Insight

Could the Ukraine crisis lead to a recalibration of how investors and companies approach ESG?

11th March 2022

Sustainability is unequivocally a force for good and is most certainly here to stay. In the years preceding the pandemic ESG was rapidly growing in importance following the 2015 Paris Agreement and the aim of moving to a global net zero economy. Then the pandemic catapulted it into becoming a major Boardroom issue for listed companies. However, with the unassailable rise of ESG there hasn’t been a moment to reflect on whether certain approaches to it have led to unintended consequences.

The ongoing crisis in Ukraine may well be that moment where there is a slight reset in the approach to ESG. In the past few days, we have begun to see politicians, executives and commentators call into question some elements of it that had hitherto been sacrosanct. This crisis could potentially lead to a more nuanced approach from investors and companies alike.

In the run up to this crisis we already saw some start to question whether certain fund managers had gone too far with their screening and divestment policies. Rupert Soames, Chief Executive of Serco Group, in December 2021 argued that decisions around ESG had become too black and white with fund managers screening out and penalising the very companies, such as those in the defence and justice sectors, the state needs to supply vital services to the country. He argued that this could have repercussions causing suppliers to governments finding it harder and more expensive to finance themselves in public markets. One of the most high-profile attacks on a company over ESG came from the venerable fund manager, Terry Smith, who argued that Unilever “lost the plot” and its management prizes displaying its sustainability credentials at the expense of running the business.

In the past few days, we have seen this come to a head further. Companies, politicians and commentators have started to argue that we can no longer screen out and shun defence companies as these are critical for national security and also act as a deterrent. As concerns grow over reliance on Russian oil and gas, Europe is rethinking its energy policy and may rely on more coal in the short term and Boris Johnson has also hinted at using more UK-derived fossil fuels. Indeed, nearly 40 MPs have called for an end to a UK ban on fracking.

Whilst most western companies have cut all business ties with Russia, we have seen a slightly more nuanced approach from some including Pepsi and Unilever who both stated that they will continue to offer daily essentials and McDonalds will continue to pay its staff. The CEO of Danone stated that the Company is going to continue operating in Russia as it has a responsibility to the tens of thousands of people who depend on the Company. British American Tobacco said it would scale back its business activities rather than suspend all operations.

In an era of increasing polarisation, a more pragmatic, thoughtful and nuanced approach from investors and companies alike may be welcome. Perhaps Larry Fink got the balance right in his annual CEO letter, published at the beginning of the year, in which he stated that divesting from entire sectors will not get the world to net zero. As events continue to unfold quickly during this crisis, we set out below some ideas of what companies should be thinking about in their approach to ESG.

Continue on the ESG journey

Whilst much of the FTSE 100 have large sustainability teams and have been focusing on ESG for some time, many smaller companies are newer on their ESG journeys. It is important to carry on that journey and set out both short and long-term goals.

Focus on what really matters to the business and stakeholders and where you can make an impact

The crucial thing with ESG is to focus on the areas where you can make a tangible difference and have an impact on the stakeholders that matter most to your business.

Make sure the issues you are taking a stance on are reflected in how you conduct your business

There is increasing activism in the workplace and Gen Z employees are much more socially minded and typically want to work for companies that act with moral purpose. This has created more pressure on companies and brands to take a stance on the issues of the day.

However, companies and brands should be careful when commenting on matters and ensure that they are walking the walk and are not inadvertently opening themselves up to calls of hypocrisy. For instance, many companies were promoting International Women’s Day, but were then being called out for poor figures in their gender pay gap reports. Similarly, Ben and Jerry’s last summer cancelled its license with its Israeli affiliate, but instantly faced a major backlash for singling out one country and not imposing any form of ban on any other country.

Always link ESG back to how it will make the business more successful

Companies should talk about their purpose and their material ESG issues, but the key is to link everything back to how it will make the business more successful.