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ANALYSIS: ESG and Covid-19 Responses Share a Common Blueprint

May 11, 2020, 8:56 AM

As the coronavirus pandemic and economic downturn continue, companies and communities must employ creative responses focused on resiliency. When a new crisis arises in the future, prudent companies will look into their past for comparable actions that they took to prepare for other crises. To that end, it’s worth observing how closely the acute risks of climate change, which pose immediate and profound threats to normal business operations, resemble the effects to business operations so far seen in the viral pandemic.

Going forward, there will be lessons learned from the coronavirus crisis that will inform companies as they prepare for climate change. Conversely, companies that have built climate change risk preparedness into their corporate strategies will likely be better prepared for ongoing effects of the pandemic.

Many companies have built response mechanisms and climate resiliency through their Environmental, Social, and Governance (ESG) and sustainability strategies and programs. But even with a robust sustainability program, the pandemic will force many of these companies to rethink their long-term risk management strategy, considering not just ESG and climate risks, but also pandemic and recession risks. Companies must ask themselves which of their existing risk management strategies can be adapted to this new reality, and what entirely new strategies may be needed.

Parallels With ESG Analyses

Risk considerations of a pandemic are not conventional ESG analyses, at least for most companies. But there are parallels.

Like climate change, the risk of a pandemic is not easily predictable, but it is also not unforeseeable. Both the World Bank and the World Economic Forum (WEF) published reports in 2019 emphasizing the importance of pandemic readiness and warning about pandemic risks to vulnerable businesses.

A central tenet of ESG consideration is to identify and communicate a company’s operational performance and risk exposure relating to ESG factors. Even before the pandemic, companies worried about blind spots in their assessments of the impacts of climate change. For the first time, climate-related issues dominated all of the top five long-term risks in terms of likelihood under the WEF’s 2020 Global Risks Report. As the concurrent effects of the coronavirus crisis and climate change continue, a comprehensive risk strategy must now incorporate both.

In many ways, Covid-19 and climate change impact the same ESG performance areas. For example, the ways that a company responds to new and immediate demands on their workforce—such as working from home policies—have an impact on that company’s ESG performance in the social context. Additional considerations will include workplace safety, data privacy, job security, and community impact. Some of these impacts will be disproportionately borne by already vulnerable communities.

Similarly, there will be impacts to business continuity and the ability to effectively govern an enterprise. There will be necessary changes to board and shareholder meeting procedures and policies. There will also be the continuing demands of strategic management decisions, especially as they relate to employment issues and continued business operations during a far-reaching crisis.

A company’s ability to adapt to these impacts will certainly be reflected in the ESG considerations of organizational stakeholders.

ESG and Climate-Related Reporting Practices

Companies and supply chains that have historically incorporated ESG considerations into their strategic planning are likely those that are most readily prepared to analyze—and disclose to stakeholders—the risks now posed by a viral pandemic and recession.

It is not clear what public companies’ ESG disclosures are going to look like after Covid-19, but the trend of investors and stakeholders demanding more quality and standardized ESG disclosures is likely to continue. SEC Chairman Jay Clayton and SEC Corporation Finance Division Director William Hinman recently emphasized the importance of public companies making high-quality disclosures about the effects of the Covid-19 pandemic on their operations, as well as their efforts to protect the health and well-being of their workforce, customers, and others.

Prior to the pandemic, investors and stakeholders were demanding increased assessment and disclosure of climate risks. This trend is likely to continue post-Covid-19. A company may want to take advantage of the Task Force on Climate-Related Financial Disclosures’ (TCFD’s) recommendations when carrying out a climate-risk scenario analysis and reporting on how it will identify, assess, manage, and integrate climate-related risks into its overall risk management strategy. Increasingly, the TCFD recommendations are being incorporated into rules and regulations in many countries. By following the TCFD recommendations, companies would be well prepared for possible disclosure obligations.

What’s Next?

Although it is difficult to predict any ultimate outcomes of this pandemic crisis, a forward-looking, risk-focused approach will enable companies to maximize resiliency during and after Covid-19. In addition, the long-term, relative performance of ESG-focused funds in response to the economic downturn likely will not be known for some time. Several major ESG fund managers are not turning away from ESG-focused strategies yet. Therefore, companies with integrated ESG strategies may benefit from the unique demand growth of ESG-oriented investment, even in times of pandemic and economic hardship.

The pandemic crisis, along with a global economic downturn or recession, will quickly put the Business Roundtable’s recent Statement of the Purpose of a Corporation to the test. If it is true that a corporation should value customers, employees, suppliers, and the environment to the same level as it does shareholders, as stated, then those shared priorities should be reflected in the corporate response to a pandemic.

Most companies will experience some level of challenge and difficulty in response to the Covid-19 pandemic, but those companies with established ESG strategies and infrastructures may be the first to bounce back. Companies that internalize the experiences of the pandemic, and apply lessons learned to the next crisis, will continue building resiliency to external environmental and economic factors.

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