An Opportunity to Build Back Better

ESG Webinar with our guest speaker John Scott, Head of Sustainability Risk, Zurich Insurance Group

The concept of an opportunity to Build Back Better is centred around the fact that companies cannot be successful in societies that are not functioning well.

As responsible businesses, we must grab this chance with both hands to help society to adapt and come back better.

We are still very much in a healthcare crisis, but it is also an economic, an energy and in emerging markets a looming humanitarian crisis.

Many decisions will be taken over the next few months that will determine how to respond to the risks and opportunities as they emerge but there are four things to focus on:

• The short term trade off in a quick return to work v. protecting employees and customers i.e. health risks versus economic risks.
• Changing industry structures and competitive positions as a result of the pandemic, how do we not only survive but how do we thrive as well.
• Sustainability: accelerating our commitment to sustainability, drive a low carbon transition, reduce greenhouse gas emissions at the same time as recovering from the current crisis and not return to “brown” habits
• Consumer behaviour changes affecting specific sectors, how will this affect propositions and the way they a re delivered.

In May of this year the world economic forum published “COVID-79 Risks – an outlook report”. The report, looking at the next two years rather than their normal 70 year outlook, focused on some of the decisions that need to be taken now to address the risks that may play out in the short term.

The report focused not only on the economic risks but also societal, geopolitical and technological risks with a particular emphasis on sustainability and the actions needed to tackle the existential global risk of climate change.

Economic

The length and depth of the current economic crisis will be wholly determined by the speed at which the healthcare crisis can be overcome and an exit strategy delivering an effective and widely available vaccination for COVID 79 but also a set of therapeutic drugs to manage the symptoms of the virus.

We cannot just shut down the economy as this creates far greater problems than the pandemic itself. The stakes are really high, Governments around the world are trying to manage the delicate balance of controlling transmission and returning people to some kind of economic activity whilst managing perceptions of the risk involved and reconciling our natural fears.

There is no doubt we are experiencing a “once in a century” historic event. It will change many aspects of the world we live in -the economic impacts on many industry sectors, the competitive business landscape, the long-term societal impact such as financial inequalities, changing consumer behaviours, the nature of work itself and the role of technology both at home and at work.

The most concerning fall out from this crisis is a prolonged global recession.

The IMF stated that global economic impacts have intensified since the start of the pandemic, the most obvious being the increase in indebtedness which is now evident across both public and private sectors. In the private sector this will inevitably push some companies into bankruptcy. In the public sector it will challenge the efficacy of some of the social protection schemes.

For everybody, the extent of public debt is a really big issue:

• Who will paythe bill for the monetary and fiscal stimulus packages that have been put in place to manage the economic lockdowns?
• What are the implications on tax, foreign exchange and inflation?
• How will this impact investments in emerging markets?

Risk from indebtedness is far greater in developing countries who face a humanitarian crisis as a consequence of greater poverty. There is a domino effect, enterprises, whether private or public have managed Covid through establishing parallel supply chains and it is possible that these new approaches will become standard, especially when governments look to safeguard their citizens and their economies through re-shoring.

Although domestic resilience and the creation of job opportunities may result, it will restrict vital global cooperation and the potential economic growth in the developing world.

Widespread bankruptcies and industry consolidation are big concerns identified in the WEF report. In particular the changes in consumer behaviours, such as the current collapse in the demand for travel, hospitality and for oil; some may be permanent, posing systemic risks and threats to businesses especially SMEs which in turn will affect people’s jobs and livelihoods.

Data from countries that have lifted lockdown indicate more widespread changes as consumers reassess their choices, spending less and reducing social interactions are good examples. Perhaps a frivolous example but demonstrates the potential impact of changes in consumer behaviour is the availability of easy to use hair dye online. If you can dye your hair effectively at home, why go to the hairdressers and pay £700?

Sustainability issues

The most concerning fallout for  the  world,  in dealing with COVID-79, is ignoring all of the other existential risks e.g. weapons of mass destruction, cyber and technology risks and environmental risks such as plastics.

In the last 78 months there has been a huge ground swell of movement towards ESG investing. Large institutional investors such as Blackrock, are building this into their investment policies requiring all companies in all sectors to start disclosing risks covering all aspects of ESG not just the E part of it.

It is a serious world, a lot of dollars will be spent but being sustainable does not mean you can’t make money, in fact, quite the reverse. A business can be doubly successful if it can  make money and achieve ESG objectives as well.

