COP26 may be delayed, but don’t let coronavirus distract you from your ESG agenda

15 April 2020

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

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Phil LloydHead of Market Structure & Regulatory Customer Engagement

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Varun SardaHead of ESG Advisory

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Other insights

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3 minute read

Some may wonder whether sustainability is still a valuable topic for 2020. It certainly will be…

In his widely applied Time Management Matrix, American author Stephen Covey distinguishes ‘urgent-important’ from ‘not urgent-important’ activities (see “The 7 Habits of Highly Effective People”, first published 1989). During the current pandemic, for most companies their liquidity falls in the first, while ESG strategy will sit firmly in the latter – even if their operational carbon footprint has, for the time being, dramatically reduced.

Stephen Covey’s Time Management Matrix

Delays to major sustainability initiatives such as the COP26 could make some wonder whether sustainability is still a valuable topic for 2020. It certainly will be.

Even in these volatile times it would be a mistake to narrow your focus solely to the ‘urgent’ category. The post-coronavirus era will likely place a greater premium on sustainability strategies than the time preceding it. In the coming months we will study this in greater detail through a series of thought pieces. This article introduces some of the areas we will be focusing on.

Regulation moving on

Regulation is one factor. The call for “greenification” of the financial system is being heard by a growing coalition of monetary authorities, as the recent addition of another nine new members (including Brazil) to the Network for Greening the Financial System (NGFS) makes clear. Even the US Fed chair Jerome Powell has indicated they’ll “probably” join this grouping of like-minded central banks, which currently has 63 members.

Despite the pandemic, policy makers are still aspiring for breakthroughs in green and climate change regulation in 2020. Several examples include:

Investors are keeping an eye on the long term

The buy-side also remains on the offensive. The Principles of Responsible Investment (PRI), whose signatories represent over $85 trillion AUM, has called for a sustainable recovery to the coronavirus emergency  aligned to “the climate and biodiversity emergency and the level of inequality”. Over 250 investors have signed the Investor Statement on Coronavirus Response, setting out their current ESG areas of focus, such as paid leave, maintaining employment and financial prudence.

In time, we expect this ESG lens to broaden. The focus will then likely shift towards how companies have improved their supply chain and their operational and financial resilience as well as the ways they’re supporting communities and governments in the economic recovery.

Corporate reliance on fiscal and monetary authorities

Coronavirus is also showing that no corporate in today’s interconnected world can “go it alone”. There is strong dependence on fiscal and monetary authorities. And, while they all have differing priorities, it’s evident that climate change action in many countries reaches across the political divide.

Yes, there is a risk that in the short term government resources and focus gets diverted as it implements urgent relief programmes. Yet electoral pressure around sustainability will only grow, with countless surveys highlighting strong millennial support for climate change and broader sustainability action (e.g. https://www.forbes.com/sites/margueritacheng/2019/06/19/8-characteristics-of-millennials-that-support-sustainable-development-goals-sdgs/#601f2a5d29b7)

ESG agencies keeping a close watch

While credit rating downgrades have been hitting the wires, ESG rating agencies are biding their time. They’re analysing how companies’ responses to coronavirus impact their sustainability profile – such as their human capital and community relations scoring. Firms seen to be disregarding broader stakeholder interests (such as employees and the community) will find themselves being downgraded. Particularly controversial decisions may take years to fully recover from.

Some corona driven ESG greenshoots?

Fortunately, there is hope for optimism. Many companies are finding that certain operational sustainability measures are critically important in their response – for example digitised service delivery, employee flexible working and well-being schemes.

A few firms are going the extra mile, establishing unprecedented collaborations to address urgent social needs – suggesting the same could be done for longer-term environmental pressures. Five of the biggest companies in the IBEX (Spanish stock market) have jointly committed €150m to acquire medical equipment and use their logistics infrastructures to support the government.

In the UK, some distilleries are switching to  manufacturing hand sanitizer, and supermarkets such as Sainsbury’s and Iceland have introduced special opening hours for senior citizens. Turning to the capital markets, we’ve seen the first Sustainability bond issue from a pharmaceutical company (Pfizer), which includes financing for global public health initiatives.

Corona sped-up effect of what could happen to ESG outcasts

The past weeks in the capital markets are a condensed account of what likely awaits firms deprioritising sustainability policies – particularly around environmental issues. Growing regulatory, investor and legal pressure will lead to falling share prices, steepening credit curves and a drying up of liquidity.

The coronavirus epidemic has led to some shifts in corporate thinking around ESG. Let’s hope this will translate into longer-term sustainability action.

To find out more about how coronavirus is impacting the regulatory agenda…read this article.

ESG/Sustainability


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