Top Five ESG Considerations for Public Companies

As the world continues to respond to the threat of COVID-19, financial markets and corporate constituencies are looking more closely at how environmental, social, and governance (ESG) considerations can help companies respond to the impact of COVID-19, both in the short term and long term, drive the re-imagination of global business models, and prevent crises in the future. COVID-19 has highlighted that companies face much more than just financial market risks, and the failure to take due consideration of such non-financial risks and related ESG factors could spell disaster. In this post, we will discuss the top five ESG factors that companies should consider as they navigate the current crisis and craft their strategic and tactical response to COVID-19 and to future pandemics or other similar risks in our globalized economy.

1.  Disclosure to Stakeholders

Going forward, companies should be prepared to provide more robust disclosures to all of its stakeholders – customers, employees, suppliers, shareholders, and communities. Companies should provide disclosure on their corporate resiliency strategy – including ongoing contingency planning efforts, stress testing of the command and decision-making structure, and similar crisis planning items. Transparency provides assurance to all stakeholders that the company is prepared to withstand a market shock, make the right decisions quickly, and survive, even thrive, during the chaos of crisis. Companies should also disclose in real-time, internally and externally, their active responses to an ongoing crisis. Implementation of remote-working programs, business travel restrictions, cancellation of in-person meetings, revisions to policies and procedures both with suppliers and customers, and other similar health and safety actions should be communicated clearly, early, and often, demonstrating confidence in execution and genuine concern for all stakeholders. The opportunity to build corporate reputation and stakeholder loyalty during a crisis should not be lost.

2.  ESG Ratings

Over the past several years, investors have increasingly relied on ESG ratings, scorecards, and other similar metrics to identify companies in which to invest – companies that share their personal views regarding sustainability, social issues, and other governance matters.  Although the large universe of ratings systems has led to marketplace confusion, recent efforts to find a common system, reduce noise, and improve comparability will ensure going forward that future ESG ratings will provide investors an easy and effective way to see how companies are performing on ESG indicators relative to each other, and we should expect that such ratings will increase in importance as companies and industries compete for available capital. Every company should know its ratings, ensure they are based on accurate data, and actively message its successes and ongoing efforts to all stakeholders. ESG ratings are going to become a significant key performance indicator (“KPI”), evaluated by investors no differently than financial metrics, operating metrics, and human capital metrics.

3.  Sustainability Reporting

COVID-19 will accelerate stakeholder demands for companies to demonstrate that they have a long-term strategy in place to respond to various market disruptions, including climate change, pandemics like COVID-19, and other similar market shocks. Building on the disclosure principles discussed above, companies should annually, and even more regularly if possible, provide a report on the economic, environmental, and social impacts of their day-to-day business activities. Such disclosure should also include long-term sustainability strategy and related goals, and progress towards achieving those goals. Sustainability objectives, performance measurements, and transparent reporting build stakeholder goodwill and trust, help drive top-line revenues and bottom-line profitability, and ensure maximum access to capital. Companies that have demonstrated excellence in sustainability initiatives and messaging will be better positioned to respond to market disruptions like COVID-19.    

4.  Supply-Chain Durability and Optionality

The global supply chain has been stretched thin in recent months. Everything from masks and medical gowns to food products and electronics have been in short supply as large geographic areas undergo lengthy quarantines or stay-at-home orders, preventing workers from operating factories and logistics infrastructure from functioning properly. Companies should seriously consider diversifying their supply chains to source more supplies and products locally and to wean themselves off of any dependence on any one region or population to supply critical inputs to their production process. Every business is different but, generally speaking, a shorter supply chain with redundancies and stress-tested back-up plans is a supply chain better suited to withstand market shocks. Stakeholders will demand more durable supply-chain networks going forward, and companies should act now to build for the long-term multiple functional relationships with existing and new suppliers in a variety of locations, both internationally and locally. It is also key that companies understand the full functionality of their supply chains, not just their tier-1 supplier. To be truly tested and ready, and to ensure the nimblest response during a crisis, each company should understand the strengths and weaknesses of their supply chain all the way back to the necessary raw materials. And companies should clearly message to all stakeholders the durability of their supply chains and efforts taken to test those chains and identify alternatives in the event of a crisis.

5.  Human Capital

Virtually every company’s workforce has faced disruption with COVID-19. Around the world, governments have implemented strict shelter-in-place or stay-at-home orders, forcing workers out of offices and factories and into their homes for extended periods of time. Companies should be focused on supporting their workforces, boosting morale and ensuring their health and safety. Listen to their concerns and respond rapidly with thoughtful and caring solutions. These responses can include robust work-from-home programs (which can last beyond this crisis), providing broad medical insurance coverages to help employees recover quicker from illness, offering substantial unemployment or furlough programs to extend salaries and benefits as long as possible (even if factories are shut or stores are not operational), and remaining active in their workforce’s community with charitable giving and other support programs. While federal and state governments are providing some assistance to workers, shareholders, and the wider public, expect companies to take action to shield their workers from the worst effects of COVID-19. Genuine care for your people can generate significant trust and loyalty across all of your stakeholders. And remember the power of social media to disseminate very negative messaging regarding any perceived mistreatment of employees.

Winston & Strawn’s COVID-19 Task Force brings a comprehensive approach to the complex legal and strategic challenges presented by the pandemic. View all of our COVID-19 perspectives here. Contact a member of our COVID-19 Legal Task Force here.