Building Back Better for the Next Normal

Posted on August 17, 2020

Tytti Kaasinen
Tytti Kaasinen
Director, Stewardship Services

‘Build back better’ has become the new mantra for post-COVID-19 hopes and ambitions. As people, companies and governments are coming to terms with the crisis and starting to consider the post-pandemic world, many are realizing that going back to how things were is neither possible nor desirable. Just like disruptive technologies throughout modern history have swept away what humanity thought was the best or only solution and replaced it with something superior, the disruption brought on by COVID-19 has also opened the door for making and accepting some long-overdue changes. To truly leverage the opportunity to correct the destructive course on many fronts, responses to the pandemic must involve going beyond adapting to the new normal and focus on shaping what we want the next normal to be. Investors can play an important role in this transition by aligning their strategy and active ownership with progressive long-term objectives.

Big challenges ahead

Building back better is not a new concept; it was originally coined in connection to disaster response and risk reduction.[1] While reconstruction after a natural disaster can look very different from that following a global pandemic, improved resilience and the revitalization of livelihoods, economies and the environment are at the core of both. In its blueprint for a sustainable, resilient post-COVID-19 recovery, The Organization for Economic Cooperation and Development (OECD) underlines that the responses and stimulus packages must not solely focus on getting economies quickly back on their feet, but also address well-being, inclusiveness and various systemic vulnerabilities.[2] It particularly calls for action on climate change, biodiversity loss, air and water pollution, poor ocean health, social inequalities, heightened risk of infectious diseases, deforestation and unsustainable food production.

The challenges ahead are complex, numerous and immense, and progress is urgently required on several fronts simultaneously. The transformation cannot and need not happen overnight. In the discourse around reforming the agricultural sector, for example, a common timeframe is how to feed the world in 2050. The key is to assume a long-term perspective and start acting without delay.

An opportunity to review, reset and revise

Recovery will take years[3] and it is notoriously difficult to predict the future. It might seem challenging to develop far-reaching strategies when the pandemic is still far from over and the day-to-day pressures dominate the agenda. This is not an excuse for inaction though: it is already clear that there is no going back to business-as-usual. For a holistic change, responses need to be integrated and all stakeholders must be on board. Companies and investors are also increasingly expected to reassess their practices and demonstrate how they intend to contribute to more just and sustainable systems.

The most obvious first step for any rebuilding is to assess what was not working before and make sure this is not carried over to the ‘after’. This is an opportune time for companies and investors to examine any biases and flaws that have existed either in their own operations or in the world around them, and take measures to ensure that the way forward is founded on better practices. Many have already started incorporating the learnings from COVID-19, not least to be more resilient to future disruptions, whatever these may be. For best results, however, the scope of revisions should extend beyond eliminating shortcomings and mitigating risks. Setting their sights towards the next normal, leading companies and investors are considering what that should and will look like, what they can do to drive the necessary evolution, and how to best position themselves to benefit from the future opportunities.

The precedent set by the Sustainable Development Goals (SDGs) is not encouraging. The world the 2030 Agenda envisioned and set out to build is only 10 years away, and we were not on track to achieve the goals even before COVID-19 struck.[4]  The path is even more challenging now. However, the ‘build back better’ movement and SDGs share many of the same objectives, and the motives and incentives that were perhaps previously lacking may feel more compelling now.

Business case for embracing the change

Companies are often on the frontline, experiencing and adding to the negative impacts of local and global challenges. They also have a crucial part to play in reforming harmful practices and facilitating positive change. The SDGs recognized the importance of the private sector contributing to the sustainability agenda and similarly, the potential of the post-COVID-19 transformation will not be met unless companies take an active role. This is not only a moral imperative but also has material relevance. Old approaches are unlikely to provide a competitive advantage in the next normal. Given the magnitude of systemic shifts underway and their link to the economy, many externalities are likely to be internalized back into the business and companies relying on ecosystem services directly or via the supply chain will find that it will become difficult, more expensive or outright impossible to carry on as before. Likewise, few businesses can thrive with a supply chain where fundamental vulnerabilities remain or in a market where people are unable or uninterested in buying its products or services. On the other hand, there are tangible benefits to be accrued from identifying and capitalizing on future revenue streams, addressing inefficiencies throughout the value chain, helping to create conditions conducive to a healthy marketplace and consumer base, and proactively positioning the business in alignment with emerging trends.

