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Stewardship during a crisis: Lessons from the pandemic

With the publication of the 2020 Annual Review of engagement and voting highlights by EOS at Federated Hermes, Dr Hans-Christoph Hirt, Head of EOS, reflects on the pandemic and the stewardship lessons for companies and investors.

At the start of 2020, few of us could have envisaged the dramatic changes to our daily lives wreaked by the Covid-19 pandemic. As governments scrambled to impose national lockdowns to protect public health, it soon became clear that the coronavirus would have far-reaching impacts on individuals and families, businesses and employees, the global economy, and society as a whole.

The human and economic cost of the pandemic has been staggering. To date, over two million people have died, and the global death toll continues to rise. The International Monetary Fund has forecast that global GDP will contract by 4.4% in 2020, and public debt is at record levels in many countries.

We see two key lessons for investor stewardship, and for tackling future sustainability challenges and crises.

1. Interdependence of different elements of society

By pressing pause on “business as usual” and forcing companies to adopt new ways of working, policymakers demonstrated they were willing to impose sweeping restrictions to address the public health crisis. Many businesses had to close for prolonged periods or change their operating models, affecting their employees, customers, and supply chains.

During the first phase of the Covid-19 pandemic, global supply chains, customer safety and employee well-being became priorities for many companies. As the crisis lengthens, companies face difficult decisions driven by the perceived need to achieve financial returns in the near term, potentially at the expense of strong long-term relationships with key stakeholders, especially employees. For example, if a company decides it needs to make large-scale redundancies or to cut salaries and benefits, particularly among the lower paid, it will need to explain its actions and justify them against returns to investors, including dividend payments and share buybacks. 

Once we have emerged from the pandemic, companies will be remembered for how they managed their staff, dealt with their suppliers, and treated their customers. Those that failed to demonstrate their value to society during the crisis may attract negative publicity and public criticism. The pandemic has shown the importance of businesses maintaining a social licence to operate, underpinned by a clearly articulated and meaningful corporate purpose.

Unless businesses actively fulfil their societal role, we expect that in some jurisdictions, governments and regulators will increase their scrutiny and may intervene in areas such as health and safety, employment law, corporate taxation and executive remuneration. This will come against a backdrop of rising unemployment and significant increases in public debt, due to the support that governments have provided to businesses and society.

Covid-19 has demonstrated the critical interdependence of different elements of society, including businesses, governments, employees, customers, and supply chains. We believe this interdependence and the need for a meaningful corporate purpose will only grow over time as society faces even bigger interconnected challenges, such as responding to the inevitable impacts of climate change, safeguarding biodiversity, and addressing inequality.

2. Planetary boundaries and interconnected sustainability issues

The pandemic has emphasised the links between sustainability issues and the risks associated with exceeding safe planetary boundaries. The planetary boundaries concept, first introduced by the Stockholm Resilience Centre in 2009, identifies nine processes that regulate the Earth’s system. It highlights that a change in one process can have significant knock-on effects in another due to the delicate balance within complex ecosystems. Four planetary boundaries, including climate and land-system change, have already been crossed. The pandemic offers a chance to reconsider our approach to nature.

The increased incidence of novel infectious diseases, such as Covid-19, has been causally linked to land-use change resulting in habitat destruction, the wildlife trade and intensive farming. Furthermore, these human activities are contributing to the loss of biodiversity, which is now occurring at unprecedented rates. Many sectors are directly and indirectly dependent on the common goods provided by nature, so the protection and restoration of biodiversity must rise up the corporate and investor agenda as a matter of urgency.

There is also clear evidence linking the occurrence and severity of vector-borne diseases with global warming. If the climate crisis remains unaddressed, it will lead to catastrophic impacts and exacerbate a wide range of social and environmental challenges, including inequality and the loss of biodiversity.

Governments and the private sector must draw on the lessons from the pandemic and apply them to the climate crisis – an emergency that requires far greater planning, resolve and transformation. Given the systemic importance of climate change, engagement with companies on physical and transition risks with the objective of Paris Agreement-alignment will remain a top priority in our stewardship activities.

Companies and their investors must recognise the impact that companies can have across a range of sustainability issues, understand the relevant connections between them, and manage them in a holistic manner.

Known and unknown risks - preparedness and resilience

Ultimately, success in stewardship will also be measured by enhancing the preparedness and resilience of companies to known and unknown risks. The known risks result from recognised but insufficiently understood phenomena, whereas the unknown risks cannot be anticipated based on past experience or analysis. 

The implications of the global pandemic were unexpected. However, the fact is it was a known risk, albeit one that very few businesses had paid enough attention to or planned for. Another known risk, which we believe deserves much more attention and focus, is the threat from antibiotic-resistant bacteria, or antimicrobial resistance (AMR). Such “superbugs’’ are evolving because of the overuse of existing antibiotics and the failure to develop new ones. There needs to be a concerted effort to step up the fight against drug-resistant bacteria, which, according to the World Health Organization, already kill an estimated 700,000 people a year and may kill as many as 10 million a year by 2050.

We will explore this and other known risks with companies, as we are ramping up our engagement on sustainability-focused risk management. At the same time, we need to be humble in accepting that there will be unknown risks that can only be managed by maintaining adequate operational and financial resilience.

Looking ahead, there are strong grounds for optimism that the Covid-19 pandemic will be substantially overcome in 2021. We must now use its lessons of sustainability and resilience to rebuild the economy and our societies.

To find out more, read the EOS 2020 Annual Review

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