Coronavirus ESG series: The impact and outlook for corporates

04 May 2020

Varun SardaHead of ESG Advisory

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Dr Arthur KrebbersHead of Sustainable Finance, Corporates

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Phil LloydHead of Market Structure & Regulatory Customer Engagement

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10 minute read

Friedman once said that only a crisis – actual or perceived – produces real change. Could this be an inflection point?

Before the coronavirus pandemic struck, 2020 was set to be a historic year for environmental issues characterised by growing calls for urgent and concerted action, non-governmental organisation (NGO) campaigns and investor pressure, and a line-up of international conferences to address climate change and biodiversity. Only a few months earlier, companies, including Microsoft, AstraZeneca, and Sainsbury’s, had unveiled ambitious carbon targets.

However, the world has changed. According to analysis from NatWest Markets, global gross domestic product is forecast to fall by 4.2%1 in 2020, which would be one of the largest declines on record. For many, the pandemic has brought a complete halt to their business, forcing many companies to swiftly shift their focus towards securing liquidity, accessing Government assistance programmes, and executing emergency action plans to address the crisis. 

As the coronavirus pandemic continues, there has been extensive debate over recent weeks as to whether companies have reduced their focus on Environmental, Social, and Governance (ESG) as a result of the pandemic. The answer to this question is not straightforward. Companies have been affected by coronavirus in different ways owing to their size, complexity of supply chain, geography and sector of operation.

This article looks at various ways in which companies are being impacted by these issues and outlines the opportunities which they have to drive change in order to be more resilient and successful in the post-coronavirus era.  

Social issues are moving to the forefront

Although history indicates that sustainability objectives can be deprioritised during crises, the coronavirus pandemic has helped to raise the profile of social issues, by forcing companies to consider social aspects more strategically. In many ways, the pandemic is the first real test of ‘stakeholder capitalism’ – a model that positions private enterprises as trustees of society. Important constituencies, including the US Business Roundtable, the World Economic Forum, and the Financial Times had proposed that stakeholder capitalism provides the appropriate framework to address societal and environmental challenges. This construct is being put to the test under the severe circumstances of the coronavirus pandemic: corporate approaches towards worker protection and health, flexible working and caring responsibilities, supply chain disruption, contingency planning and community support – to name a few – have all moved into sharp focus. For many years, these topics had been overshadowed by environmental concerns, including climate change. Companies are now being called-out when they don’t have ‘acceptable’ social practices. For example, a number of retailers and manufacturers have recently faced criticism over their treatment of employees during the pandemic. Equally, many corporations are investing hundreds of millions in planning for employee and customer protection measures in work environments when lockdown conditions are eased. Indeed, we could begin to see societal factors begin to reshape corporate practices.

There is likely to be a ‘new normal’ in the workplace

Coronavirus is primarily a health crisis, but it has also taken a toll on the mental and physical wellbeing of employees at all levels, particularly those from ethnic minorities who have been reportedly more sharply affected by the pandemic. This is likely to manifest itself in various ways including, anxiety over present and future uncertainty, dealing with bereavement, financial or physical strains resulting from demanding work and personal responsibilities; or difficulties adapting to new social and working patterns.

We have yet to fully comprehend what the eventual impact of these developments will be on enterprises, but one thing is certain: many of these issues will catalyse into long-term changes in the workplace and in corporate, government and regulatory approaches to social issues in the workplace. Some of these changes will be positive – for example, the pandemic has helped to break down stereotypes around working remotely, around flexible working patterns, and job descriptions. However, in many instances negative experiences from this crisis may impact employee morale and productivity, and employer relations negatively.

What does this paradigm shift mean for companies?

Companies have the opportunity to create positive outcomes by embracing the required changes with responsibility and care. In the first place, they can pay particular attention to these matters and ensure mechanisms are in place to engage, support and motivate employees. In the longer term this needs to be reflected in their organisational culture.

At the same time, it presents companies with an opportunity to highlight and to specifically finance these important social initiatives when sourcing funds from banks and from the capital markets, for example in the form of bonds with social use of proceeds and/or loans which are linked to the achievability of social targets. We’ve already seen this with the first Sustainability bond issue from pharmaceutical company Pfizer, which includes financing for global public health initiatives. This is also becoming more apparent in sustainability-linked loan financing as some borrowers start to incorporate social related key performance indicators, as well as the more common environmental targets.

Effective corporate governance is more important than ever

The coronavirus pandemic has, unsurprisingly, evoked a stronger interest in corporate governance. Investors are keen to see how company boards and executives are planning and executing business continuity initiatives and how they’re evaluating their strategy for recovery once they emerge out of this crisis. In virtual annual general meetings, boards and executives have to articulate how they are dealing with a wide variety of issues, including approach to dividends, compensation, and how they are addressing broader stakeholder interests from employees, suppliers and communities at this time.

