11 minute read 12 Jun 2020
ey-bridge-over-falls

Why sustainability and ESG are now more important than ever

By EY Americas

Multidisciplinary professional services organization

11 minute read 12 Jun 2020

Sustainability is just as important now. Here are some practical steps for staying on track during the crisis.

Sustainability and ESG are now more important than ever.

The novel coronavirus (COVID-19) is testing our health, social and economic systems in extreme ways. This crisis is unlike many other disasters we have witnessed in recent years with respect to its pervasiveness and the speed at which it has affected, directly or indirectly, billions of people around the world.

As people and organizations face extreme circumstances and need to make immediate decisions, the present is, understandably, often prioritized over the future. When possible, it is important to balance responding to the crisis in the short term with maintaining resiliency to other risks facing business and society in the long term. For example, in the 2020 annual risk report from the World Economic Forum (WEF), the top five risks in terms of likelihood were environmental, and the top four of five risks in terms of impact were both social and environmental in nature. (1)

While the risk of a pandemic was noted as important in the report, and something for which we are unprepared globally, it was not identified as one of the top five risks in terms of likelihood or impact in the 2020 survey.

High-impact and highly probable risks, such as climate change, biodiversity loss and water crises, are just as present now as they were before the pandemic started and could amplify the challenges created by COVID-19. Thus, while dealing with the immediate challenges posed by COVID-19, maintaining strategies and programs that may reduce risks to other long-term threats will be important for building long-term organizational resiliency.(2)

Sustainability and environmental, social and governance (ESG) programs are key components of long-term value and business resiliency; but in the current crisis, they may seem like a luxury that can be sidelined for now.

However, to the contrary, strong ESG programs may help buffer the impacts of the current crisis, hasten recovery, spur innovation needed to navigate a “new normal” and reduce risks to additional crises in the future. For example, ESG funds have shown stronger performance than non-ESG rivals during COVID-19.(3)(4)

The crisis has revealed for many companies the benefits of investing in their social and human capital, which is enabling them to mobilize talent and resources in new ways and continue to function in uncertain circumstances through a culture of trust, commitment and innovation. Similarly, research has shown that a loyal and motivated workforce creates enterprise value over the long term through increased productivity, lower voluntary turnover and improved labor costs.(5)

The pandemic has also revealed the importance of other nonfinancial factors that impact business outcomes and are important to ESG investors, such as disaster preparedness, continuity planning and employee benefits, like paid sick leave and flexible working arrangements.(6) Some companies are showing their commitment to society by proactively seeking ways to be part of the solution to the pandemic as demonstrated by Apple, Tesla, General Motors and Ford Motor Company, who are directing their resources to increase accessibility and production to critical medical supplies.(7) Distilleries such as Anheuser-Busch, Pernod Ricard, Bacardi, Tito's and others have redirected operations to produce significant amounts of much needed hand sanitizer.(8) Google is supporting the state of California by providing 100,000 free Wi-Fi hotspots and donating 4,000 Chromebooks to students across the state.(9) Grocery stores around the country, from Whole Foods to Stop & Shop, are offering special hours for seniors and others who are most vulnerable to the disease.(10) In being part of the solution and adding value to their communities and society, companies are likely to secure long-lasting trust in their leadership, which is an increasingly important factor to investors, customers and future employees. (11)(12)

Given this, what are some tangible steps that companies should take with respect to leveraging their ESG and sustainability programs during the height of the pandemic and afterward to build a resilient business that creates long-term value for all of its stakeholders? Below are a few steps your company may consider now and in the months to come.

ey-view-of-bridge-at-sunset-ch1
(Chapter breaker)
1

Chapter 1

Short-term

Prioritize key issues, protect human capital and engage your stakeholders

Focus on your material issues:

Now more than ever, it is important to focus on addressing and managing the ESG issues that are most material to your company, that best capture your impacts on society and that are of highest importance to your internal and external stakeholders. If you don’t know what those are, a materiality assessment can help you identify them. If now is not a good time to do that, we recommend consulting the Sustainability Accounting Standards Board or the Global Reporting Initiative for guidance on the issues that are deemed relevant to your sector until you can conduct a materiality assessment.

Engage and communicate with your stakeholders:

In general, an advantage of leading ESG companies during this crisis is that they are more likely to take a stakeholder view of their business as opposed to a purely shareholder view of their business.(13) Stakeholder engagement is a key component of all ESG strategies and promotes transparency, trust and helps companies to understand stakeholders’ priorities and concerns. Now more than ever, it is important to reach out to your stakeholders to transparently communicate how you are addressing the crisis and convey your commitments to your values and your relationships in good times and bad.(14)  Some companies have sent out proactive letters and established COVID-19 information sites for their customers to let them know how they are dealing with the pandemic, addressing health risks that could affect people who use their products and services and what they are doing to try to address the problems the pandemic has posed.(15)  These proactive measures instil confidence and trust that a company understands the impact of the crisis, is positively managing risks and remains committed to the people they serve. A recent survey of approximately 12,000 consumers across 12 countries affected by COVID-19 found that 37% of respondents reported they had started using a new brand as a result of their crisis-related communications and 60% reported they were turning toward brands they felt certain they could trust during the pandemic.(16)

Protect your human and social capital:

