What will the post-COVID19 ESG agenda look like?
2 June 2020 - By Nicoletta Ferro, Senior Account Manager
While COVID-19 is still in many ways an unknown disease, the scientific world agreed on a general understanding of the factors triggering the pandemic. As with previous coronaviruses such as SARS that have anticipated the current global situation, the origins of COVID-19 are to be found in the human interference with fragile natural ecosystems due to a prolonged exploitation of natural resources.
Issues generally found on the Environmental side of the ESG agenda - mapped by the Datamaran ontology list - such as land degradation, deforestation, loss of biodiversity, water pollution, and animal preservation have proved fundamental in shaping the roots of the pandemic, potentially causing new strains of infectious diseases to thrive.
Once the sustainability origins of the crisis have been acknowledged, we may wonder whether the ESG agenda has been impacted by the crisis or not. The answer is yes. The impact seems to have been positive in keeping the attention on and even rising ESG prominence within the corporate world.
This is partly due to the continued focus of the investor community, especially as ESG-portfolio investments are outperforming non-sustainability related portfolios during the downturn.
As the crisis unfolds, it marks a turning point for ESG with relevant outcomes for disclosure, materiality, and risk management.
1) Risks are never isolated
The crisis has awakened companies to the financial realities of ESG risks (and opportunities). But the very nature of external risks is rapidly changing. They are emerging and manifesting at a faster pace than ever and are strongly interdependent. As the pandemic has shown, nothing happens in isolation. When one dimension is involved, the consequences are soon extended to the others.
2) ESG climbing the financial risks ladder
Although Covid-19 was not a totally unknown risk to either governments or companies, it has been a continuously underestimated one. Risks are multiplying and emerging today at a faster rate than ever. These risks have the potential to threaten the stability of companies and directly affect their financial performance. The evolving nature of risk calls for a progressive integration of ESG into existing corporate risk management practices and frameworks and to consider them at the same level as financial risks. CFOs will be in charge of this shift, backed by sustainability managers and other members of ESG teams.
3) Dynamic materiality is on the way
What the crisis highlighted are limitations of traditional approaches to materiality, accelerating a transition that was already on the way. Materiality, as it is conceived and used today, is very valuable in providing a still and static picture of the potential ESG risks, but is not able to capture rapidly changing external scenarios where what is not material today can become material tomorrow. In this sense, the COVID-19 pandemic serves as a major turning point for materiality - unleashing new approaches backed by technology such as the one provided by Datamaran. These new approaches are known as dynamic materiality, providing a continuous horizon scanning capability.
4) ESG entering the Boardroom
The ESG roots of the crisis have put a renewed spotlight on sustainability issues, opening the doors of the Board room. Investors are now eager to know how companies have managed to navigate the crisis. From their side, governments expect companies to play a role in managing the outbreak. Consumers, as well, have shown that they value companies who have made positive contributions in this regard, while naming and shaming those who did not contribute. The Board can not be detached from all this and at the same time integrate ESG reasoning into strategic planning.
5) A different approach to disclosure
Transparency is more important than ever, and investors want to know how companies have weathered the storm. Accountability and disclosure are at the center of this. Companies are currently discussing how to disclose their crisis strategies and mitigation actions through the traditional tools such as corporate financial reporting, but some are looking at additional methods. These additional methods include focused issue-specific reports, CEO statements, and technological means - all excellent practices for the future.
6) More focus on S & G than E
The crisis has driven the focus of the attention on the Social and Governance dimensions of ESG, temporarily overshadowing the Environmental element that was so central prior to the pandemic. Topics such as employee health and well being, community relations, crisis management, and supply chains are rising to the fore now and will affect the way companies will face the recovery. Issues such as taxpaying are expected to be more relevant in the near future. This realignment of priorities is likely to be a temporary situation, however, that will eventually be resolved when we learn to look at ESG in a more comprehensive way.
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