How Will The COVID-19 Experience Affect The Idea of Sustainability for Investors?
Investors can be forgiven for being a little confused as to exactly what “sustainability” means when it comes to investing. The word is used often and, historically, is meant to cover a range of topics and issues.
For example, in 2015 the United Nations General Assembly set as its Sustainable Development Goals (SDGs) 17 separate goals for attaining and then sustaining a desirable future, which ranged from the elimination of poverty and hunger to establishing gender equality. Only two specifically related to climate and clean energy.
Yet, contemporary research into expressions like “sustainable investing” or “sustainable finance” might lead one to believe that sustainable refers almost exclusively to addressing climate change: reducing carbon emissions, advancing the objective of a low carbon economy, green investments, etc. Investors are encouraged to help create a future that features businesses that are sustainable; that is not causing suffering, nor themselves suffering, from climate-change disruption. The rationale includes the notion that investors will be rewarded for this effort.
Certainly, investors can expect to benefit when businesses are sustainable. However, is climate-change disruption the most significant risk to the sustainability of a business? Will the COVID-19 experience remind investors to think about sustainability and risks in broader terms? Will the idea of sustainability become less closely associated with an environmentalist agenda?
One of the most important responsibilities of corporate leadership is to address the risks arising from the possibility of significant disruption to processes. Such disruptions are most concerning when they happen quickly, and so threaten business continuity and sustainability. Notably, two such risks are reasserting themselves during the pandemic: the threat from broken supply chains and the threat of ineffective technology.
The COVID-19 experience has included heightened anxiety from the possibility and occurrence of broken supply chains. Causes of these disruptions have included the shuttering of foreign and domestic factories, travel restrictions and border bottlenecks, not to mention conflicting political agendas. The situation is exacerbated by the fact that, especially in this millennium, supply chains have become increasingly global. Such concerns, though, have not been limited to overseas distribution, but have included that with our North American neighbours. The disruption has affected the receipt of essential materials, commodities and products, as well as hindering the response to more pandemic-driven needs, such as for ventilators and personal protection equipment. The Conference Board of Canada recently reported, for example, that “between January 1 and March 21 of this year, 54 governments limited exports of medical supplies used to fight COVID-19”.
The pandemic has helped expose the gravity of supply chain risks to sustainability, and what may be an underlying escalation of a global trade protectionism trend – regardless of trade agreements. It is a reminder that, in what may be seen as extreme and unusual circumstances, responses may also be extreme, and hard to predict.
This aspect of the COVID-19 experience may prompt businesses to rethink how they operate, and perhaps move away from a just-in-time, linear supply model, which may reduce agility and flexibility. Others may choose to engage in more local or regional supply chain opportunities. North American businesses may be more inclined to do business on this continent, reasoning that the possibility of higher cost would be offset by reduced risk of disruption.
Further, the Conference Board of Canada also asserts that we can “expect consumers and businesses to rely more on digital solutions after the crisis”. 3-D printing, for example, could help reduce a reliance on cross-border trade. As Canada’s service and information-based sectors advance, technology will also be an increasingly inherent component of receiving and distributing processes.
The reliability of technology is already critically important for many businesses, and the COVID-19 experience is affirming its significance in the pursuit of sustainability. As pandemic responses required the shuttering of businesses, work-from-home models proliferated. The innovative (and technologically savvy) were able to quickly find new ways to engage staff, serve clients, and maintain productivity. Those businesses that already had a functioning technology-enhanced distribution system have had an advantage and, from financial services, to restaurants, to yoga instructors, others were quick to get that up and running; and yet others have been left behind. Many have reported that the transition was relatively easy and sometimes surprisingly successful. Some are already proposing that aspects of these models may end up being permanent – the new normal. Some will never be heard from again. The reliability of technology and support has, is, and will be increasingly be essential for these businesses to be sustainable.
Protecting the integrity of the systems that are dependent upon technology will increasingly include attention to the security of information and protection of privacy. Failure of systems can be the result of data breach, as well as ransom-ware. Information Technology specialist, Vincent Fung, sounds the alarm in his book, “Computers Should Just Plain Work”: “93% of companies that lost their data center for 10 days or more due to disaster filed for bankruptcy within one year of the disaster, and 50% filed for bankruptcy immediately”. As a threat to the sustainability of a business, the security of necessary technology and data can easily be the most swift and insidious, and with the most dire consequences for failure.
Post-pandemic, we may well look back at how various businesses and business models fared to discover that those best engaged with technology were also best able to adapt and survive. Information technology and related services will be seen as essential for risk mitigation, sustainability, staff engagement, and value delivery – and, therefore, arguably the most important governance-related topic. If companies don’t survive pandemic disruptions, they won’t be around to survive longer-term disruptions, like those described by environmental alarmists.
Though the near-term effect of the COVID-19 experience on the notion of sustainability may be a focus on supply chains and technology, this may mitigate those potential longer-term risks in a number of important ways. By engaging with suppliers that are local or regional, or by embracing work-from home models, or by advancing technology-enhanced value delivery opportunities, carbon emissions from transportation could be meaningfully reduced.
Investors that want to support, and benefit from, sustainable businesses over both shorter-term and longer-term time horizons, would do well to consider how easily and significantly that business would suffer supply chain and technology disruptions. The better-governed organizations in these regards may well also be those leading the way towards longer-term, environmental sustainability as well.
Associate Portfolio Manager
Manager of ESG Integration
Rod Burylo, CIM, FCSI is Manager of ESG Integration and Associate Portfolio Manager for Croft Financial Group. Rod is an Advisor of the Year Award winner, 2019 IFSE Institute Award for Financial Literacy Champion finalist, international speaker, and business author, including his most recent book: The Wealthy Buddhist…Buddhist Ethics, Right Livelihood, and the Value of Money.
None of the information provided by Rod Burylo should be understood as a recommendation for any particular investment, product, strategy, or service. Readers should consult a professional for guidance regarding their personal circumstances.