The Shutdown Decision And Permanent COVID-19 Job Losses

The shutdown decision is a fundamental economic principle. A firm should continue to operate if it can generate sufficient revenue to cover its variable costs. A firm should shut down if it didn’t make at least enough revenue to meet its variable costs. Because of government restrictions put in place to reduce the spread of COVID-19, whole swathes of the economy need to shutdown.

Many politicians are talking about the bridge to the other side. Unfortunately, many businesses have already decided to shut down. Some did not even engage with the possible support avenues because they knew there was no chance the bank would lend them more money or their landlord cut them some slack on their lease obligations.  

The evidence of this is in the enormous unemployment claim numbers around the world. The queues outside social security offices are happening even in countries where a wage subsidy policy now exists because of COVID-19. I don’t think the blame game is helpful at this point, but some empathy with people who are the collateral damage from the public health actions exists.

The public health crisis itself is playing out differently in each country. It’s not clear yet what the real impact of COVID-19 will be – modelling is uncertain, and each country will have its factors that either make their outcomes worse or better. It is silly to think that the only problem here is the health crisis. The social consequences of a 2nd Great Depression due to the sudden stop of economic activity will be just as awful for the world.

A simple thought experiment can help us understand the likely decisions of business owners. If revenue has gone to zero, for an unknown period, there are several ways to pay costs that are still being incurred by the business. It can use its cash reserves, borrow more from the bank, raise more equity from shareholders or use government support packages.

Every business owner will know what their break-even point is. They will also be acutely aware of their ability to support the business. If they have a year’s worth of bills in the business cheque account, this isn’t an issue for them. They will be fine, assuming there is a resumption of regular economic activity on the other side of the bridge.

However, if they are already running a low cash balance or using debt to meet operating expenses, they will not be able to proceed with zero revenue for longer than a month or two. Putting businesses into hibernation doesn’t work because every contractual arrangement they have entered into has to be put into hibernation on reasonable terms at the same time.

The recent drop in asset prices due to uncertainty around COVID-19 impacts and already recognised economic losses such as travel and hospitality shutting down, mean that the fair value of any small business is lower. There are unlikely to be any buyers at present. Incurring too much debt through a crisis impairs the value of the company on the other side.

This reality is affecting large businesses too. Unlike the public sector, a private company can hit “hard limits” of what is possible. Resource constraints exist,  their bank will tell them they can’t borrow more, and the government will restrict their operations. Their employees may choose to quit instead of coming into work and being put at risk. Their landlord will refuse to cut a deal on rent.

This health crisis is a society-wide coordination problem. Without the government imposing a lockdown on all, the decentralised decision-making of many actors leads to businesses putting people at risk because other companies in their industry are still operating, so they feel like they have to as well.  It’s crazy.

One of the issues with specific bailouts is that at this stage of the collapse, it’s likely putting good money after bad. Equity owners and debt owners receive a risk premium to incur risk. If every time a crisis occurs, they get bailed out, with no consequences, the people don’t like it.

The irony is that if people thought the response of populism to the Global Financial Crisis and its fallout was terrible, just wait until the second wave of populism and nationalism arrives after a global pandemic accelerated by the free movement of people and goods across borders.

It will be even worse when banks and large corporations get bailouts when at the same time, many households can’t access welfare. The losses will be borne by those who are unable to negotiate their bailouts with their creditors and landlords because they don’t owe them enough. Because of the uncertainty, many businesses will merely shut down because their balance sheets can’t sustain six months of no revenue.

The government is trying its best under considerable uncertainty. The lesson of this particular crisis so far is that looking to the government for financial support in an emergency is a dangerous path to take. On the other side of the bridge, expect a lot of debt aversion and laser focus on lean operating models where only the critical expenditures to deliver value to customers happen.

