Sustainable investing and corporate ESG (Environmental, Social and Governance) performance were high on the agenda for many business leaders as one of the most significant legacies coming out of 2020.
ESG indicators are critical factors that assess the responsible actions of a company and predict sustainable future performance. It is now taking on far greater significance in driving investment decisions and is expected to continue to increase in a post-pandemic world.
This is because in the wake of the pandemic, the investment community is directly corelating business continuity and resilience with ESG performance and corporate sustainability. Two key factors that greatly affected business continuity and resilience in this region in 2020 - and increasingly being viewed as indicators of ESG performance - are digital infrastructure and supply chain resilience.
Nothing matters more
Digitization was on the agenda for business leaders across the region, but for too many it had not risen to the top of investment priorities. Companies that continued to de-prioritize digital infrastructure paid the price as the pandemic emphasized its necessity. Secondly, when the global lockdown hit, businesses with poorly structured and antiquated supply chains lacked the agility, transparency and redundancies required to sustain operations.
While lacking digital infrastructure and maintaining an outdated supply chain may not equate to ethical shortcomings, they are viewed by the global investment community as directly related to responsible ESG performance and key to building trust in predicting future results.
Already on board
More than 70 per cent of pension funds and sovereign funds now have ESG policies in place. This was just not the case five years ago. Since asset owners and investment managers have these policies in place, the companies they invest in will have to respect their ESG criteria and report on ESG performance.
Bottom-line, both digital infrastructure and supply chain transformation are corporate sustainability issues that require attention... and investment. While there is a cost to building resilience into an organization, both the immediate and long-term returns greatly outweigh the investment, particularly as the prioritization of ESG investing continues to grow.
A price to pay
The ultimate payoff, or "punishment", of investing in ESG principles and practices is the cost of working capital. The global financial community is directly linking the cost of financing to sustainability metrics, including the ability to produce data-backed evidence of protection from exposure to supply chain issues and other ESG-related risks.
The world’s largest asset management firm is a great example of how the pandemic is reshaping the investment point of view on ESG performance. In an annual letter to CEOs earlier this year, BlackRock Chairman and CEO Larry Fink said: “Climate change has become a defining factor in companies’ long-term prospects… but awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”
In the midst of the pandemic, Blackrock quickly shifted and expanded its definition of sustainability. “Investors and others will be looking to see how companies are rebuilding their businesses for long-term sustainability and value creation,” it said in its 2021 stewardship expectations.
The failure of major organizations worldwide to sustain operations during the pandemic had direct environmental, societal and governance implications. These issues contributed to trillions of dollars being locked up in frozen supply chains, mass bankruptcies, and loss of jobs.
Now is the time for companies across all sectors to apply the learnings about business continuity, resilience and sustainability that came to light during the lockdown. Those that proactively adopt and invest in sustainable ESG principles will be best positioned for success.
Those that don’t will find themselves exposed to serious risk and potential loss of confidence with investors.
- Dan Quinn is General Manager of Tradeshift Middle East & Africa Region.