Sustainability: the key to a resilient future

0
349

Sustainability: the key to a resilient future Ethical BoardroomBy Merima Zupcevic Buzadzic, Corporate Governance Lead for Europe and Central Asia, IFC

 

 

Looking back, it would not be an exaggeration to say that 2020 changed our lives radically. From an ominous pandemic to extreme weather events and dramatic political episodes, the year taught us to brace ourselves for a more unpredictable future. But, as we enter 2021, let us restart on an optimistic note. 

As economies and nations determine different approaches to cope with the impacts of the ongoing global crisis, they all agree that building resilience and tackling climate change are the key prerequisites to a sustainable recovery. 

Companies that responded with prompt efficiency or overhauled their business models to adapt to the new market realities have managed to navigate the impacts of the Covid-19 crisis. While they are now cited as successful case studies, it is clear that strong governance and social standards contributed to their corporate resilience. Further, 2020 showed that environmental standards and climate change impacts should be at the centre of strategy and future planning. Sceptics who think otherwise should consider the vast impacts on stakeholders, businesses, and the environment, that have hindered growth and continue to do so.

The Limtus Test

Most company disclosures tend to flaunt commitment to the highest standards of corporate governance. Given the pandemic, these frameworks – both in form and substance – served as the litmus test, determining the fate of many business organisations. Companies with the right team and processes and procedures in place for business continuity, risk management and worker protection managed to respond quickly to the ‘new normal’ enabling business continuity while others remained paralysed. 

IMD’s analysis of the performance of S&P 500 companies during the pandemic – in the context of corporate governance – found that well-governed companies clearly outperformed the poorly governed ones, a repeat scenario of the 2008 crisis.[1] These companies demonstrated better shock absorption while the markets were down because of agility and better preparedness. They were faster in turning things around and gearing up for recovery due to better processes and policies and stronger balance sheets. These companies also demonstrated higher longer-term performance potential that is concentrated on growth. They also showed better environmental and social performance, scoring six-10 percentage points higher than their peers.

Good governance is more than setting up a board of directors with requisite independence criteria and multiple committees. Instead, it means having strong and capable teams across all levels to help assess situations, critically analyse the business model, and also implement bold changes if needed. Further, strong governance requires readiness to withstand unexpected future shocks and uncertainty, while serving the interests of shareholders, workers, broader stakeholders, and the wider community.

A robust corporate governance framework also fully integrates environmental, social and governance (ESG) into the risk management system and expands the role of the board to actively oversee, guide, and provide direction for the company’s ESG values. It focusses on the connection between ESG risks and financial performance, macro environment and business continuity, and their materiality. Finally, it sharpens the ability to assess effects on the entire supply chain and customers to predict behaviours, and to respond to changes promptly.  

Also, innovation and digitalisation solutions are being increasingly used in the context of developing solutions to address potential longer-term effects as well as short-term business continuity challenges. Innovation and digitalisation will have a wide-ranging impact on workers and should be analysed meticulously. 

Some argue that this crisis has accelerated the already initiated change in how businesses are run and how they communicate with stakeholders, ushering in an era of lean organisations and customer co-creation. We are yet to see if this prompts a larger-scale overhaul in that sense. However, we need to keep an open mind and look for innovations to survive in what Deutsche Bank has dubbed as the Age of Disruption.[2]

The focus on innovation and sound ESG also reiterates the importance of diversity – gender, skills, and geographical experience – on boards and in management. Boards that are diverse are more likely to come up with new ideas for the future. Also, companies with greater gender diversity on boards show better performance on developing policies and methods to address climate change risks, according to Bloomberg.[3] In December 2020, NASDAQ proposed a minimum of two directors demonstrably different from their peers to sit on boards of listed entities to boost investor confidence, highlighting the link between diversity and competent tackling of future challenges and crises. 

Boosting Resilience

Apart from providing emergency funding, Development Finance Institutions (DFIs) have a significant wider role to play. They need to provide sound guidance to help boost resilience in emerging markets, which are the hardest hit. IFC has issued several tip sheets to help companies with advice on various aspects of the crisis and sector studies to gauge trends and learn from others’ experience. 

At the outset of the Covid-19 pandemic, IFC published a tip sheet for company leadership on crisis response.[4] The objective was to emphasise the importance of strong leadership and culture, communicating clearly and timely with staff and key stakeholders on steps to be taken, values to be preserved, and preparing the corporate system to withstand and respond to the shock. Further, we insisted on evaluating whether the board and management were fit for purpose, setting up crisis management structures to assess effects on liquidity, funding, key business lines, and supply chains. We focussed on activating or developing business continuity plans, ensuring continuity of compliance and internal audit functions, and maintaining a direct line of communication with the board.

