COVID-19’s societal, environmental and economic fallout is forcing us all to reconsider the relationship between policy, business and society.
On June 10 Freshfields, hosted a global webinar moderated by Gillian Tett (Chair of the Editorial Board and Editor-at-Large US of the Financial Times). She was joined by a panel of leaders from business, municipality and finance to discuss the unprecedented decisions impacting sustainability we currently face.
This blog post aims to summarize the discussion and the important questions it raises. The full webinar recording is available here.
As Tim Wilkins, Global Partner for Client Sustainability at Freshfields, pointed out in his opening remarks, we stand at a crossroad: “Will the pandemic cause the world to scale back on its ambitions on climate change, human rights, corporate governance? Or, will we emerge in the recovery with new ways of working, new ways of operating and new ways of governing that are greener, more just, safer and healthier?”
Recent events in the US, and the global response to them, according to Tim Wilkins, underscored that racial equality must rise higher on the sustainability agenda. “Without justice for black Americans and racial minorities around the world,” he said, “there will not be a prosperous recovery. Redressing only a present-day harm to restore a status-quo peace will not lead to a sustainable outcome. Businesses and governments will need to address the systemic issues of racism around public safety, housing, education and employment.”
This March, as the COVID-19 crisis began to unfold, Gillian Tett said she had been worried that engagement over sustainability might drop. But questions of sustainability have actually become more important and the interest has only grown in a more sustainable recovery, she explained.
So – what comes next?
Localisation and social responsibility
Lindsey Clinton, Executive Vice-President at the NYC Economic Development Corporation (EDC), which promotes economic growth in New York City, shared three lessons learned over the last months addressing the pandemic.
- Those communities most impacted by the virus in New York City were already suffering, living in poverty, and represented a higher percentages of people of color. Climate change will also likely disproportionally compound this effect on the most vulnerable in society. Sustainable growth cannot be achieved unless everyone is included.
- Coronavirus exposed New York City to risks associated with offshore production. In this case PPE-related materials produced in Asia proved difficult to source. New York was able to leverage local manufacturing capacity with whom EDC already had a prior relationship and thereby created a faster response to the urgent needs. Even more encouraging, a number of those businesses were M/WBEs (minority, women-owned business enterprises) who largely work in business sectors particularly impacted by the economic shut down. This experience of supply chain vulnerability should attract more investors to fund more local businesses to secure stable supplies.
- Public transportation use dropped by 90 per cent in New York since the beginning of the crisis. The fear is that when workers begin to return to their offices in larger numbers, they will opt for private cars and once again lead to more congestion and pollution in the city – a clear step backwards for sustainability. One option will be to develop more micro-commuting solutions, such as bicycles and scooters.
The onshoring of supply chains raised interesting questions among the more than 650 participants of the webinar around how countries, which have typically been the low-cost suppliers of goods, will fare when wealthy nations produce goods locally. What does it mean for countries like Bangladesh when corporates no longer fund into their economies through supply orders? How could the resulting job and income losses be compensated? Who will carry the costs for the higher production costs? Will consumers be willing – and able - to pay more?
And - what role can innovation play?
Kelly Fisher, Head of Corporate Sustainability US at HSBC, highlighted their commitment as a global trade bank in making the supply-chains of their clients more sustainable. By setting high procurement standards, buyer firms can help drive sustainable practices in supplier businesses.
Investments for the future
Ron Gonen is CEO of Closed Loop Partners, a New-York-based investment firm which provides equity and project finance to scale products, services and infrastructure at the forefront of the development of the circular economy. He highlighted local manufacturing and communities as key investment destinations of the future. “Investment opportunities that we used to term as sustainable or circular economy before, around supply-chains or waste management, are now mainstream… they are being viewed as what you need to do to survive in the current business climate.”
In fact, Oliver Dudok van Heel, Head of Client Sustainability and Environment for Freshfields, said ESG funds have performed better than their peers during the crisis because they tend to be more resilient to change, they are less leveraged, they have more loyal employees and customers, and are better at managing supply chains.
Also the latest BlackRock research, Gillian Tett mentioned, points to ESG resilience during the coronavirus downturn. Quoting BlackRock’s report, “Companies with strong profiles on material sustainability issues have potential to outperform those with poor profiles.” The report further states, “In particular, we believe companies managed with a focus on sustainability should be better positioned versus their less sustainable peers to weather adverse conditions while still benefiting from positive market environments.”