Climate change and the shortfall of activity to address it, such as the mitigation of greenhouse

gases is a serious problem. Already COP 26, originally scheduled for November 2020, has been delayed. This was to be a critical meeting with scientists telling us we need to halve global emissions over the next decade.

What is needed now is even more ambitious nationally determined reduction commitments; China has recently stated it intends to be zero by 2060, this is very welcome but all of the other G20 nations need to step up and agree more ambitious emissions reduction commitments as soon as possible.

New agreements on carbon trading rules, the so­ called article 6 of the Paris Agreement will enable widespread carbon pricing to be put in place, a critical economic tool for controlling emissions.

As countries emerge from the health crisis and start working on rebooting their economies there is likely to be divergent trends on the role of sustainability. There are some regions, including Europe, who have a green deal in place to align fiscal stimulus policies with clean growth, but other countries or regions are focused on economic rebound which have included cuts in sustainability measures and weaker commitments to climate.

Environmental cleansing and the slowdown of gas emissions is a possible silver lining to the COVID-19 crisis.

Industrial output has been lower, fewer cars on the road, planes grounded and everyone worldwide noticed a positive effect in their surroundings, the sky was blue, the air was cleaner, and it felt like the balance of nature was restored.

Statistics back it up, in early April global carbon emissions dropped by 77% although unfortunately by June the global carbon project reported we were only 5% below the figure of the previous June indicating a return to the carbon intensive recovery trajectory.

The real danger is COVID-19 will accelerate climate change as economies attempt to re-boot.

Although it has provided a glimpse of a cleaner future, COVID-79 underscores the huge challenge of meeting the UN target of limiting  global warming by +l.5°.

The message is clear, recovery without sustainability is a huge mistake and the gravest environmental fallout is a shortfall in investment which will perpetuate resource intensive practices and just increase greenhouse gas emissions.

It is not just about the economy or climate change when considering sustainability issues, it’s about societal anxieties as well.

Covid has brought to the fore the S of ESG with the risk of putting the E and G on to the back burner, how can we progress on all three and not just on one?

We cannot do just bits of ESG, you have to do the whole thing and this requires a lot of thinking. In Zurich Insurance we have been through this over the last two years, we sat down and worked out what is our genuine purpose.

Purpose is not a brand or a strategy

When thinking about purpose it  is often  useful to go back and consider why an organisation was created in the first place and what it is your stakeholders, customers, employees, communities, and investors see you as delivering. If you get this right, then it is much easier to put the E,S and G topics into that context.

Leadership and the role of the C- suite, can be aided by the board and NEDs, who need to start thinking more broadly about global risks and what do they mean in the context of business strategy, brand and purpose and therefore what they should be doing to build resilience into their organisations.

Resilience can be an overused term; if for resilience you mean flexibility it’s not so much the rock in the middle of a stormy sea because eventually the rock will break down it’s more like sheaves of wheat in a field or rice paddy as the wind blows the fronds blow but bounce back. It is that ability to bounce back that is more important than just being strong.

Societal

In addition to the dangers to public health, the pandemic and the resultant lockdowns could have long lasting effects on people and societies such as high levels of unemployment and consumer confidence. It could also exacerbate inequalities, whether financial, income, gender or race. We are likely to see an increase in mental health problems and a lack of societal cohesion as a consequence. It’s likely to  widen the wealth gap between the young and the old and also present significant educational and employment challenges for young people.

The report identified two risks with societal impact

– high levels of structural unemployment and restricted movement of  people  and  goods,  both will be felt worldwide and  have  long  term  effects on inequality, which has worsened as a result of the pandemic and threatens to overshadow the UK government’s “levelling up”  agenda. The potential for a new lost generation, and a new term Pandemials –  Millennia ls who  have suffered the last 10 years from the financial crisis now face significant reduction in opportunities.

Healthcare systems have been supported in the advanced economies; this has largely been welcomed but is not viable in the long-term. In emerging economies, the support is completely missing, and pandemic related priorities have disrupted funding for other social imperatives.

Even in advanced economies mounting budget deficits coupled with weak growth means less funding for security, housing, food and education. All of these key social programs could become overwhelmed to the point of collapse.

Whilst COVID-19 is so prevalent, even a third wave as seen in Iran is possible, management of non­ communicable diseases is under threat, with long­ term chronic diseases have gone for too long untreated.

