Resilience and business contingency are no longer only about how to continue operations remotely during a natural disaster. Organisations need to also consider how Environmental, Social and Governance (ESG) factors contribute to tangible financial risks, and how to manage them. By accounting for non-financial factors in their long- and short-term business plans, organisations will be better prepared for such ‘expected unexpected’ impacts, allowing them to optimise performance against current and future material ESG issues.
By accounting for non-financial factors in their long- and short-term business plans, organisations will be better prepared for such ‘expected unexpected’ impacts.
Corporate responses are now in the spotlight, revealing an organisation’s ESG integrity. Just as situations of stress show a person’s true characteristics, how an organisation reacts in global stress situations such as a pandemic is evidence of how deeply embedded ESG factors are in the organisation. The measures that organisations take to ensure employees’ health and safety depend on the type of labour policies in place. The decision to lay off employees during the pandemic relies heavily on the type of governance structure it has. How organisations convey layoffs reflects its culture. Any response can reveal the depth of ESG integration of an organisation, and whether those ESG factors are a part of the company culture or merely a check-box to comply with what’s required.
How an organisation reacts in global stress situations such as a pandemic is evidence of how deeply embedded ESG factors are in the organisation.
On top of the environmental factors that have long been dominant in the ESG landscape, investors are now increasingly interested in the social and governance elements. These newly prominent factors include health and safety policies, disaster preparedness, continuity planning, workforce planning, supply chain resilience, board effectiveness and employee treatment. Not only do these factors contribute to the way organisations handle crises, investors also regard these factors as a signal of future resilience instead of relying solely on historical data. With the data available, investors can now identify companies that can navigate unforeseen stress while highlighting companies that are aligned – or misaligned – to their ESG investment strategy.
An analysis of COVID-19 response signals done by TruValue Labs – such as changes in supply chain, corporate operational responses and labour policies – identified a correlation between positive sentiment and the number of response signals captured1. The same analysis also saw a shift in focus among investors on the policies companies have taken to ensure the health and safety of employees, and companies’ decisions to keep workers on the payroll, furlough or to announce layoffs. Along with investor perception, corporate responses have also become a powerful branding opportunity. Companies will be remembered and rewarded for their responses – such as charitable donations, monetary benefits and extended childcare leave.
With the data available, investors can now identify companies that can navigate unforeseen stress while highlighting companies that are aligned – or misaligned – to their ESG investment strategy.
1 https://www.truvaluelabs.com/news/press-release/truvalue-labs-introduces-free-covid-19-data-set-and-dedicated-coronavirus-esg-dashboard
The pandemic has highlighted the importance of materiality. While the concept of materiality is not foreign, the idea of dynamic materiality is less familiar. Dynamic materiality is when something universally cataclysmic happens in a very condensed time period. An issue that is immaterial today can become material tomorrow, to every company in every industry, for better or worse. We must recognise that the materiality of ESG issues changes over time and could happen slowly or quickly. For example, we typically consider issues of employee health and safety or labour practices to be more material to manufacturing companies where employees are in contact with machinery more often than, say, a bank teller. However, the pandemic has made the issue now material across all industries. With investors paying close attention to corporate responses, organisations should be aware that disclosures and weightage of such factors matter more today than before. An example of a slow shift includes a movement in stakeholder focus towards data security in the semiconductor industry, with data volume increasing from 3% in 2009 to 11% in 2019, signifying that it has emerged to become a material issue within the industry.2
For a while now, the 'S' aspect of ESG had taken a backseat while organisations make headlines with environmental efforts and carbon emission commitments. The pandemic has illustrated the importance of all three components, and the fact that none should be left as simply a box to be ticked. The new focus on ESG will put pressure on organisations to go a step further with disclosures of all aspects, providing in-depth information on actionable items and target outcomes. This comes with a great deal of responsibility to investors, where organisations must uphold their commitments and be accountable for what they do, not simply what they say.
2 TruValue Labs, Dynamic MaterialityTM: Measuring what Matters, page 13
