The immediate human and economic impacts of the coronavirus has been very visible across the world. It may take time for the non- economic and non- business issues to be heard, however, and this may only happen after COVID-19 is abated. Environmental social and governance (ESG) issues do not go away though and some even exacerbated by this global shock. In time, businesses will have to rethink the true level of resilience to potential shocks like a virus climate or otherwise.
Let’s examine how certain parts of the economy are affected by the spread coronavirus and what that means from ESG perspective.
The environment has benefited from fewer greenhouse gas emissions as people travel and commute less. But after industrial output results emissions could spike as energy demand grows.
Less air travel is seen as positive for the ESG as there was massive reduction in the travel. It has been seen as positive for the climate as less greenhouse gases have been emitted in the short term. Regulators may even stop requiring airlines to fly near-empty planes to retain takeoff and landing slots. There may be also are re-think about where we obtain fresh produce ie. less fruits or seafood being flown in from abroad may encourage more local sourcing.
As business travels has ground to a halt more meetings and even conferences are taking place virtually. Whilst this may not a perfect replacement, many in government, business, academia and civil society may consider virtual meetings positively, especially as it removes the travel aspect. The travel aspect is the largest slice of our carbon footprint. Hence more e-meeting and teleconferencing are seen positively for ESG.
Working from home will reduce commuting and hence lowering emission and local air pollution. But any savings in heating or cooling workplaces with fewer occupants will probably be more than offset by the extra energy used to heat or cool homes. The effect of WFH on ESG is mixed.
More online delivery has a mixed effects for ESG. There have been reports of significant increase in online ordering of groceries and daily items as a population avoids going out. The delivery van emissions are probably more than offset by fewer personal shopping strips but it could see more boxes and bags were used and discarded.
The slowdown in industrial output meant factories consume less energy and emitted lesser greenhouse gases. However, this is temporary. When production resumes, emissions are likely to spike back as energy demand grows and factories try to catch up on lost output. Hence, lower emissions from reduced industrial output has mixed effect on the ESG.
The same could be said on the economic stimulus from governments may focus on short term revival by helping carbon intensive industries. Resources could be redirected away from long-term issues such as climate change as political attention concentrates on preventing the spread of the virus and treating the affected. That could delay climate-related action policy or even negotiations including the political view to raise climate pressures in a 2020.
many outlets still serving coffee or tea have announced a complete move to disposable cups. However, disposable cups are often difficult to recycle which means that more waste will end up in landfill. This will also delay the move towards a ‘circular economy’ which promotes sustainable development and minimizes waste.
Moving on to social issues, COVID- 19 has forced a closer look at how resources are allocated within healthcare system, conditions for workers in the service economy and the impacts of flexible work and digital access on social inequality. Without a doubt, low- income households are likely to be hit the hardest, economically and some even fall into poverty.
The health impacts of COVID-19 highlights the vulnerabilities of global health system, with the number of potential patients far outweighing available beds in many countries. This raises the questions on how healthcare system will allocate services and eventual treatment. The long run positive effect on ESG is that we have to take a closer look at the resilience of healthcare system.
In respond to the virus risk, a number of employers are temporarily extending their leave policies to hourly workers and contractors. Even in the gig economy, Uber and Lyft have announced plans for sick pay or funds for drivers. The rethinking on how workers in the gig economy are paid is seen as a positive effect.
As more employers are encouraging flexible work arrangement so workers can self- isolate, although many are still unable to do so. Half of the college educated workers can work from home, only 13% of workers with a high school diploma can do the same. And the increase in people having to conduct daily tasks online could lead to functionality and digital access improving over time, but those without digital access may suffer. Indeed, social inequality is heightened by the virus so its effects on ESG is mixed.
As low income household, especially in developing countries, are unlikely to be disproportionately affected by the burden of COVID- 19. Besides the loss of livelihood ( due to quarantines or lack of steady work), any ill- health and potential loss of bread winner would have negative impacts on other household members. Those marginally above the poverty line could see themselves fall into poverty and would adversely affect any progress. The impact on poverty reduction measures is certainly seen as negative on effects on ESG.
We now move on to governance related issues. As more companies may offer proxy voting options for shareholders, balance sheets could see increased impairment charges and the quality of a company filings could diminish given or the challenges.
Large gatherings are discouraged across many countries, annual general meetings are proving more difficult to hold. Most companies must hold these meetings once a year and vote on certain company-related issues namely accounts and directors. There has been a trend in recent years for allowing proxy voting , electronically or mail, because not all shareholders can attend in person. A shift towards proxy voting is a positive effect on ESG.
Travel restrictions related to the coronavirus outbreak could limit the work of external auditors, possibly leading to incomplete reports, late filings on last minute announcements that companies will miss reporting deadlines. This could result in company fines, share suspensions, impact compliance with debt covenants, and add additional uncertainty to markets. The trouble with audit work is a governance flaw, hence negative effect.
So in conclusion, with few signs of the outbreak abating and a spillover impacts across almost all parts of the global economy, we believe there will be a lot of consideration given to the robustness of existing business models. Overtime we think questions will emerge over how resilient businesses may be to future shocks – ESG or otherwise.