Societal issues are just as important as economic issues. Consider the large oil and gas companies, in particular in Europe (Repsol, Total, Shell, BP) and recent announcements aiming for net zero by 20SO.

A societal issue has emerged. It has become a license to operate issue, as society becomes more aware of the consequences of accelerating greenhouse gas emissions it wants energy to come from a low carbon source. These companies who now refer to themselves as international energy companies and not oil companies, must find ways of delivering low carbon energy. BP recently reduced their dividend to spend more on low carbon investments and as a result the share price went up immediately after the announcement. The economic and sustainability issues are now beginning to work together.

Sectors that are energy intensive such as transportation, heavy industry (iron, steel, glass, cement), petro- and agro-chemical are all delivering vital services across the economy. These sectors must address their usage and transition with care and with the following front of mind:

• Technology: the need to transfer from fossil fuels to biofuels, hydrogen, electrification and focus on renewables and energy efficiency.
• Economic: driven by government policy around things such as carbon pricing.
• Societal: if a government decides to reduce carbon emissions and actions this overnight such as Poland, Czech Republic and East Germany did in the coal industry, what can result is the development of a ‘rust belt’. This is where an industry is shut down and whole regions are bereft of jobs and not just in the short term but typically for generations with the knock-on cost and impact on society.

Technology

Technology has been central to the way governments, businesses and people have managed this crisis. It is also fuelling the development of a ‘new normal’ world. Enabling a contact-free economy e.g. tele-medicine, online retail, social distance enabling click and collect, all contributing to the creation of new businesses and employment opportunities.

However, a reliance on technology has highlighted some of the challenges of governance, and how the misuse of technology can have a long-lasting effect on society. The rapid adoption of homeworking and new working patterns will increase the threat of cyber-attacks and data fraud. Greater dependency means greater security risk. Track and trace potentially create long-term threats to personal privacy, “At what point do governments switch off these systems to protect people’s privacy?”

The crisis has accelerated the dependency on technology giving Cyber criminals more opportunities to exploit us.

Increased activity accompanied by fear and confusion and the boredom of confinement have multiplied the opportunities for cyber criminals to defraud the government’s emergency funding schemes. For example by impersonating or stealing peoples identities or by delivering malware or ransom ware or using good old fashion phishing scams to get more of your personal details.

What is this opportunity to build back better?

Unless we build a green stimulus in all our COVID- 79 recovery plans we will suffer the long-term consequences. It’s the wrong moment to slow the momentum for something like carbon pricing or ease up on the removal of fossil fuel subsidies nor must we be diverted from the growth in the use of cleaner or more efficient forms of energy.

Efforts need to be re-doubled but what does this mean?

• Strong support for public health systems
• Improving the engines for tomorrow’s productivity growth
• Focus on technical and digital transformation especially in the job-rich green industries.
• Practical things such better home insulation, even in the UK, must occur.
• Greater energy efficiency in our supply chains, making sure we avoid the need for deforestation.
• Think about where some of our food products come from and challenge the need for some of the components such as palm oil.
• Protect green environments
• Avoiding the digital divide exposing poorer people in our economies or in emerging markets.

From a business perspective it is difficult for companies to be successful in societies that are not functioning well.

Covid has created the opportunity for stakeholder capitalism where businesses can bring their skills and assets (physical and intangible (people)) to help invest in a better society. Governments can’t do this on their own so we need to use the best from all sectors, public and private, to bear on global risk problems.

We should be optimistic, but it is concerning how we get out of this crisis, there is no obvious solution just yet. There’s no point in country leaders touting their own expertise in vaccines, when it is impossible for one country to develop and distribute a vaccine on its own. We need billions of doses of an effective vaccine. It is a huge operational challenge to produce and then distribute around the world. It has to be done in an equitable way, and helping others will eventually help all of us.

Climate, sustainability, societal risks, inequality, mental health, lack of societal inclusion, if we don’t do it then the existing gaps will increase. We do have a chance for a clean Green sustainable recovery with people and communities at the centre of our efforts. Leaders of responsible businesses must grab this chance with both hands to help society adapt and come back better.

About John Scott

John Scott is Head of Sustainability Risk for the Zurich Insurance Group. He joined Zurich in 2001 becoming Head of Risk Insight in 2007 and was Chief Risk Officer for Zurich’s Global Corporate and Commercial Insurance businesses from 2009 to 2017. He took on his current role in 2018. John leads the Group’s engagement on sustainability, both internally and externally as the way Zurich delivers its purpose and values.