7 minute read 17 Jun 2020
Man enjoys view over mountains

Why COVID-19 could boost ESG performance and stakeholder capitalism

By Matthew Bell

EY Asia Pacific Climate Change and Sustainability Services Leader

Climate change and sustainability leader. Engaging in purposeful change and creating long-term value for global organizations. Savvy in science and technology.

7 minute read 17 Jun 2020

The COVID-19 crisis presents an opportunity for businesses to focus on their environmental, social and governance performance. 

At its 2020 Annual Meeting in January, the World Economic Forum (WEF) launched its Davos Manifesto, which stressed the importance of stakeholder capitalism as a response to the economic, social and environmental challenges the world is facing. In the run-up to the launch, Klaus Schwab, founder and Executive Chairman of the WEF, summarized the fundamental tenets of stakeholder capitalism as follows:

“The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large.”

There has been growing recognition of, and support for, the importance of stakeholder capitalism and long-term value creation of late, such as the work done by the Embankment Project for Inclusive Capitalism (created by EY and the Coalition for Inclusive Capitalism) to identify new metrics to measure long-term value. But has stakeholder capitalism been taken seriously enough by governments and company leaders? Recent events might suggest not.

As we have witnessed during the pandemic, most businesses and governments are neither forecasting megatrends nor understanding what the drivers are for longer-term risk and opportunity. It’s worth noting that “infectious diseases” featured in the top 10 global risks in the WEF’s Global Risks Report 2020 in terms of impact, though not in terms of likelihood, and so, when COVID-19 arrived, most countries and their governments were woefully underprepared. Within the space of a few weeks, organizations around the world were faced with more immediate concerns – in particular, the health of their workforce, protecting their consumers and society at large, and managing short-term loss of revenue as whole swathes of economic activity ceased or were drastically curtailed.

The purpose of a company is to engage all its stakeholders in shared and sustained value creation.
Klaus Schwab
Founder and Executive Chairman, World Economic Forum

But as the world moves into the next phase of its response to the pandemic, and certainly in the longer term, what can be learned from this crisis and does it present an opportunity for businesses to rethink what they do and how they do it? When organizations discuss economic risk and significant megatrends, and when they consider specific risks such as climate change and pandemics, they tend to take decisive action only when they consider that those risks are likely to impact them in the short term. Now that one of those risks has become a reality, that may change. This could be a once-in-a-generation chance to press the reset button. 

So how might the COVID-19 crisis help to accelerate the move toward stakeholder capitalism? It’s helpful to consider the possible outcomes through the lens of the three central areas that investors continue to use to measure sustainability: environment, social and governance performance.

Environment: old economy or new economy?

Climate change remains the most pressing economic and environmental challenge globally. The problem here has always been inertia; before COVID-19, the economic model in many markets continued to derive shareholder value to public companies regardless of whether or not they were polluting the environment. Despite commitments made at both national and company levels, action has not been taken quickly enough to avert the climate crisis.

Now, though, as the financial ecosystem rebuilds, there is an opportunity to rethink the economy of the future and move toward more sustainable practices. As nations return to work, what should they focus on? 

Take Australia, where I live, as an example: should it keep developing emission-intensive energy export infrastructure, or could it instead become the largest exporter of renewable power in the world? The move to green hydrogen (a clean-burning fuel that can be used for long-term energy storage) and to renewable power will continue; Australia has plenty of those natural resources and the technological capability to exploit them.

So, if public and private investment is going to stimulate an economic rebuild, will it stick with the old economy that is declining, or will it instead stimulate the new economy that is needed in order to avoid catastrophic climate change?

This could be a once-in-a-generation chance to press the reset button.

These are the kinds of discussions that are doubtless taking place in government departments and boardrooms around the world. I hope that as the light switch is turned back on again, a low-to-zero-carbon economy will develop, because that’s how countries will leapfrog their rivals in terms of productivity and progress, and it’s the commitment nearly 200 of them made under the Paris Agreement of 2016.

