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The Covid-19 has made ESG alignment even more of a prerequisite

Since 2015, markets and legislators have been paying closer attention to Environment-Social-Governance (ESG) issues

  • Regulations are being rolled out especially in Europe and China requiring disclosure of material risks associated with Corporate Social Responsibility (e.g. Non-Financial Reporting Directive (NFRD) in Europe).
  • Assets Managers, sovereign funds, and major shareholders such as BlackRock (7 T USD AUM) request the publication of ESG performance from their investment companies as a way to better gauge their own risk exposure.
  • Over 400 ESG shareholders resolutions have been filed this proxy season alone, an average increase of 30% p.a.1, driving ever more attention to ESG issues as 2/3 directly target climate change, political spending, and women on boards and the working place.2
  • The consolidation of the ESG-rating industry by credit agencies (Trucost and Sam by S&PG, Vigeo-Eiris and FourTwenty-Seven by Moody’s, Sustainalytics by Morningstar, Carbon Delta by MSCI) pushes ESG issues to mainstream financial markets. This directly impacts companies’ bottom lines: ESG champions who communicate their performance have access to a significantly lower cost of financing.
  • The Green Bond market has been thriving approaching $260 bn in 2019, growing at 51%3 global corporate bonds 4.6% growth rate4.

The Covid-19 pandemic magnifies risks and potential impact, and speeds the necessity to act:

  • The COVID-19 pandemic has put global economies and companies’ resilience to the test and questions the current economic model geared towards constant optimization and minimization of working capital, fully relying on delocalization, short cycles, rock-bottom inventory, little slack and no redundancy.
  • The pandemic demands that we revise the assumptions that have dictated the international division of labor, starting with the frictionless movement of goods, individuals, and capital, especially in a context where climate change could impose even stronger and long-lasting restrictions on the movements of assets.
  • The pandemic also accelerates trends, spurring the switch to a digital economy and workplace with a long-lasting impact on the organization of labor, distribution of wealth, and career paths, and a potential exacerbation of all inequalities (wealth, health, education, jobs); all foreboding magnified risks and threats to companies’ lean models. Materiality is another name for timing: “The COVID-19 pandemic illustrates the materiality of environmental and social risk factors, along with the importance of strong governance.”5
  • The concept of risk materiality is obsolete. Risks should be assessed in terms on damage incurred along diverse time horizons.
  • Risks associated with climate change are already material and spread along an unknown but shortening timeline.
  • It is not a matter of if but of when. Levels of preparedness to confront ESG disruptions will sort out winners and losers, at both the country and company levels.

These disruptions call for a bold strategic response as “strong ESG performers with stakeholder-focused and adaptivegovernance structures are likely to remain resilient amid these rapidly changing dynamics.” 6

  • Reimagine supply chains based on ESG risks and develop new business models building up companies’ resilience (e.g. relocation of strategic steps, creation of new intermediaries by complementary partners, valorization of wastes for a circular economy, selection of suppliers and partners based on their ESG performance)
  • Let ESG criteria guide innovations, use ESG approach as the lens to identify corporate pain points and remediation options
  • Identify and generalize industry ESG best practices (e.g. create internal ESG-dedicated teams that become the ESG knowledge repository and can integrate any project structure; educate workforce)
  • Redefine corporate interactions within territories, tap local stakeholders’ knowledge and intelligence to build local resilience and map out common growth path and emergency response
  • Align corporate KPIs with ESG performance metrics in all relevant processes at all levels of the hierarchy including boards in order to embed ESG in every day’s decision-making process

 

  1. https://www.pionline.com/interactive/esg-resolutions-continue-gain-shareholder-support
  2. https://www.pionline.com/governance/2020-proxy-season-includes-400-plus-esg-resolutions-report
  3. https://www.climatebonds.net/resources/reports/2019-green-bond-market-summary
  4. https://www.theice.com/market-data/indices/growth-trends-in-the-world-bond-market-report
  5. https://www.spglobal.com/ratings/en/research/articles/200420-the-esg-lens-on-covid-19-part-1-11444298
  6. https://www.spglobal.com/ratings/en/research/articles/200420-the-esg-lens-on-covid-19-part-1-11444298

 

INUO Strategic Impact has the tools and expertise to support your strategic goals and create sustainable EBITDA

Full Potential Impact: definition and implementation of a robust ESG strategy, including identification of immediate risks and vulnerabilities across the value chain and design of a remediation roadmap based on disruption scenario analysis, reevaluation of the supply chain, alignment of companies KPIs with adequate ESG metrics, identification of relevant ESG best practices, preparation to ESG certification by a third party agency.

100-360! Full Efficiency Impact: 100 days to diagnose and deliver sustainable EBITDA-positive operational results, enabling the financing of a Full Potential Impact transformation program, whose monetizable results obtained after 360 days are characterized by ROIs of the order of 3 to 5.

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