Three ESG lessons from Covid-19 for the climate crisis

None of us coming out of the Covid-19 pandemic unchanged. The crisis has forced everybody to respond to new challenges and, largely, we have adapted well - parish council and cat filtered lawyer zoom calls notwithstanding.

Three ESG lessons from Covid-19 for the climate crisis

Climate change is an even more profound global crisis, but as yet we have failed to adapt to it as quickly. As we build back better post-Covid, we should apply what we have learnt from the pandemic to accelerate our progress on climate change.

The landscape can change suddenly, but so can our remedial action

Since March last year, we have seen first-hand how suddenly the global landscape can shift. We have felt the impact in all areas, with many companies having to rethink their business models.

The pandemic has also highlighted how remedial action can be taken much faster than we might previously have thought. We shifted from commuting to offices to working from home (or living at work, as it might better be described) within days, and we have witnessed the development of vaccines at a far quicker pace than usual.

We haven’t seen a comparable, instant shift in mindset about the urgency of addressing climate change, but there is a growing awareness of the value of sustainability and we are seeing companies’ and investors’ focus on ESG factors become more acute – particularly with respect to decarbonisation.

Shell recently announced an acceleration of its move to net-zero and AstraZeneca brought forward its target of zero carbon emissions from its global operations by five years to 2025. However, there is still a long way to go. Last September, EcoAct reported that less than half of the FTSE had committed to net-zero by 2050 and less than 20% had realistic decarbonisation plans in place. More recently, ClientEarth revealed that more than 90% of the accounts of the UK’s largest listed companies make no reference to climate change-related factors. Now that we know how fast we can move, there are no more excuses: companies must deliver on sustainability.

Investors’ expectations will also be different post-Covid. Companies shouldn’t forget that investors, whether pension scheme trustees or individuals, increasingly want to invest sustainably and with impact. The investment profession is expected to support the transition to net-zero by designing products that meet client demands and making disclosures that help clients make informed choices. Aviva Investors’ demand for companies to set credible, science-based net-zero targets is a sign of things to come.

Trust has never been more important

Another lesson to take from Covid to climate is the need for clear communication in building and maintaining trust.

A recent study of UK communications during the Covid crisis showed that trust in news declined over time, but trust in government communications fell even more sharply from 67% in mid-April to 40% in early August. The failure of the country’s test and trace system during this period may owe something to this collapse in trust. An Australian study on government communication strategies during the pandemic points out that ‘people are more likely to follow advice if they understand the rationale behind it…When change is at hand, leaders should communicate early, even with incomplete information. While people dislike uncertainty, a perception of obfuscation is worse because it diminishes trust.’ Both the Australian and UK studies point out the benefit of using experts and providing clear data and this is the approach we must take on climate.

Investors, too, rely on data and should demand clarity about governments’ and companies’ decarbonisation plans. Investors should be able to rely on the same depth of data about companies’ responses to sustainability as they require on how they steward clients’ capital to generate value. Better yet, investors should be able to see that governments and companies understand the feedback loops between sustainability policy and value generation as we move into an era of dual and/or dynamic materiality.

Addressing climate change must focus on the ‘S’ in ESG and be a social endeavour

Tackling Covid has required a strong social contract – an acceptance of our responsibilities to each other. Addressing climate change requires a similar contract. We are not just dealing with environmental factors, but also with social ones. There is a strong relationship between the ‘E’ and the ‘S’ factors in ESG – most obviously between biodiversity and health) that is summed up in the concept of the ‘just transition’.

Just as we have jointly borne the burden of tackling Covid, the costs and frictions of the transition to net-zero need to be shared. If they are not, it will be difficult to maintain the necessary momentum and political will. Investors, companies and government must work together to harness our respective resources and capabilities as we accelerate our joint efforts on this critical challenge.

Will Goodhart, chief executive, CFA Society of the UK

CFA Society of the UK

Topics: CSR & ethics
Tags: coronavirus | green finance | investors | ethics
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