The current operating model for many businesses has grown over time to include a lot of unnecessary expenditure. There will be a focus on crucial value streams – what is the bare minimum required to deliver an excellent experience for customers? Product and service catalogues will need to be simplified. Entire categories will disappear because they will seem frivolous in more austere times.

Many firms are already replaying their GFC playbook. This playbook means cancelling projects, standing down staff, offboarding contractors and consultants, and eliminating discretionary spending wherever they can.

Unfortunately, this is the last thing the economy needs. When businesses tighten their belts, the drop in demand from public health restrictions accelerates further. The carnage from further reductions in economic activity will be just as awful as the health crisis happening in the hospitals.

A pandemic of this nature is going to change our way of life for decades to come. The health and economic scarring will be worse than the Great Depression because other than those directly impacted by the GFC, many in the developed countries have not known adversity on this scale their entire lives.

Hopefully, random acts of kindness and humanitarian response from governments to help their people in crisis can prevent a complete collapse of social order. This COVID-19 pandemic is a crisis on many fronts, and the worse the health crisis becomes, the worse everything else becomes. The other side of the bridge mightn’t be one we want to cross in the end.

ESG Risk, Technology Risk And Reducing Inequality

One of the UN Sustainable Development Goals is about reducing inequality among and within countries. The UN SDGs are a high-level framework of 17 goals that the world can achieve by 2030. They are useful as a way of understanding your firm’s social impact and identifying how to change your operating model to reduce any adverse effects or enhance any positive ones.

ESG risk and reducing inequality may seem entirely unrelated. However, there are ever-increasing community and employee expectations when it comes to issues such as executive compensation, wage growth, sharing in productivity increases, and managing rising living costs.

The detailed sub-goals of Goal 10 are really about the developing world, and not the relative poverty issues in developed countries. Many countries cannot afford social protection policies and legislation that richer countries can. Some richer countries place high tariffs on goods exported from poorer countries which makes it more difficult for people in these countries to trade their way to higher living standards.

An example of the ESG risk in this space is the cost of migrant remittances. Hundreds of millions globally send billions every year back to relatives in their home country. Often, there are high fees associated with this and many global financial institutions have encountered a lot of issues ensuring AML/CTF compliance in this space.

Goal 10.C is quite sad – reducing the cost of remittances to no more than 3% by 2030 and eliminating remittance channels that cost more than 5% in transaction costs. The rise of startups in developed countries that enable you to send money overseas at wholesale FX rates when poor people are charged enormous premiums is definitely in the social risk category.

Product management and pricing decisions around FX or overseas transfers will be even more complicated over the next decade than they already are. It’s certainly an area that is being disrupted by firms with better technology and customer experience than the banks. People who are moving between developed countries or paying less for their overseas holiday shopping and dining out capture much of this benefit in reduced costs.

When researching this particular UN SDG, the issue of technology startups in developed countries coming up with great ways to solve problems that only work in developed countries became quite clear. Many amazing innovations will only work if you have a passport from an OECD country. There are still enormous increases in transaction monitoring capability required to change negative screening for entire countries that some financial institutions still feel the need to do because their technology is decades behind Silicon Valley.

The strength of the focus on risk and compliance over the past decade has led many boards to authorise investment in their technology platforms. But merely spending hundreds of millions of dollars on technology isn’t necessarily enough.

How many ESG risks are hiding in the legacy technology ecosystems of major financial institutions around the world? A target operating model for a risk function includes more than just the implementation of transaction monitoring software. The people, processes and systems all need to work to clear principles and deliver the right outcomes for a broad group of stakeholders.

The irony of the enormous spend on risk and compliance technology, particularly regarding regulatory and legislative compliance, is that it has provided many large firms with the right model for how they might need to prioritise investment in climate change risk reduction.

The problem for the customer experience is that if you already have a poor customer experience that will cost $X to fix, and now your bank needs to spend a further $X on more risk and compliance programmes of work, then very soon you start running into a point where the duplication of all of these technology investments across different companies becomes redundant.

