May 21, 2020
May 21, 2020
Investors and other stakeholders have been outspoken about environmental, social, and governance (ESG) risks for some time now. For companies and directors that have struggled to understand why, just look at the impact that the COVID-19 pandemic has had on your company.
In many ways, COVID-19 has amplified the need for companies to focus on long-term sustainability using an ESG lens. It has also demonstrated the need to expand the definition of a stakeholder group as companies think about the impact of their actions on shareholders, as well as employees, customers, suppliers, communities, and others.
Here are just a few examples of how COVID-19 has demonstrated the importance of an ESG focus and how this could carry through to the future:
Environmental: You may have thought that the “E” in ESG didn’t really affect your business. But consider how environmental risks can have a material impact on a company’s supply chain. Companies with supply chains in countries that have been hit hard by COVID-19, such as China and Italy, have suffered significant disruptions, and their businesses have been impacted. Take generic drug makers or technology companies, for example, who have had to temporarily halt some or all production in affected countries during the pandemic.
This time it was COVID-19, but next time, it could be a climate event: Is your supply chain limited to one region or country that is susceptible to hurricanes and droughts, for example? Are its operations highly dependent on secure water sources? COVID-19 has demonstrated the importance of having a resilient supply chain that can withstand interruptions.
Social: Social risks cover a variety of topics, but employees and cybersecurity are two good examples to showcase. Most companies have had employee safety and well-being at the top of their priority lists from the onset of the pandemic. Companies that continue to do their best for their employees—emphasizing well-being, flexibility, and mental health, for example—will come out on top from a talent and reputation perspective. Those that don’t make their employees a priority risk losing some or not being able to attract workers in the future.
As companies move to more virtual work, those that were already set up with relevant equipment and had good cybersecurity and data privacy practices and employee training in place were well-prepared. COVID-19 has highlighted the importance of putting employees’ health and safety first, as well as ensuring cybersecurity and data privacy are continued areas of focus. Concentrating on these types of changes now can help benefit companies in a future where telework and digitalization will be even more prevalent.
Governance: While many companies have already been addressing board diversity, the governance component also includes elements of regulatory compliance, risk management, and ethics and compliance behaviors. For example, despite meeting eligibility requirements, some publicly traded companies—with better access to capital markets—faced criticism after taking Coronavirus Aid, Relief, and Economic Security Act funds. The funds were meant to help keep smaller businesses afloat, but many were not able to get loans before the fund went dry. COVID-19 has shown the importance of having strong governance practices and procedures in place and how they can help protect against reputational risks or issues.
Addressing investors’ ESG concerns may not be at the top of your agenda right now. And rightly so—many companies need to focus on short-term financial resiliency. But ESG shouldn’t stay on the back burner for long. Once you understand what investors are looking for around ESG now and in the future, you can use your experience from COVID-19 to rethink your ESG messaging and tell your story. And you can use that same experience to better understand how investing in ESG strategies today will make you more resilient when the next crisis occurs.
COVID-19. Uncertainty. Fear. Recession. Fiduciary Duties.
It’s essential that directors know what to focus on and when.
NACD: Tools and resources to help guide you in unpredictable times.