9 min read.Updated: 09 Nov 2020, 12:16 PM ISTVinay Dixit,Lloyd Mathias
The pandemic has changed everything for business globally. Ignoring sustainable goals is no longer an option
In India, presently these ESG metrics are mostly relegated to the fine print but many business failures point to the absence of tight corporate governance standards
Covid-19 and its resultant upheavals have raised fundamental questions about some widely-accepted corporate beliefs: the role and scope of purpose in business; the need to look beyond the ecosystem of customers, employees, business partners and shareholders; the quarterly and annual evaluation horizons; and the need for optimal balance between efficiency and resilience.
The soul-searching due to the crisis is likely to warrant significant change—in societies, in business landscape and in consumption patterns. These massive shifts will require businesses to seriously introspect and develop new competencies to succeed in the altered environment.
Reactions of companies to the crisis have ranged from those who quickly reshaped and communicated their approach—work from home, shift to digital technologies, alternate distribution models—to others who seemed more reactive.
There have been cases of many companies that have moved decisively and beyond cashing in on the pandemic. Hindustan Unilever for one worked closely with police officers, sanitation workers and healthcare professionals to provide mass quantities of sanitizers, disinfectants and cleaning solutions, besides donating ₹100 crore.
Similarly, Diageo India quickly saw the spike in need for protective products. Its India team repurposed their factories to produce hand-sanitizers and donated masks for use by healthcare workers. It also created an insurance fund to support bartenders in this time of need. And, as early as in April, MG Motor India partnered with Vadodara-based MAX Ventilators to increase the supply of ventilators from 300 to 1,000 per month by utilizing its funds, engineers and facilities.
On the other hand, inconsistencies from companies who paid crores to the PM Cares fund while cutting costs by not paying employees, contract workers and vendors were being called out on social media. These are in stark contrast to the companies which announced wage cuts, especially among executives to pare off the need for job redundancies of the more junior members of the workforce.
Fact is it is increasingly clear that companies will have to consider environmental, social and governance (ESG) matters at the heart of their strategy and operations. Businesses can no longer sacrifice ESG goals at the altar of profits. This need is being driven by the actions of three key stakeholders: investors, employees and consumers.
The 2020 Edelman Trust Barometer studies trust among government, business, NGOs and media. It revealed that none of these four societal institutions are trusted, thanks to a growing sense of inequity and unfairness in the system. The perception is that institutions increasingly serve the interests of the select few over everyone.
The primary reason for this increasing distrust is people’s fears about the future. This is a wake-up call for businesses and institutions to embrace a new way of effectively building trust: balancing competence with ethical behaviour. Of the two primary drivers of trust: competence (delivering on promises) and ethical behaviour (doing the right thing), the latter was the one that people were most worried about.
The pandemic has highlighted the fact that while the whole world is facing the same storm, we are sadly left to our own boats to navigate our way out—some of them hugely inadequate. The migrant crisis in India during the early days of the lock down put the spotlight on the disproportionate impact of income inequality on weaker sections of society.
The increased penetration of the internet and widespread use of social media has enabled more people to develop a point of view and, more importantly, air it freely within and outside their circles. So, while “word of mouth" was always strong, it is the “word of mouse" that has become increasingly important in mobilizing public discourse.
With the political class seeing their electability is at risk, there seems to be a greater inclination of the political leaders to take action on ESG matters. Companies and governments have to accept and act on this or run the risk of losing out.
Earlier this year, the Black Lives Matter movement in the US, in response to the killing of George Floyd, created enough dissonance and employee activism within organizations. This forced companies to act, with many pulling advertising off Facebook.
Whether it is internal dissonance of employees or consumers holding brands to task if found wanting in their response to these injustices, we are witnessing a renewed zeal to discuss, debate and act towards improving these systemic issues. Clear enunciation of a corporate voice and issues that matter is now becoming important even as the ESG stance of a company is being increasingly viewed by potential employees, especially millennials, as a criteria towards joining/working in a company.
Finally, we are witnessing a rising swell in the economic model of investors. While the need for financial returns remains critical, it is no longer subservient to ESG matters. Several recent examples supplant this move—BlackRock, the world’s largest investment company $7.4 trillion in assets under management), has a clearly enunciated sustainability mission as a core goal in its investment decisions and has included Sustainability Accounting Standards (SAS) and the UN Principles for Responsible Investment (PRI) disclosures in its annual statements.
Sunita Subramoniam, Blackrock’s global head of sustainable investments, asserts that while they are maintaining weights of various asset classes (e.g. US equities, bonds, emerging market ETFs), now they are looking for sustainable companies in each asset class.
