In this article, we look at how the pandemic is shifting the business paradigm and the increasing role that environmental, social and governance (“ESG”) issues are playing in that transition.
"The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind." Gordon Gekko, Wall Street, 1987.
For the second time in just over a decade , massive state intervention has been necessary in the private sector of developed economies. The liberal economic orthodoxy that has prevailed since the 1980s is under attack like never before as the result of the COVID-19 pandemic. After the initial emergency response by governments and Central Banks to hugely increase liquidity in the system in April and May, governments are now looking to supplement these emergency measures with longer-term and more pervasive State interventions to prevent mass unemployment and social breakdown, as well as to build resilience into their economies and healthcare systems.
With the results of the policy of austerity introduced following the financial crisis, in terms of increased wealth inequality, fresh in voters’ minds, alongside mistrust of those financial institutions that benefitted most from previous taxpayer largesse, a consensus appears to be emerging that a similar policy response to the current crisis will not do. The issue of trust looms large, but is much less amorphous than at the time of the financial crisis. This time around, trust has an existential dimension: at its most basic, the pandemic means that employees and customers need to trust that their workplace is safe if the recovery is to succeed.
"Dear UK plc, COVID 19 creates an unprecedented challenge for governments, economies, companies, investors and individuals … As providers of risk-bearing capital we have an important role to play in this, alongside governments and banks. Our message is clear: in the short term companies need to prioritise their key stakeholders, in particular employees but also customers and suppliers. We believe that by focusing on these drivers of long-term returns the benefits to UK investors and the economy will eventually be forthcoming." Schroders, 2 April 2020.
In turn, trust breeds confidence. And confidence is perhaps the most important ingredient in any economic recovery. So it’s hardly surprising that business, private enterprise is being expected to play its part.
Building back better
Since the COVID-19 pandemic, there have been numerous calls for business to "build back better". The Financial Times laid out a range of approaches in the article "Business 'saints and sinners' in the coronavirus crisis" on 18 May. Examples of positive corporate behaviour in response to COVID-19 highlighted by the FT include:
- Repurposing production to create PPE
- Allowing priority access to shops for the vulnerable and front-line works
- Guaranteeing pay and jobs
- Making corporate donations to charitable causes
- Negative corporate behaviours include attempting to open shops contrary to government guidance and poor treatment of staff and whistle-blowers
COVID-19 – government support
Our summary of international government support mechanisms can be found here. For the most part, support has been "NSA" (no strings attached), much in line with the precepts of regulation of the gig economy and of social media, but out of step with the regulation of banks and financial institutions. However, there is increasing attention as to whether or not this should be the case and, in some cases, strings were attached from the outset.
In the US, for example, on the "social" side, companies receiving certain forms of COVID-19 support were required to agree to compensation restrictions for high earning employees and commitments to make reasonable efforts to maintain payroll and retain workers. On the "governance" side, Poland and Denmark introduced measures to prevent beneficiaries of government support being ones that rely on offshore tax jurisdictions. Whilst on the "environmental" side, Air France's rescue package is conditional in a reduction of carbon emissions.
UK change of heart
It was announced in mid-May that British businesses will face curbs on dividends and executive pay if they get more than £50 million ($61 million) of government-backed coronavirus loans or borrow from the Bank of England for more than a year.
MPs have strongly criticised the fact that certain companies accessing government support have been paying dividends, and accused ministers of acting too late with restrictions. Andrew Mitchell MP is reported to have said: “This sort of corporate behaviour is outside the spirit of our common endeavour and brings these companies into disrepute. When the reckoning comes once we are through this stage it will not be a happy one for companies that do this.” Margaret Hodge MP has said that it was “absolutely scandalous that so many large overseas companies have tapped up the UK taxpayer while handing out dividends to shareholders”.
There has also been press criticism of furlough payments being used for redundancy payments. Others have objected to the bail out of some EU airlines as deliberately creating an uneven playing field, contrary to the EU's "open skies" policy, and potentially in breach of state aid requirements.
This emphasises that governments will need to consider the cogency of their policy commitments. Policy schizophrenia will not help companies to build and implement a coherent ESG-guided strategy.
Merely reinforcing a trend?
However, COVID-19 should not be seen as being responsible for a new wave of concern over corporate responsibility and sustainability in its own right. Indeed, organisations such as the Principles for Responsible Investment (PRI) and the Task Force on Climate-related Financial Disclosures (TCFD) have been at the forefront of such a push for some time.
Presciently, as it turns out, in January 2020 the European Commission published a "Study on due diligence requirements through the supply chain", which aimed to:
- provide a detailed examination of the existing regulation and proposals for due diligence in companies’ own operations and through the supply chain for adverse human rights and environmental impacts, including relating to climate change; and
- develop and assess regulatory options, including the possibility of introducing due diligence requirements as a legal duty of care at the European level, as well as the initial perceptions of stakeholders relating to possible regulatory options.
Whilst there is no guarantee that the measures contemplated by the report would have changed corporate behaviour overnight, they do seem to be relevant to many of the ESG and social licence to operate-related matters that are highlighted above.
Further, the European Commission has gone on to announce that it will develop legislation that would require EU companies to carry out human rights and environmental due diligence which will be "inter-sectorial, mandatory and of course with a lot of possible sanctions". Our full summary of this announcement is available in this article.
Green new deal and sustainable finance
The above initiatives do not stand alone. In March 2020, the European Commission adopted a new Circular Economy Action Plan (the original having been adopted in 2015). This is one of the main blocks of the “European Green Deal”, also adopted in 2020, and which sets out Europe’s new agenda for sustainable growth. The Plan announces initiatives for the entire life cycle of products, targeting for example their design, promoting circular economy processes, fostering sustainable consumption, and aiming to ensure that the resources used are kept in the EU economy for as long as possible. It introduces legislative and non-legislative measures.
These are just two key measures in a range of initiatives being promoted in the EU, many of which are summarised in our article looking at current ESG trends. They include ESG disclosures and a taxonomy of environmentally sustainable economic activities. It remains to be seen whether the UK will be bound by recent EU ESG developments.
What does this add up to?
Only time will tell, but here are some things for CEOs to look out for:
- Enhanced due diligence, including of the supply chain. Concerns in this regard should include whether the "E" in ESG is being properly considered and the implications of having to achieve "net zero emissions by 2050", how to ensure that the "S" in ESG is being properly defined and monitored and whether the company could be open to any accusations of mal-governance (note the "G").
- Increasing importance of ESG disclosure, and preparedness for awkward conversations with stakeholders about balancing any competing ESG and financial priorities as well as long-and short-term considerations.
- Identifying any processes that need to be embedded in order to facilitate the above.
- Constantly reviewing corporate behaviour in line with best practice. A company's social licence to operate will evolve, with or without the lingering threat of COVID-19.