The report noted that out-sized performance also has been powered by a range of material sustainability characteristics, such as employee satisfaction, strong customer relations, and board effectiveness: “Overall, this period of market turbulence and economic uncertainty has further reinforced our conviction that ESG characteristics indicate resilience during market downturns.”
In this context Viviana Alvarez, Head of Sustainability North America at Unilever, urged for the acceleration of inclusive capitalism, where sustainability is merged with corporate strategy. Consumers have significant power in demanding this, she said.
A member of the audience asked if investors and companies are prepared to earn less for a more sustainable and fair economy. Or framed differently: are investors and companies prepared for the risk associated with not investing in a more sustainable and fair economy? And what is the role of regulators to encourage sustainable investments?
Freshfields is currently conducting research for the UN Principles for Responsible Investment, UN Environment Programme Finance Initiative and the Generation Foundation whether and how legal frameworks allow for – and incentivise – investors to consider sustainability impact across major markets. It will be published in the second half of 2020.
The power of the individual
Each one of us, as a citizen and a consumer, has the power to accelerate the transition to a more sustainable world. We have the power to buy one product and avoid another, and in doing so to affect the companies that produce them. Transparency about what businesses, investors, governments or cities are doing is key in helping individuals make informed choices.
Viviana Alvarez explained that Unilever sees sustainability as a very important factor for their customers and that science-based information can change consumer perceptions. But she also stressed that consumers are in most cases unwilling to make a trade-off for sustainable items in terms of price or quality. During the crisis, people shopped less and bought what was available instead of prioritizing sustainability, which emphasizes again the importance of resilient supply-chains.
Unilever’s focus on climate, inequality and waste led them to take part in Loop, a new circular approach to product packaging introduced in early 2019, which includes 26 mainstream consumer goods brands. This is a global, waste-free shopping system that could tap into the COVID-19-related likely consumer willingness to test new shopping models. It is still too early, Viviana Alvarez said, to say how behaviour will be impacted over the long-term.
A webinar participant asked if the “long-term” commitments in timeframes of 10-20 years are the right time frames given the urgent issues facing us now. What can we do to get companies and governments focused on actions and accountability in the near-term?
As mentioned earlier, I think the power of the individual plays a critical role here, as consumers, investors, parents and voters.
A legal framework for sustainability
Does the current legal framework enable individuals, governments and business to make these necessary changes? What is the role of lawyers?
Oliver Dudok van Heel emphasized the long relationships lawyers tend to have with their clients, sometimes spanning decades (or, in the case of Freshfields, centuries). This yields insights on clients’ long-term needs, including sustainability.
Freshfields provides strategic legal advice to support clients transition towards a more sustainable and profitable future. We advise on sustainable financing of big infrastructure projects, corporate governance aspects, but we also incorporate sustainability into our core transactional work. Lawyers need to understand the risks in transactions that can arise from an environmental, social and governance perspective and consider this in the due diligence process.
Oliver Dudok van Heel explained that legislation is beginning to support a sustainable transition, but more needs to be done.
The EU Green Deal or EU sustainable finance action plan are very promising. In the EU, the crisis accelerated legal developments on sustainability, as Ursula von der Leyen, President of the European Commission, put sustainability at the heart of the EU’s COVID-19 recovery plan. As a firm, we monitor these developments carefully.
Keeping the social in ESG
Picking up on the opening remarks from Tim Wilkins, panellists and the audience alike stressed the importance of the social aspects of ESG, especially in the light of recent events in the US and beyond.
Ron Gonen suggested that governments have an opportunity to support job growth by working with major companies to bring supply chains and manufacturing back into local regions. Materials should be locally re-used and re-manufactured, providing increased employment and cutting landfill waste.
Kelly Fisher highlighted a potential role for banks, referencing the HSBC SDG bond framework. She explained that the apparel industry has many great programmes to enable women to access education. The same financial incentives a bank can set for environmental behaviour can be set for social behaviour, she added.
The social issues that might arise from onshoring supply chains are undeniably complex, deserving an international multi-stakeholder dialogue. The sustainable transformation of our economy is at stake.
Gillian Tett closed the session with what she called the “four Ss” that COVID-19 has shown us:
- science matters;
- systems can create contagion;
- society matters (if the weakest link in humanity’s chain breaks then we all suffer); and
- sacrifice (we are willing to sacrifice for social change: it’s a real thing and it can happen).
“Will the pandemic cause the world to scale back on its ambitions on climate change, human rights, corporate governance? Or, will we emerge in the recovery with new ways of working, new ways of operating and new ways of governing that are greener, more just, safer and healthier?