So, instead of just looking at US equities, they are looking for investments targeted at a subset of US companies that have a much stronger sustainability record. This sends a strong signal for all companies to get their act together, lest they miss out on an increasingly large investible pool.
Similarly, Goldman Sachs, another leading global money management firm, announced that it will not invest in any business that doesn’t have a woman on its board. More and more investors are now coming good on their commitments to ESG objectives before investing in any company.
The way forward
Businesses need to target becoming “planet positive" through adoption of Sustainable Development Goals (SDG). SDG alignment can also drive financial value by generating new revenues created by opportunities for market differentiation and growth besides addressing regulatory compliance and managing risks.
Companies are also changing direction based on customer feedback. As an example, in the 1990s, the big mantra for automotive companies was using recyclable materials (especially plastics and metals). But they found that while the customers appreciated this, it did not drive the purchase decision. Japanese companies were the first to look at overall cost of ownership and came up with much more fuel-efficient engines. This reduced the emissions on one hand and also provided an economic benefit to the consumers, thereby gaining significant share of the market.
There is clearly a need to calibrate organizations on their resilience and relationships with stakeholders. Companies need to start with their own employees, addressing issues like the remuneration disparity between the CEO salary and the average employee that is widening; downsizing as the first management impulse; issues of gender, race and diversity.
Similarly, how companies treat their business partners and associates needs more transparency, starting from the avoidance of cronyism; engagement and payment terms and adherence to ethics and values. Finally, one has to look at the impact on the community: how the company responds to customer grievances; contribution to the community; participation in local matters. Cases in point are the decisions by the Tatas, HUL, Asian Paints who clarified that they would not downsize their workforces.
Nike in the US has been at the forefront with its stance against racial injustice. It received a significant backlash (including from President Donald Trump) when it supported Colin Kaepernick’s act of defiance by kneeling during the playing of the national anthem. In fact, Nike’s Labour Day ad on the 30th anniversary of its “Just Do It" campaign celebrated this position.
Despite some strong negative sentiments (there were cases of people burning their Nike apparel) the positive impact was significantly stronger. The ad went on to win an Emmy Gold and more importantly, Nike’s stock hit its highest-ever price. This clearly showed the positive impact on investors, consumers and society.
Finally, there is a need to tighten corporate governance and define an ethical business code as a set of principles which a company adopts in order to influence the behavior of its employees. Some of the big corporate meltdowns in India in recent times—Satyam, Videocon, ILFS and Yes Bank—all point to weak corporate governance that did not provide enough control to keep profligate managements in check, to the detriment of the shareholders, customers and employees.
Of course, blending purpose with profit can generate a unique competitive advantage for discerning consumers and investors. It is notable that recently, a long term stock exchange (LTSE) has been set up that expressly looks at investing in companies that have a track record of emphasizing sustainability as being core to their strategy. It looks at a broad set of stakeholders and multi-year (even decades) performance of companies to ascertain whether they can be included in LTSE listing.
There is enough evidence to debunk the conventional thinking that investing for sustainability means sacrificing returns. During recent market upheavals like the Global Financial Crisis and the ongoing pandemic, the need for business resilience has become obvious. Given this, there is a need to integrate key ESG metrics into the core measures of corporate performance that investors, regulators and markets consider while making investment and consumption decisions.
But there is some good news. In the past decade, the importance of ESG has significantly grown. As an example, in 2011, only 20% of S&P 500 companies had any kind of reporting on ESG matters. By 2019, this has grown to a whopping 86%—and the remaining companies must surely be scrambling to develop these measures.
In India, presently these ESG metrics are mostly relegated to the fine print but many business failures point to the absence of tight corporate governance standards—weak boards; conflicts of interest like colluding auditors trying to maximize on allied services; and suppression of whistleblowers.
Clearly there are a few role model companies which have been seen as bastions for “growth with a heart". However, a large majority of corporates need to move with a sense of urgency in this regard. The example of global companies has shown that investing behind ESG does deliver longer-term sustainability. It behooves smart management and boards to consider limited short term investments that build resilience.
With the explosion of entrepreneurship, start-ups are mushrooming across the globe. It is extremely important that these businesses keep ESG matters front and centre right at their inception. Younger entrepreneurs do get it— their sensitivity is much more heightened towards these aspects. Large disruptions to celebrated unicorns like WeWork and Uber have shown that start-ups are not immune to material impact on business if they don’t pay heed to ESG matters.
The global pandemic has brought ESG upfront in public and corporate discourse. Let us not let this crisis go waste. Remember, there is “No Planet B".
Vinay Dixit is business transformation expert, CMO and mentor; Lloyd Mathias is an angel investor and business strategist