Human and social capital are among the most valuable assets during a time of uncertainty. For example, firms that entered the 2008 financial crisis with strong social capital earned higher stock returns and experienced higher margins, sales growth and sales-per-employee relative to firms that entered the crisis with lower social capital.(17) Culture, trust and transparency are key building blocks for social capital and are critical for making sure employees and suppliers stay committed to finding shared solutions to challenges the crisis poses and can help keep the business going when working remotely. In addition, addressing the health and safety risks and the concerns of your employees is a hallmark of a strong ESG program and is critically important now, especially for companies that have employees and suppliers on the frontlines of exposure to the virus. Investors are already looking at the other side of this crisis and will want to invest in companies that made good decisions with respect to their employees during the crisis.(18)

ey-man-standingon-cable-of-bridge-ch2
(Chapter breaker)
2

Chapter 2

Medium-term

Take proactive measures to build resiliency and manage social and environmental risks across your supply chain and organization

Build resiliency into your supply chain:

COVID-19 is testing and disrupting global supply chains in novel ways.(19) Increasing visibility into your supply chain through traceability and supply chain mapping, for example, is now more important than ever for identifying and understanding where risks may exist as well as opportunities for efficiency gains. Engaging with your suppliers to explore how to best work together during the crisis and identifying opportunities to build agility and redundancy across your supply chains with respect to diversification of suppliers, sourcing options, production locations and distribution channels, based on lessons learned in COVID-19, may help reduce supply chain disruptions caused by a range of social and environmental risks in the future. A broad supply chain where you have strong assurance that workforces are being kept safe and treated well is a key component of resiliency, especially for companies that source products and services from all over the world. Companies that made smart decisions regarding their supply chains during this crisis are likely to be viewed favorably by investors.(20) Reference guidance and examples on developing responsible, resilient supply chains can be found here.

Integrate ESG risks into your core ERM strategy:

Many people are referring to the pandemic as a ”black swan” event, meaning it was a risk that was very difficult to predict. There are also risks, such as climate change and water scarcity, for which predictions are strong and scientifically robust, and businesses should prepare for both. This crisis has demonstrated the impacts that risks of all types can have on a company. Integrating material ESG risks into core enterprise risk management (ERM) activities can help prepare you for nonfinancial risks that can have significant financial impacts on an organization. Guidance on integrating ESG into ERM developed by EY, the World Business Council for Sustainable Development (WBCSD) and the Committee of Sponsoring Organizations for the Treadway Commission (COSO) can be found here. In addition, conducting scenario analyses can help you explore how different risks, such as a pandemic or climate change, may affect your business. For example, the Taskforce on Climate-related Financial Disclosures (TCFD) recommends and provides guidance on conducting scenario analyses as a tool to help businesses assess implications of climate-related risks and opportunities as well as for informing stakeholders about how the organization is addressing risks and opportunities. 

ey-downward-view-of-bridge-ch3
(Chapter breaker)
3

Chapter 3

Long-term

Update your sustainability and ESG strategy to manage and measure impacts that will support Long-Term Value creation in a new world

Sharpen focus on long-term value drivers:

While a crisis naturally focuses attention on the present and the short term, increasingly, investors likely want to see business strategies tied to long-term value creation. Today, the majority of a company’s value comes from nonfinancial drivers that create value across societal, customer and human dimensions. Components of long-term value such as culture, innovation and intellectual capital may become even more important for recovery as businesses are challenged with finding new ways of working and identifying new solutions and opportunities in a different post-COVID-19 world. Investors appreciate this and want to invest in companies that will be resilient and successful over time.(21) An ESG strategy is an important element of a broader long-term value strategy that is tied to a business’s purpose and vision. The EY long-term value framework, as demonstrated by the Embankment Project for Inclusive Capitalism (EPIC), provides a market-based approach to help develop and shape this discussion. This crisis represents an unfortunate, yet critical, opportunity to rethink short-term strategies and develop long-term value strategies that encompass both financial and nonfinancial drivers of value that can offer resiliency during a crisis and will be more sustainable over time.

Focus on impact management and measurement:

After this crisis, we will likely see the beneficial impacts of actions by companies that have committed to solving problems posed by the pandemic and/or have an ESG foundation that contributed to their resilience throughout the crisis. Whether it be contributing to the needs of their communities, supporting their employees or managing exposure to other risks, such as climate change during this period, understanding how your actions and business strategies created positive or negative impacts for your stakeholders and your business overall, will likely be important to report to investors and can serve as critical inputs for continuous improvement aimed at building a sustainable, resilient business strategy in the long term. Developing an impact management and measurement framework, based on a theory of change, can provide you with the framework you need to identify, implement and measure the impacts your organization creates for your stakeholders in priority ESG areas. Guidance and examples on how to do this can be found in the Embankment Project for Inclusive Capitalism and the Impact Management Project.

Refresh your ESG strategy:

Current issues like climate change, culture, diversity and inclusion, and transparency will be as important as ever after COVID-19. Some issues may be elevated in greater importance in the aftermath of COVID-19, such as flexible working arrangements, community partnerships, innovation and enhanced health benefits. When time and resources allow, it will be important to revisit how COVID-19 may have affected or shifted the priorities and needs of your stakeholders and assess the implications this may have for your business and the ESG issues, actions and initiatives you prioritize.

Crises also provide unfortunate yet valuable learning opportunities by helping us understand the factors that contribute to resiliency. Similarly, we will likely learn a lot more from companies that emerge intact and resilient to this crisis and the role that strong ESG and sustainability programs played in their resiliency and recovery as well as new opportunities that emerge as a result of the pandemic. Early observations are showing that a solid ESG foundation can help companies navigate, manage and recover from this crisis.

Summary

As organizations face extreme circumstances and need to make immediate decisions, the present is, understandably, often prioritized over the future. When possible, it is important to balance responding to the crisis in the short term with maintaining resiliency to other risks facing business and society in the long term. Sustainability and ESG actions can help navigate the crisis while building resiliency and long term value creation.

About this article

By EY Americas

Multidisciplinary professional services organization