We followed up with advice on various worker and stakeholder-related issues and advice on developing a Covid-19 emergency preparedness and response plan. We drilled down on the roles and responsibilities of the crisis management team, risk assessment, and controls and response related to workers, operations, supply chain, and community. A tip sheet on disclosure and transparency during Covid-19 was then developed to help companies effectively convey their strategic responses to investors and other stakeholders.[5]

Sustainability: the key to a resilient future Ethical Boardroom

IFC’s disclosure and transparency framework that revolves around disclosing information on strategy, performance and governance now includes additional advice on how to report on materiality in light of the pandemic, stakeholder engagement, operating environment, business model and various implications on staff, organisation, funding and profitability.

Business Wise

While IFC closely tracks the progress of its clients in emerging markets, we see different levels of resilience. This is not only linked to the pandemic’s impact on the sector, but also company-level factors that have been referred to earlier. Some companies were prompt in protecting their workforce from the virus, while others suffered major outbreaks that disrupted their activity. Some overhauled their business models while others tried to deliver on the agreed business plan activities.

However, we have noted some similarities. Most financial institutions had sound business continuity plans that were activated, allowing banks to continue without significant interruptions and safeguarding workers from major outbreaks. A sharper focus was introduced on non-performing positions, liquidity, capital adequacy, as well as loan security. We have also seen how boards play a far stronger role while supporting management to weather the crisis.

“Good ESG is not a cosmetic choice but a business imperative. Embracing the ESG agenda will better equip us to weather any future crises and also help us recover from the current one.”


In the real sector, many companies changed their business models and adapted to new customer needs. In the Europe and Central Asia region, a food producer introduced bakery products with longer shelf-life overnight in response to lockdowns. The company also launched a wide media campaign to assure customers of its ability to serve the market during the crisis. This approach worked well, given that the company is a key food producer in a small market and has had excellent effect on its performance and customer satisfaction. Another client in retail distribution outsourced its staff to competitors and partners in the supply chain to soften the immediate effect of the crisis on its employees. The company further changed its business model, shifting to new sales channels and products, and is now doing well. These are real examples of resilient companies that found ways to survive and tend to the needs of their workforce and clients.

Given the importance of ESG issues for resilient and sustainable businesses, regulatory pressures are likely to increase. In a notable development, the European Union Sustainable Finance Taxonomy Regulation came into force in July 2020. While its application will start in January 2022, this marks an important step in defining which business activities can be considered sustainable going forward. The initial focus is to define environmentally sustainable economic activities, but the scope is expected to extend to social issues as well.

The goal is to encourage investment in sustainable business activities, thereby contributing to EU’s overall sustainable finance agenda. This is just one example in which the crisis helped underline the centrality of the climate and overall environmental agenda and ESG’s potential effect on the private sector in the future.

New Lessons

A strong ESG foundation, created through values, leadership and a healthy corporate culture, is essential to tackle crises and absorb internal shocks. The pandemic reiterates the importance of being a responsible corporate citizen and taking into account the effects companies have on the environment and internal and external stakeholders (including communities in which they operate).

As we bounce back, we need to prepare for future crises to avert drastic business disruptions. For that, companies need, first and foremost, to develop and convey their values to stakeholders. They need to rethink core strategies vis-à-vis customers’ evolving needs, which will help in decision making and in adaptability to crisis situations. With the pandemic, we saw how several aspects of business continuity evolved almost overnight. Drawing from that experience, organisations need to ensure that control and risk management functions are agile, well-resourced, and focussed on prevention and mitigation. This will help them respond promptly and adequately. 

To sum up, good ESG is not a cosmetic choice but a business imperative. Embracing the ESG agenda will better equip us to weather any future crises and also help us recover from the current one. 

 

About The Author:

Merima Zupcevic Buzadzic is IFC’s Corporate Governance Lead for the Europe and Central Asia region. Merima joined IFC in 2008 and has since been advising IFC and private sector stakeholders on company-level corporate governance risks and potential for improving company access to finance using good corporate governance principles. She has also worked with multiple regulators and government institutions throughout the region advising on corporate governance codes and listing requirements. Merima holds Master degrees from King’s College London and La Sapienza University in Rome. She is also a holder of INSEAD’s Certificate in Corporate Governance and is a published author on corporate governance and post-conflict political economy.