COVID-19: Implications for ESG disclosure
With the COVID-19 pandemic deeply impacting and disrupting business operations and the debate about whether governments and businesses should take the path of a green recovery, it is expected that ESG issues will be further integrated into how businesses articulate and redefine their value creation strategy. Recent evidence has shown that companies and portfolios with a deeper integration of ESG issues have responded better to the economic shock that COVID-19 has brought to the global economy and markets (source).
In this context, ESG performance evaluation and non-financial disclosure is key. The need to better understand the financial implications of non-financial performance becomes central to the medium-term profitability and resilience of businesses, their supply chains and consumer relationships. We expect that, as a result, companies will move towards a more integrated thinking and reporting.
As many organizations continue to focus their energy on responding to the impacts of COVID-19, we have engaged clients and partners to flesh-out the implications of the pandemic and its impact on corporate strategy and reporting practices and the upcoming 2020 reporting cycle.
Here are our top five things to keep in mind:
- Revisit materiality: organizations should understand what long, medium and short-term impacts COVID-19 is having and what exactly these impacts mean for the future of the organization. Materiality should reflect the implications for the business and its context over these different timelines. The next reporting cycle should allow companies to review any neglected ESG risk and new opportunity. Issues such as health and safety, supply chain resilience and digital transformation should arise as new or more material topics. It is impossible to ignore the material impacts of inequality. It is pronounced in both wealthy and less well-off nations, the latter suffer the most from the critical challenges we face, the climate crisis and a pandemic. Ignoring that fact is arguably willful ignorance.
- Reconsider the importance of context: long overlooked, this principle is intended to invite organizations to understand impacts and risks, goals and practices, and assess and disclose performance in the framework of the specific challenges and trends of the environmental, social and economic systems in which they operate. Material issues are also material as per the sustainability context of an organization. This requires the consideration of concepts such as planetary boundaries, doughnut economics, business impacts on multi-capital stocks, science-based targets, cost internalization or impact valuation to better define goals, and frame and evaluate performance. It also requires an understanding of the trends and challenges in the short, medium and long-term and how the company is responding through its business model and strategy. The commonality of these frameworks and concepts is the requirement to understand the social and environmental thresholds within companies, communities, cities2 and nations, and the recognition of the need to operate without damaging our supporting social and environmental systems and make better decisions about how to allocate the resources needed to deliver products and services (source).
- Connect financial and non-financial: the pandemic has reinforced the evident connection between financial and non-financial performance, one of the founding principles of and multi-capital thinking and the basis of TCFD recommendations. Regardless of the reporting standard your organization is using, investors, capital markets and boards are increasingly aware of this connection and require more information to better inform the decision-making process. It is expected that 2020 corporate reports will present an important focus on COVID-19, implications for the business, and the response and investments required to support employees, suppliers, consumers, clients and communities. This coming reporting cycle will lay bare the interconnection between business and society, the financial and non-financial, driving the need to ensure an integrated approach to corporate reporting.
- Go deeper into supply chain management and performance: almost every company has seen disruptions in its supply chain due to COVID-19. Supply chain vulnerability should lead companies to define resilience strategies based on better and accurate data relating to the ESG performance of suppliers not only in Tier 1 but also Tier 2 and beyond. ESG data and information regarding dependencies and risks emerging from global supply chains are key to assess financial exposure of a business and attract the attention of investors.
- Finally, are you future-fit and resilient: COVID-19 impacts are a taste of what massive effects a long-term global recession or climate change will have on our economy, society, political and environmental systems if we do not transform our business models and change our current path. Systemic approaches to how and for whom businesses create value are needed now more than ever. ESG disclosures and sustainability reporting should provide a transparent perspective about your organizational approach to the future and how preparations are progressing for a more inclusive and environmental balanced economy, under a more resilient business model.
As COVID-19 has resulted in a sudden slowdown of the global economy, it might give us the opportunity to accelerate our transition as companies, governments, communities and individuals to a more inclusive and regenerative economy that serves the well-being of everyone everywhere.
Do you want to share your thoughts or expand this conversation? Do you have questions about how to go further in your ESG reporting and transparency journey?