESG takes centre stage

Will governments and business leaders seize the opportunity and widespread demand to place ESG matters at the centre of COVID-19 recovery planning? Doug Morrison investigates.

Amid the global devastation caused by COVID-19, environmental, social and governance (ESG) issues have remained resolutely high up the business agenda. If anything, there is a growing lobby to ensure policymakers promote a green and sustainable economic response to the pandemic.

By far the biggest collective business shot across the bows of governments came in May in a joint statement signed by CEOs from 155 multinationals with a combined market capitalisation of US$ 2.4 trillion and representing over five million employees.

Backed by the United Nations (UN), these business leaders urged governments around the world to align their COVID-19 economic recovery efforts with the latest climate science. It was also a reaffirming of their own science-based commitments by blue-chip corporates as diverse as Hewlett Packard Enterprise, Nestlé and Zurich Insurance Group.

As the UN pointed out, major companies want to see policies that will build resilience against future shocks by supporting efforts to keep global warming in check, not least by reaching net-zero emissions before 2050. In effect, this was big business saying they want policymakers to show the same urgency on the environment as they have on COVID-19.

ESG takes a step forward

“It has taken a global pandemic to show us how incredibly fast governments can move and regulate to save lives, how swiftly businesses can innovate and change, and how quickly people adapt to a lower carbon, simplified existence,” says Elaine Grotefeld, Partner and Head of Odgers Berndtson Canada’s CleanTech Practice. “We’ve now had a glimpse of what things could be like, and many don’t want to lose the giant step forward we’ve been forced to take over these past few months.”

And there is no time for complacency. The UN-backed appeal to governments followed a report by the International Energy Agency, which forecasts that global CO2 emissions will fall by 8% in 2020 as a result of the pandemic-induced reduction in energy demand. This will be the largest ever year-on-year reduction, but in itself still not enough to ease the climate emergency. As was the case following previous crises, the IEA warned, the rebound in emissions may be larger than the decline, unless investment to restart the economy is dedicated to cleaner and more resilient energy infrastructure.

According to Mike Gerbis, CEO of The Delphi Group, a leading Canadian environmental consultancy, the health crisis has “temporarily slowed action” by governments on sustainability while nonetheless reinforcing its importance.

“COVID highlights the delicate nature our existence and the intersection between health, economic, environmental, and racial justice issues,” he says.

“COVID stimulus packages also provide a significant opportunity for government and the private sector to invest in infrastructure and innovative solutions that will accelerate our transition to a socially just, sustainable and low carbon economy.”

Gerbis also points out: “COVID has brought to the forefront the social dimension of sustainability, and that our progress and our ultimate success relies on ensuring that solutions are inclusive and equitable.”

Climate change and employee wellness

Gerbis’ views are supported in a Deutsche Bank study of company and investor sentiment towards ESG, published in July.

As Deutsche Bank says in ESG through the pandemic, “at the beginning of the year there was no question that climate change was the hottest ESG topic”.

But since the outbreak of COVID-19, there has been a significant rise in concern for “employee wellness” – particularly in the US where it has supplanted climate change as the main ESG issue. The study indicates that supply chains and social inclusion have also increased in prominence as corporate ESG priorities.

Though corporate sentiment towards ESG may be generally positive, hard investment is another matter. Deutsche Bank’s analysis indicates a mixed outlook. Overall, investors “severely curtailed” their investment into ESG funds in the three months to July. As a result of the pandemic, 20% of investors plan to cut their “impact investment” allocations and yet 15% say they will increase allocations. The bank also notes that some unlisted ESG-focused companies have outperformed peers during the crisis as they have not had the distraction of a volatile equity market.

Such a mixed outlook partly reflects the conventional focus on short-term profits and past performance – by both companies and their investors – and this needs a radical overhaul, says Dr Ravi Fernando, who is a leading authority on the “triple bottom line” approach to business.

The triple bottom line: profit, people, planet

Dr Fernando argues that the triple bottom line principles of profit, people and the planet are not just an option to reset their business models but are vital now for leaders trying to chart a course for long-term success. As Dr Fernando says, the triple bottom line is not a new concept – the acclaimed management consultant John Elkington came up with this accounting framework in the 1990s – but its time has come. It is an essential foundation for Dr Fernando’s own ‘21st Century Board Leadership Model’, which he created and copyrighted in April this year.

“I would say the climate and health emergencies have to be looked at as part and parcel of the standard operating procedure every business must now address,” says Dr Fernando, who is Chairman and CEO of the Global Strategic Corporate Sustainability consultancy as well as a visiting lecturer at the INSEAD Business School in Fontainebleau, France.

“Boards must look at their portfolio and ask, do we have one or two businesses that are less vulnerable to the climate and health emergencies, which we can now invest in and take to another level?”

Dr Fernando’s ‘21st Century Board Leadership Model’ also calls for a much deeper understanding of new technology and geopolitical disruption, and in this respect, he sounds a note of caution on “a massive knowledge and skills gap” among many senior leaders. But he also draws comfort from the growing presence of the millennial generation across the corporate spectrum – now in management positions and increasingly influential as investors. They are, he says, well versed on the benefits of “ESG value-creation” and triple bottom line.

Equally important, Dr Fernando argues, is the idea of looking forward rather than back. He highlights the example of Paul Polman, the former CEO of Unilever, who in one of his first initiatives after taking on the top job at the company in 2009 was to move away from quarterly reporting. As Dr Fernando says, this was a clear declaration of the importance of leaders committing to long-term ESG investment goals rather than being bound by past financial performance.

Odgers Berndtson’s Grotefeld agrees: “Emerging from COVID-19, we need leaders across the board – in government, business and community – who recognise that this total disruption of ‘how things were’ presents a once-in-a-lifetime opportunity to not go back but to keep up the momentum of moving us forward. Specifically, we need leadership that is oriented towards the future, not the past.”

In any event, Dr Fernando suggests, “business as usual” is no longer an option for any leader. He concludes: “I think this is the moment of truth for all businesses, simply because the climate and health emergencies will be with us in some way or form for the next 25 years and maybe the next 50 years.”

How are companies and their leaders adapting and reimagining their organisations’ strategies through the immediate impact of the coronavirus pandemic? In this series, OBSERVE investigates The Great Reset.

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