The Future of ESG and Sustainability After the COVID-19 Pandemic

The COVID-19 pandemic has the potential to impact ESG and sustainability activist investor initiatives and long-term corporate strategic planning.

Some of the most important data people have been looking at to gauge the impact and timing of a COVID-19 pandemic has been Chinese emissions, specifically nitrogen dioxide. 

With the initial outbreak of the COVID-19 coronavirus in Wuhan, China implemented a massive quarantine — and Chinese manufacturing all but ceased, as did Chinese emissions.

I mention this topic because ESG activist investor demands have been sharply on the rise. In 2018, there were record levels of activist investor demands, both globally and in the United States. This can be seen in Figure 1 and Figure 2, respectively.

Figure 1: Global Companies Subject to Activist Demands

Figure 2: U.S. Companies Subject to Activist Demands

Plus, in 2018, some of the top areas where there were activist investors pushing for goals and initiatives included climate change (19%), sustainability (13%), other environmental (7%), and political activity (19%).1 You can see the breakdown in Figure 3. If we consider sustainability a type of environmental initiative along with climate change and other environmental resolutions, we see that 39% — a plurality — of all activist investor resolutions filed in 2018 were environment related.

Figure 3: Type of Activist Resolutions Filed in 2018

I want to be careful here on one point. I am not putting a value judgement on these resolutions. I merely wish to show that they were a plurality of activist investor resolutions in 2018 — and that they are likely to become increasingly common.

And they will become increasingly important in finance. In short, activist investors are usually large investors that use their shareholder power to push companies to make fundamental changes in the way they operate.

And their activities have been on the rise. In fact, the number of companies subject to activist demands globally rose by almost 54 percent between 2013 and 2018. This can be seen in Figure 1.

Domestically, the situation is very similar, and the number of U.S. companies subject to activist demands is up by over 50 percent since 2013. This can be seen in Figure 2.

It should therefore not be a surprise that there has been a push to hold companies responsible for these externalities. After all, this is one of the very first things most economics students learn.

But here’s the deal: Fully pricing in externalities to company operations is likely to erode profitability for some companies. And that may be just the beginning. Ratings agencies have already started warning companies I work with in the energy space that their sustainability goals (or lack thereof) could impact their bond prices and their weighted average cost of capital — their WACC. This could in turn impact their profitability, overall valuation, credit rating, and equity prices.

Looking Ahead

In the future, companies will increasingly need to demonstrate achievable sustainability and other ESG goals. If they don’t, they will be at the mercy of activist investors. And their profitability and share prices may very well suffer.

Furthermore, reduced emissions from shut-in manufacturing capacity, remote work, remote schooling, and reduced travel could inspire activist investors to support adopting some of these now necessary changes permanently once the COVID-19 pandemic crisis has passed.

The logic for this kind of push to adopt these extraordinary actions stems from a belief that if a company wants to show it is greener, what better way is there to do that than by:

— Reducing commuter fuel consumption of the office staff.

— Reducing power consumption in the office.

— Reducing jet fuel demand and the CO2 footprint that  accompanies extensive (and especially international) business travel.

It is my expectation that some companies may carry the experience and policies of reduced energy consumption forward. And for some activist investors, this experience is likely to reveal that carbon emissions can be cut significantly if a tremendous commitment to that endeavor is made.

But even if companies were to fully return to operating their businesses exactly as they had before the COVID-19 pandemic outbreak, I would still expect the number of activist investor initiatives to increase on trend over time. And I would still expect sustainability and climate change to remain at the top of the shortlist no matter what.

As in other areas, the COVID-19 pandemic has revealed for ESG and sustainability a potential that already existed but was not being acted on. In this case, the potential revealed was the potential to materially reduce energy consumption and emissions. 

The Future After COVID

This is an excerpt from Jason Schenker's recent book The Future After COVID, which was released on 1 April 2020. It is currently a #1 New Release for Macroeconomics on Amazon.

This book can be ordered at www.FutureAfterCovid.com

Jason Schenker is one of the world's leading futurists. He is the Chairman of The Futurist Institute and the President of Prestige Economics. Jason is also an instructor for LinkedIn Learning.

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