Looking at recent examples, there are companies that have adapted quickly to the new realities and others who have been slower to react. Some companies have shifted their business and social purpose materially, including re-purposing their entire production lines or forming unique collaborations to support efforts against the coronavirus. A number of Pharma companies have joined forces in vaccine collaborations to fight coronavirus. Other examples include luxury goods and chemicals manufacturers shifting to produce hand sanitizer and hotels providing accommodation for homeless people or offering free rooms for National Health Service staff.

On the other hand, some companies’ actions (or lack of action) have been criticised by employees, customers, shareholders and other stakeholders.

All of these developments indicate that companies will be entering a period of enhanced scrutiny in a post-coronavirus era, where there is not only a focus on ‘what’ they do, but also ‘how’ they do it. This will also have an impact for those companies looking for financing through the capital markets as investors and rating agencies scrutinise governance actions and response.

Ushering in a new era of collaboration

Over the last few weeks we’ve seen a number of innovative public-private partnerships forming to help tackle the pandemic. Manufacturers are working with governments to produce ventilators and protective equipment, supermarkets are collaborating with local authorities to protect the elderly and vulnerable, technology firms tracking and predicting the spread of the pandemic and logistics operators using their systems and capabilities to procure essential products. Other companies have offered more flexibility in their products and services and/or donated to coronavirus relief efforts.

As we emerge from this pandemic, governments and corporates will likely act on the realisation that in today’s interdependent world they cannot go it alone. It will become important for companies to re-evaluate their social investment and stakeholder partnerships and redefine what a successful social engagement strategy represents. Coronavirus also offers lessons on how public-private partnerships can evolve to achieve global goals. Pharma companies, for example, are planning and aligning their investments in long-term pandemic preparedness to involve collaboration with a broad range of governments and stakeholders.

Learning the lessons from this crisis

The majority of corporates already have contingency and business continuity plans which are actioned in response to high-risk and low-probability events. However, coronavirus has highlighted the degree of interdependency and complexity that exists in global value chains, the shortcomings of existing business models and the limitations of crisis action plans. Furthermore, the pandemic has illustrated how companies risk their reputation when their corporate practices fall short of expectations.

Companies should use their own and others’ experiences to draw lessons and re-evaluate whether their business continuity plans are fit-for-purpose, particularly to address extreme global events. This includes, for example, engaging in enhanced supply chain visibility and conducting vulnerability assessments of business process outsourcing connections. In the medium- to longer term, and with the current geopolitical situation and potential emergence of trade protectionism, companies may begin to source more ‘locally’ for their supply chains or simplify them in other ways to ensure they’re better prepared for future shocks.

The UN Sustainable Development Goals (SDGs) can also provide a useful general roadmap to better understand the impact of external influences on business activities. Actions including regular risk reviews, assessments and disaster/contingency exercises are valuable planning tools as well.

Coronavirus: Wake-up call or hindrance to sustainable growth?

While the social and economic impact of the pandemic has been unprecedented, coronavirus will serve as a helpful wake-up call to governments and companies the world over. The climate crisis – and, in time, other urgent environmental and societal challenges – present similar global existential risks as does coronavirus and demand similar concerted and communal action.

Several coalitions, including politicians, companies, industry associations, think-tanks and NGOs, are arguing that the period following coronavirus is the right time to foment a sustainable recovery plan, and that the forced economic pause should be used as a turning point in rebuilding a sustainable global economy.

This would mean investing significantly in the green and socially impactful activities, together with the digital sector as well as in the circular economy. The capital markets have increased their interest in and support of green, social and sustainable financing, with many companies studying how they can best use the recovery to align their strategies and investments with their transition to sustainable finance.

Pioneering change through crisis

Milton Friedman once famously said that only a crisis – actual or perceived – produces real change. Many will agree that we’re at such an inflection point for change.

As we emerge out of this crisis, there will be no shortage of lessons and opportunities for companies to change. The coming months will test the intent of corporate ESG commitments in many ways. Those companies which show leadership and exhibit the right behaviours and actions towards their stakeholders during these times of extreme stress are likely to be rewarded and emerge more resilient and better placed for the future. Those that fail to adapt will find themselves exposed.

1 GDP forecast (as at 01.05.2020) is -4.2%. Our global growth aggregate is the seasonally-adjusted annual change and includes 18 countries together accounting for 82% of global growth. Countries included are the UK, US, Euro Area, China, Japan, Australia, Brazil, Canada, India, Mexico, Norway, Poland, Russia, Singapore, South Africa, South Korea, Sweden and Turkey. The growth estimates shown are year-over-year changes

ESG/Sustainability
CV19
Green bonds
IBOR reform
Sustainable finance


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