At a company level, there are likely to be many that make these decisions independently. Others may need to be nudged in that direction. In cases where organizations are asking for government support, or looking to the capital markets for debt or equity to support them through this period, it is likely that those key stakeholders will demand more from them in terms of what they need to do over the long term.

An example of this “nudging” in action has already been seen in Europe, where one major company has recently received government funding that is conditional on it taking steps to reduce carbon emissions from its activities. The European Green Deal – the European Commission’s ambitious plan to transform the 27-country bloc from a high- to a low-carbon economy – will play an important role here, with the potential to act as a framework for a more sustainable recovery in Europe.

Social: the importance of purpose and values

The majority of organizations have prioritized the health and well-being of their employees and suppliers over short-term profitability during the COVID-19 crisis. Individuals will certainly have taken note of how their employers have treated them. This is a time of taking stock for everyone, and many people are doubtless rethinking their priorities in areas such as the amount of time they spend traveling for business and the flexibility (or otherwise) of their working arrangements.

More broadly, people would generally prefer not to work for a company that ignores its stated values. There have been some notable examples of companies that have a “purpose” that they abandoned the moment the economy started to dip. Such actions erode trust and damage the organization’s reputation, and will echo in the minds of employees for a long time. It’s likely that those companies that didn’t stand behind their values during the COVID-19 crisis will lose their best talent when the economy rebounds.

Governance: a focus on sustainability at board level

Sustainability functions in large organizations differ from other areas of governance in that they look beyond a five-year time horizon. They analyze megatrends and think about how they could impact on the business. They also view issues through a wider stakeholder lens than other functions, examining how the business impacts on the community and the environment, and vice versa.

The COVID-19 crisis has shown the importance of this kind of broader, long-term thinking. Either during or after the crisis, there is likely to be a renewed focus on sustainability at board level as non-executive directors in particular ask questions about whether companies’ governance frameworks were adequate to deal with the crisis, how they are thinking about megatrends, and how they are building that thinking into risk management processes and strategy. Boards will almost certainly be spending more time discussing sustainability issues than they ever did before.

The question for many will be whether the sustainability function was influential enough at a time of need. Few companies, if any, actually contemplated the scenarios identified by their sustainability teams as part of their megatrend analysis and considered how they would respond. How these teams better feed into the risk and strategy functions of the organizations they serve will be critical.

 

Those companies that set an agenda for climate-resilient growth will be seen as an attractive prospect in terms of their long-term ability to withstand systemic shocks.

Gaining a competitive advantage through stakeholder capitalism

A crisis such as the COVID-19 pandemic is inevitably a time for reflection. Organizations will be holding a mirror to themselves and asking whether they really prioritize stakeholder capitalism and long-term value creation in the way they think and act. And their stakeholders – including investors, suppliers and employees – will be asking similar questions. Those companies that set an agenda for climate-resilient growth will be seen as an attractive prospect in terms of their long-term ability to withstand systemic shocks.

The COVID-19 pandemic, rather than distracting from the need to drive a sustainable future, actually reinforces that imperative. This is a once-in-a-generation opportunity for companies to realign themselves and prioritize long-term value creation. Everybody has been put on the same level playing field; the companies that realign themselves to the stakeholder capitalism agenda will have a competitive advantage over those that try to return to business as usual.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

The views of third parties set out in this article are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.

Summary

The COVID-19 crisis has created an unexpected opportunity for organizations to rethink what they do and how they do it. Those companies that realign themselves to the stakeholder capitalism agenda and prioritize long-term value creation through ESG frameworks may well have a competitive advantage in the coming years.

 

About this article

By Matthew Bell

EY Asia Pacific Climate Change and Sustainability Services Leader

Climate change and sustainability leader. Engaging in purposeful change and creating long-term value for global organizations. Savvy in science and technology.