Investors as change agents

Investors are a pivotal stakeholder in building back better too, not least through directing financing accordingly and deliberately adopting a long-term perspective that appropriately values natural and social capital. Advocacy towards decision-makers and participation in multi-stakeholder initiatives are other effective ways to ensure that the potential investors have for effecting change is utilized. Active ownership, specifically engagement, also provides direct opportunities to push the progressive agenda and ensure that investee companies’ objectives and horizons extend beyond short-term recovery.

Future-proofing portfolios should include broadening the focus from investees’ current performance and expecting more than eliminating wrongdoing and minimizing foreseeable risks;

  • In line with preparing companies and portfolios for the next normal, investors would benefit from considering what kind of future they anticipate and want and incorporating related topics into their engagements.
  • Discussing global ESG trends with investees, including what problems and opportunities may arise in their respective operating environments over medium and longer-term, can provide useful insights into portfolio companies’ strategic direction and their resilience to future shocks.
  • Crucially, engagement also enables investors to influence companies to adopt more responsible business practices, a vital building block in setting the world on a more sustainable post-COVID-19 trajectory.

Ensuring that engagements target both the forest and the trees

Sustainalytics’ Thematic Engagement service, covering a range of ESG topics, is forward-looking and aims to create impact beyond targeted companies. Our themes focus on emerging and intensifying challenges. Aside from encouraging companies to safeguard their business contingency, we flag root causes and promote collaboration with the view of alleviating the structural failings. More robust and stable systems are in everyone’s interest. Reflecting the disruption that COVID-19 has caused and the corporate responsibility in tackling racial injustice that has been underlined recently, investor dialogues should explore related measures to be taken by companies. However, it is important not to lose sight of the megatrends that were already in motion, requiring companies to adapt, and of the future that investors and companies can play a role in shaping.

One opportune area for engagement, for instance, is strategic human capital management and resilience in the face of ongoing and upcoming technological and demographic changes. While investors should expect companies to leverage the learnings from the 2020 events, they would also benefit from considering skills needed further in the future, the long-term competitive advantages of diversity and inclusiveness, and the extent they are positioned to weather the effects of expected and unexpected disruptions on employees and the labour market.

Another example is the shift towards low carbon-economy: renewable energies are intended to play a big role in the transition, but for this to be fully aligned with the ‘build back better’ and SDG agendas, the underlying processes should match the ESG credentials of the products. Through engagement, investors can ensure that both they and their investee companies assume a holistic approach to the environmental and social impacts throughout the cleantech lifecycle. To reflect the need for forward-looking, pre-emptive and truly sustainable practices in these two fields, Sustainalytics has this year added the Future of Work and Responsible Cleantech themes among its Thematic Engagement options for investors.

One of the most important course corrections that investors can contribute to is ensuring long-term food security within planetary boundaries. This is interlinked with many SDGs and global environmental challenges and addressing the vulnerabilities in the food system is an essential part of the post-COVID-19 rebuilding efforts. Sustainalytics will launch a new engagement theme focused on the future of food production in September. The theme aligns with the need for a food system reform and will engage with companies on the resilience of their business models, based on science-based scenario analysis and consumer trends.

For more information on these themes and Sustainalytics’ other Thematic Engagements, please click here or contact us.

Sources:

[1] https://en.wikipedia.org/wiki/Build_Back_Better
[2] http://www.oecd.org/coronavirus/policy-responses/building-back-better-a-sustainable-resilient-recovery-after-covid-19-52b869f5/
[3] https://www.mckinsey.com/featured-insights/coronavirus-leading-through-the-crisis/charting-the-path-to-the-next-normal/covid-19-recovery-in-hardest-hit-sectors-could-take-more-than-5-years
[4] https://unstats.un.org/sdgs/report/2020/