When the pandemic ends, will the social role of business persist?

Authors: Johnson Kong Chun-San, Researcher and Serena Chow Yuk-Ching, Assistant Researcher at Our Hong Kong Foundation 

From cancelled dinner dates to cancelled trips, COVID-19 has dealt a serious blow to global industries and financial markets. Yet at the same time, numerous corporations have played a pivotal role aiding the global fight against COVID-19. They demonstrate the social value that businesses can provide. As stressful and uncertain a time as this is, it poses a valuable opportunity to reconsider the role of businesses in the post COVID-19 era. 

Sustainability risk management as the new norm

COVID-19 is not the first time businesses have been affected by risks coming outside of the market, nor will it be the last. Super typhoons, flooding, and droughts are a few examples of the many climate risks businesses face. Other non-market risks may have to do with policy changes, such as the effect carbon taxes potentially has on the energy industry.

The current pandemic is a case in point. Take the energy sector as an example: US coal power plant Longview Power, recently filed an application for bankruptcy, citing COVID-19 as the reason.  

And it does not seem that sustainability crises like COVID-19 are going away any time soon. The World Health Organization has warned that climate changes may alter the pattern in which infectious diseases spread. This means that in the near future, we may be no stranger to pandemic outbreaks and other sustainability crises.

Growing demand for ESG investments

Within such context, investors in recent years have acquired a keen interest in environmental, social and governance (ESG) investments in order to minimize environmental and social risks. In the United States alone, the net inflow of ESG investment funds reached US$ 20.6 billion in 2019, four times that of the previous year. 

Interestingly, despite COVID-19, the demand for ESG investments has been on the rise. Since the beginning of last year, UBS has recorded an increase of over twofold in its sustainability investment portfolios in its Asian private banking department, reaching US$1 billion. The demand has also been on the rise during the pandemic. According to a study conducted by Merrill Lynch, even during the selling spree, the top 20% of the ESG stocks outperformed the market despite industry adjustments. 

The social role of businesses

On one hand, the pandemic highlights the importance of managing social and environmental risks for businesses. On the other, it also brings into attention the role businesses could play in solving environmental and social problems. 

At the height of the current pandemic, numerous internationally renowned corporations extended measures to counter the virus’ impact. For instance, the LVMH Group redeveloped its cosmetic factory in France to produce hand sanitizers for complimentary distribution to hospitals and the local government. Microsoft and Johns Hopkins University collaborated in tracking COVID-19 and provided teachers with Microsoft Teams and related training to support them in distance teaching. 

The pandemic has shown that businesses, other than generating profits, could and should help solve environmental and social problems. And this should also be the case even in the post-pandemic era. After all, the environmental and social sustainability of the community in which businesses strive in is, ultimately, part and parcel of their long-term business prosperity. COVID-19 has made it strikingly clear that if there is a decline on the environmental and social fronts, businesses will suffer too. 

Collaborative ESG effort

Needless to say, the responsibility of creating social and environmental impacts should not be shouldered by a mere few, but the whole business community. To ensure this, investors have a pivotal role to play. 

It is evident that investors are coming to such realization. In recent years, investors have been increasingly active in engaging businesses on ESG affairs. In 2018, US$10 trillion worth of assets were managed through such methods.

On the global level, we see a shift in focus from managing risks to creating impacts. The United Nations’ Principles for Responsible Investment network, for example, is currently conducting research to facilitate investors going beyond sustainability risks to consider the impacts of their investment on sustainability. Compared to individual companies, investors managing huge assets and straddling multiple industries inevitably bear the direct brunt of environmental and social degradations. 

Reinventing a sustainable, resilient future

And the pressure is not just coming from the investors either. Millennial employees and consumers are showing increasing interest in companies’ environmental and social performance.

Meanwhile, the government needs to coordinate and support businesses to develop in a sustainable manner. In early May this year, the Green and Sustainable Finance Cross-Agency Steering Group was established amongst governmental and various other regulatory bodies to coordinate their efforts to support sustainable finance as well as the government’s climate strategies. 

While this is a good start, more remains to be done to push businesses to be purposeful and impactful in creating a sustainable future. As we start to reclaim parts of our society and life, it is high time to restructure our business ecosystem with the social role of businesses in the spotlight.