SUSTAINABILITY IN FOCUS
Engagement: COVID-19 Shifts the Focus
The aim of engagement is to elevate the importance of sustainability issues at companies, and where possible, at getting board-level attention focused on them. With companies rightly focused on the immediate coronavirus crisis, it is difficult to get boards to spend time on sustainability topics. We are mindful that priorities have changed, but we will also need to ensure that sustainability issues are not forgotten, and that companies continue to make progress where they can. Even in a time of short-term crisis, we need to keep our eyes on the long-term investment horizon.
Short-term decisions are always short-term
With the disruption caused by the COVID-19 crisis, “social” considerations are back at the forefront of ESG. While corporates work to navigate near-term challenges, it is important to keep in mind that decisions affecting a company's human capital, customers, and the communities in which they operate can have lasting implications, both positive and negative. These factors can be linked to long-term performance and returns. Short-term decisions made during the COVID-19 crisis around human capital, customers, and society as a whole can have reverberating impacts. Decisions around workforce management will vary materially across sectors and are likely to be dictated by a range of factors, including changes in product demand, government-mandated shutdowns, liquidity, type of workforce (e.g. hourly vs. salaried), and employees' ability to work remotely. The level of fiscal policy support will also be a driving factor. We should remain wary of the long-term implications that human capital decisions can have on employee satisfaction and corporate culture. Separately, companies' treatment of customers and their efforts to provide aid and solutions around COVID-19 could be an important driver of brand equity and improved customer relationships over time.
It takes many good deeds to build a good reputation
A 2017 study by the Optimy, a consultancy in corporate sustainability, suggests that 60% of customers are willing to pay more for products from companies with reputable brands and good values, and 71% of millennials would choose to work for a company that has demonstrated a strong commitment to its community. As the saying goes, “it takes many good deeds to build a good reputation, and only one bad one to lose it.” We will see greater focus on how companies treat their customers, many of whom may be under material financial stress, and also on the steps companies are taking to help society through this unprecedented situation. Both of these actions could go a long way in positively or negatively affecting a company's reputation in the eyes of its various stakeholders. Companies that successfully adapt in a dynamically changing environment, while operating in ways that maximize the benefit (or minimize the disruption) for all of their stake-holders, could realize long-term competitive advantages.
Why sustainable investing matters
Source: “The Millennial Investor”, Julian Seelan, Investments & Wealth Monitor, April 2019, SRI = Socially Responsible Investments
Questions that must be answered
We highlight questions to consider for engagement with companies around the impacts on human capital, customers, and the communities in which they operate:
- What efforts are being taken to support employees during the COVID-19 crisis?
- What are the near-term cost implications of human capital decisions being made?
- Are there union or contractual obligations that may impact the decisions made around human capital management?
- If employees have been temporarily furloughed, have they been given transparency around the length of leave? What benefits and support are available to them during their furlough?
- What efforts are being taken to ensure that employees remain engaged? If working conditions have changed, what steps have been taken to ensure employees can remain productive and efficient?
- Have there been changes made at the C-suite level (e.g. salary cuts) as a result of disruption caused by COVID-19?
- If demand snaps back, how quickly can the workforce be re-staffed?
- What actions has the company taken to support customers who may be facing financial challenges as a result of the COVID-19 disruption?
- How will the various government policy measures impact the company?
- Has the company made any extraordinary efforts in providing additional support to the community during the crisis?
We have a choice
The coronavirus pandemic is an unprecedented global crisis. The human, economic and financial impacts have already been huge, and it is not yet clear how quickly the virus will be brought under control in order for normal economic activity to resume. At a macroeconomic level, the International Energy Agency have warned that the slowdown is likely to stop many government-funded green projects, as governments urgently divert resources to keeping businesses and individuals afloat. The more significant point in relation to climate change is the impact of COVID-19 on the practical preparations and political momentum. We still have a choice to make this work.