ESG – Covid cure-all or emperor’s new clothes?

6 July 2020

The ESG ‘movement’ had been gathering pace well before the Covid-19 outbreak, driven by increased investor scrutiny and an acknowledgement, spelt out most dramatically perhaps by the US Business Roundtable in August 2019 that businesses needed to be run for all stakeholders, not just investors.

The agreed statement ended: “Each of our stakeholders is essential. We commit to deliver value to all of them.”

Powerful stuff which, in the words of Darren Walker, President of the Ford Foundation, will, “…result in shared prosperity and sustainability for both businesses and society.”

Equally, demand from employees to understand the role their employer plays in society and customers wanting certainty that they were transacting with ethically sound companies have raised the issue up to the fringes of many boardrooms. Even before the crisis leaders had already gone much further, publishing and measuring data and speaking with conviction about the purpose their organisation played above and beyond meeting quarterly reporting targets and minimum disclosure requirements. At the other end of spectrum many remained unconvinced, questioning just how much of ESG is cosmetic and citing a lack of evidence that embracing sustainability had any impact on the bottom line or share price.

Covid-19 has prompted a huge uptick in interest in ESG. Distressed companies have stated their broader role in society and very real actions have shone through – from responsible use (or non-use) of government assistance, the re-direction of resources to helping combat Covid-19 whether through re-purposing manufacturing facilities to produce PPE or releasing staff to volunteer. Equally Covid-19 has forced changes in working practices with many commentators suggesting a reset, long overdue, is now taking place as companies put in place more flexible working practices. At a macro level many have called for the refinancing of the global economy to come with green strings attached – new commitments to be required across a range of green measures to be the conditions of bailouts.

This vision is, of course, attractive: the rampant capitalism of the early 2000s brought back to earth, with a new, fairer economy emerging, where all stakeholders are treated equally and CEOs wake up in the morning thinking not just about financial returns but how their actions contribute to a better society.

Unfortunately much of the above may well be wishful thinking. Some businesses have fared well in this crisis, more often as a result of their sector and services than social purpose. Stricken retailers may well wish to treat their employees and suppliers well but when it comes to waves of redundancies and store closures harsh reality bites. As GDP figures tank how many businesses will have the room to consider their ESG credentials when survival and right-sizing occupy senior management day and night? Pressure can be applied from the top, you might argue, but as was pointed out on a recent Fitch webinar, how many regulators and governments are really going to crank up expensive new reporting standards and targets as the constituents of their economies are struggling for survival?

So is it all doom and gloom and has ESG had its moment? To answer this it is perhaps most helpful to understand what ESG is.

When talking to investors who assess ESG, what most are looking for is a company that through good management is creating long term sustainable value and providing data and measurement to help shareholders understand what drivers the senior management believe are material to doing this. ESG therefore is more about assessing long term value drivers than reporting on a random selection of data points that fall in an ESG bucket.  Rigorous internal assessment is needed to understand what sustainable principles drive value creation. A clear articulation from senior management, enhanced measurement and reporting and increased transparency will drive a better understanding amongst employees, investors and customers, fostering a deeper relationship and understanding of what role a company plays in society and what actions the company will take to accelerate measures that drive sustainable value.

So, this isn’t the emperor’s new clothes, rather an internal reflection of measures which will ensure the long term survival of a company. This should lead to focus; some activities that are ‘nice to do’ should be discarded, and other areas will require genuine commitment in terms of new targets, reporting and governance.

Picking up on an early point made about a short-term push back against ESG, at DRD we don’t see this as a long term reverse, rather a tactical reflex. This should temper those pushing the agenda to recognise economic realism but not deter efforts to enhance reporting and sustainable business practices. In none of the conversations we have had does anyone believe ESG has gone. Consumers will care and ask questions, employees want to know why they get up in the morning beyond pay and rations and ESG indices and reporting standards will continue to drive appetite for metrics and measurement. But it needs to be real.

Lawrence Dore, DRD Partner

PHOTO Credit: Ethical Boardroom