Download full Board Memo 2021
Anyone expecting sustainability to fall out of focus amid the response to the pandemic was wrong. Companies with strong environmental, social and governance (ESG) scores have proven more resilient through 2020 and have outperformed the market. There are several complementary factors that explain their success and point to a 2021 where investors and governments insist corporate recovery plans feature a “building back better” focus on ESG matters.
These factors include the following.
- Companies with better sustainability credentials benefited in the crisis from stronger relationships with stakeholders including customers, suppliers and employees.
- Many governments, especially in Europe, have insisted that if trillions of dollars are required to rebuild their economies, those investments should be used to reduce emissions and drive other positive environmental and social impacts. The US has not yet tied stimulus funding to ESG goals but this could change in a Biden administration.
- The vulnerability of global supply-chains was laid bare by COVID-19, highlighting the benefits of both the low energy expenditure and resiliency of local sourcing. Further, as resources generally become more scarce, circular solutions that promote the re-use of products and materials are likely to thrive.
- Employers with the most advanced diversity programs engendered greater loyalty among employees and consumers in the face of global protests for racial justice.
- The Biden administration will see the US re-join global efforts to combat climate change with increased regulation and business incentives. For example, the President-elect proposes to achieve a carbon pollution-free power sector by 2035.
- Recent moves by the US Department of Labor (DOL) to limit the flexibility of fiduciaries of private-sector retirement and other employee benefit plans to consider ESG factors in their investing strategies will be frozen or terminated in a Biden administration. This includes the DOL rule passed just days before the election requiring ERISA plans to select investments based on so-called pecuniary or financial factors, rather than other goals or nonfinancial objectives.
Given these regulatory and investor dynamics, boards and senior leaders will need to get out early in 2021 with their “build back better" strategies by:
- using authentic sustainability brand management to improve customer loyalty;
- ushering in Workforce 2.0 approaches to employees that facilitate remote working and enable diversity to flourish at all levels of seniority;
- vetting global supply chains and nurturing local networks for essential goods, ideally based on circular economic principles; and
- tapping into growing green financing pools for both environmental and social projects.