The pandemic has accelerated big ESG shifts being watched by investors

If COVID-19 has a silver lining, it could be the permanent changes to company work practices and corporate accountability.

Jun Bei Liu

Dec 5, 2021 – 1.59pm

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There is no doubt that the COVID-19 pandemic has come at great human and economic cost. But as we stand on the cusp of regaining our full freedoms, including travelling – and without dwelling too much on the omicron variant – there is a silver lining.

The pandemic has brought on a rapid shift in ethical and social awareness, and for the first time we are seeing a united front on these issues across consumers, big corporates and even governments.

A positive result from the pandemic is more flexibility and diversity in the workplace. Getty

Large corporations no longer just focus on making returns for shareholders. They are now taking a more holistic view, where boards and management teams consider the needs and wellness of other key stakeholders, including employees, suppliers, customers and the wider community.

So far during the pandemic, we have seen plenty of examples of corporates stepping up and helping communities.

Woolworths had priority deliveries and a dedicated shopping hour for their most vulnerable customers, such as elderly people and those with disabilities; Ramsay Health Care made hospital beds available in case of a high number of COVID-19 patients; and Telstra delayed planned cost cuts to keep employees on the payroll.

Executive compensation is another area where we have seen rapid shifts. Before the pandemic, there was a rise of ESG-related KPIs [key performance indicators] in management compensation plans. What the pandemic highlighted is the need for diverse measures – which are not all financially linked through executive compensation KPIs – to ensure the right incentives remain during times of economic uncertainty and volatility.

Companies with COVID-19-related measures and targets, such as employee wellness and other social KPIs in executive compensation plans, have proved to be better positioned to perform in the economic recovery and reopening.

Kept on payroll

It has also become clear corporates that prioritised employees during the pandemic were better positioned to respond to, and benefit from, the recovery as economies began to reopen, despite higher initial costs.

Those in the services industry that kept employees on the payroll during the pandemic have been able to operate at full capacity as soon as lockdown was finished, taking advantage of the pent-up demand. Those that did not have been hit by the severe staff shortages, and some of those businesses will remain closed.

So, the question is: will some of those corporate behaviour changes lead to a structural shift when it comes to corporate social responsibility or governance? I think yes.

The pandemic has led to a shift in working practices, greater focus on employee wellness, and more corporate accountability, including a greater acceptance of flexible working and more of a focus on employee wellness.

The pandemic was proof that, generally speaking, people can work well from home or in the office, unlike the previous belief that employees are less productive at home.

Strong employee performance results combined with heavy investment into technology platforms through the flexible hybrid model will most likely continue after the pandemic.

Many multinationals have now also expanded their approach to wellness to include mental health, with a clear boundary to support the work/life balance. Wellness is expanding rapidly as an industry: McKinsey estimates the market is worth about $US1.5 trillion ($2.1 trillion), growing at 5-10 per cent a year.

With more digitally oriented consumers who have more information at their fingertips, companies are more accountable to ensure processes are in place to manage risks across their value chain, have an engaged and satisfied workforce, and customer support to ensure their messaging to the public is right.

This trend also highlights the need for companies to consider the adaptability of their business model for a more digital environment, which presents growth opportunities into new markets.

Other structural shifts include sound governance on cybersecurity and supply chain management becoming must-have initiatives.

Cybersecurity breaches can disrupt a company’s operations and cause serious reputational harm when sensitive customer data is breached. Cybersecurity is increasingly being raised at the board level, with a chief information security officer (CISO) now common in most organisations.

Awareness about the importance of resilient supply chains has increased. Historically, the ESG focus on supply chains was centred around consuming controversial raw materials, such as conflict minerals or rare ingredients, and labour-related issues. However, COVID-19 has increased awareness on supply chain resilience, as issues related to supply and demand of goods have become more acute.

Building supply chain resilience is becoming a major focus to respond to potential disruptions in raw material supply. Many companies, especially in the manufacturing industries, are highlighting a shift towards “just-in-case” supply chain models, away from the conventional “just-in-time” strategy.

The global pandemic has had great human and economic cost. Yet, we are seeing multinational corporates, investors, stakeholders and even governments take a healthier and deeper view towards their impact and contribution to society. They know they are being more critically assessed on grounds far broader than simple profitability.

Future investment will become more discerning and will differentiate between those areas that are focused on ESG objectives. We have already seen the first signs of this through the pandemic, and the structural changes brought on by COVID-19 are profound and are touching every area of our lives. These trends are only set to accelerate. In a way, our society and corporations are now in a healthier state.

Jun Bei Liu is the lead portfolio manager of the Tribeca Alpha Plus Fund at Tribeca Investment Partners.