Covid-19 offers chance to speed up ESG reforms

The world is slowly coming to terms with the idea that Covid-19 is here to stay and we will have to somehow learn to live with it.

Coupled with the imperative to try to slow down global warming to avoid a climate catastrophe hitting today’s young, this has huge implications not only for our way of life but also for our economies, the way we shop and very likely our diets.

Supply chains are not something that people usually get excited about. “Where does this thing come from” was not a question that came to the mind of the savvy shopper until a few years ago, and it probably isn’t today for most people, despite all the talk about necessary changes to our way of living.

“How much does this cost” or “can I afford this” are currently still the most important questions for people going shopping – and with the devastation that Covid-19 brought to economies around the globe, it is no wonder that this is so.

However, the changes that we will all need to make to our way of living not just because of Covid-19 but also to tackle climate change will mean that supply chains will have to change dramatically in the coming years.

Due to its ambition to reduce greenhouse emissions and heightened awareness of environmental, social and governance (ESG) issues, the European Union is likely to be at the centre of this transformation.

More than 40% of the harmful ESG effects of the 1600 companies that make up the MSCI World Index come from their supply chain, a recent report by the European ratings agency Scope Ratings shows. If we look at the negative impact on the environment alone, the supply chain effect rises to almost 60%.

For the European Union, things are even worse.

“For the 300 EU companies in the MSCI World Index, the weight of their supply chain on ESG impacts is slightly higher than the average level of all MSCI companies,” the report says. “Of the total ESG impact of EU MSCI companies, 44% is attributed to their supply chains. In terms of negative environmental impacts, the figure is 65%.”

Food in focus

Looking at sectors, of the 1600 components of the MSCI World Index the food sector’s supply chains have the heaviest effects, with an average of 78% of a company’s overall impact. If we look only at the environmental impact, this proportion increases to 88%, the Scope Ratings analysis has found.

High environmental costs occur both when raw food (milk, meat, vegetables) is produced and also when they are processed into so-called value-added food such as charcuterie, processed cheese, ready meals.

The transport and distribution of these foods adds to the environmental burden. Consumers in the Northern hemisphere have become used to having fresh fruit and vegetables available to them during winter, as well as regular access to exotic food products.

All this will probably have to change if we are serious about tackling climate change. Governments could start looking at taxing companies to force them to change their ways. For example, a “luxury food tax” could be introduced on products that are not considered staples or part of a balanced diet.

If they do this, we will of course have to pay quite a bit more for non-essential food products, cook more at home with products that are local and in-season, and rely less on ready meals.

Packaging is also responsible for a big part of the negative effects that these products have on the environment. So, governments would also have to take tough measures to limit plastic packaging, which is harmful to the environment, and subsidise less harmful alternatives.

This will again affect supply chains and increase the price of exotic foods even further; you cannot transport fresh fruit thousands of miles without having to resort to some sort of plastic packaging.

More localised agriculture could also mean the agricultural sector taking off in countries where it traditionally had been shrinking. This could potentially help to absorb some of the unemployment that is occurring elsewhere – like in the retail and hospitality sectors – but it will not be enough.

Image by NickyPe from Pixabay

Other sectors, though, could perhaps contribute to absorbing the workforce that has been displaced by the Covid-19 crisis and the shifts it has created in work and leisure patterns.

The pandemic has made countries and companies in Western Europe realise how dependent they are on China for manufacturing, so perhaps this will act as a catalyst for them to bring at least part of that production back home. A revival of manufacturing in Europe is possible.

This would also mean that companies can keep a closer eye on the practices of these manufacturers, so not just the environmental component of the often-used ESG acronym would benefit, but the social and governance factors as well.

Unless a very efficient vaccine that eradicates Covid-19 quickly is found, the world will have to learn to live with Covid-19. Investors should consider those companies that are taking the most innovative steps towards adapting, at the same time taking into account ESG factors, as future opportunities.