The role of a board is to provide governance to an organisation, and this includes making tradeoffs between Project 1 and Project 2. The problem is that many of the loudest voices criticising their every move on ESG risk don’t exactly appreciate the concept of constrained resources. For many financial services firms, they will face a point where they need to consider their entire current operating model and seriously rethink their purpose and strategy.

What is the link between this and the central problem of reducing inequality among countries and within them? Well, previously, a firm could make tradeoffs inside its operating model transformation that included plays like outsourcing or radical restructuring. Now, every person with a Twitter account could set off a backlash for something as random as invoice payment times for SMEs.

The reporting on this issue in Australia has been great because nothing could demonstrate more clearly to a board and senior executives that the operational-level decisions inside their operating model are now fair game. ESG risks must now be fully understood and considered at the customer interaction level and the supplier interaction level.

A board that wants to obtain an independent assessment of its ESG risk and current operating model should consider what social license to operate means in the 2020s. A higher proportion of people will increasingly demand more and more of the private sector.

Unlike politicians, CEOs face the market test. Many are already far advanced in changing their firm’s way of doing business to differentiate themselves from competitors. Higher enterprise value is likely to accrue to firms that have low ESG risk relative to other investment opportunities. Protecting access to finance at all should now be a consideration of boards – one serious enough ESG controversy could see lines of credit cut, investment banks no longer willing to work with you on a debt issue, or even suspension from trading on an exchange.

The level of seriousness boards and senior executives have to take these issues is quite clear. They are skating on thin ice in a real-time communication world. Independent assessment of the ESG risks they face and the steps to take to mitigate, reduce, or eliminate them will be a top focus for 2020 and beyond.

Large transformation projects that have already started may require even larger investments or potentially cancellation and writedowns. The business strategy of a large financial institution is also facing severe risk in an ultra-low interest rate environment. A pandemic related recession could be on the cards in many countries.

When interest rates go down, eventually there is no choice but for net interest margins to go down. The subsequent pressure on high bank operating expense ratios increases ESG risk even further due to the short-term earnings pressure from many shareholders. What a fascinating era!

Sustainable Infrastructure And ESG Risk Management

The UN Sustainable Development Goals are a useful high-level framework for business to use in assessing its negative or positive social impacts. Global partnerships between government, NGOs, and the private sector will be required to achieve them by 2030.

The rise of community expectations around climate change and other ESG risks means that boards and senior executives can no longer function in “press release” mode when it comes to sustainability initiatives.

The management of ESG risk is a crucial part of your risk management framework, and firms need to identify and manage both quantitative and qualitative risks. The excuse that it is difficult to quantify some ESG risks will not cut it with stakeholders over the coming decade.

Institutional and retail investors will increasingly expect rapid and decisive responses to controversies, including the immediate resignation of directors and senior executives. “Riding out” the storm of displeasure will be very difficult given the increasing volume in the media on these issues.

One of the important considerations when thinking about sustainability reporting and the achievement of the UN SDGs by 2030, is that innovation and profitability in the private sector is a crucial success factor.

Many businesses have the opportunity to assess their current operating model, identify where and how they can make a positive social impact, and move towards implementing a responsible operating model that delivers for a full group of stakeholders while still generating an appropriate level of profit.

Goal 9: Build resilient infrastructure, promote sustainable industrialisation and foster innovation

Goal 9 of the UN SDGs is about how essential investments in underlying infrastructure are to enabling sustainable development. Technological efficiency, energy-efficiency, and increased productivity enabled by investments in transport, energy, technology, healthcare, education, and irrigation will all help developed and developing countries alike in improving their standard of living.

A lack of necessary infrastructure in developing countries means that their people are at a clear disadvantage when it comes to ease of access to more markets to sell their products and services. Sustained employment growth will become more realistic for some countries once appropriate infrastructure investments are made and brought online.

Environmentally sound infrastructure development will help achieve other sustainability outcomes while providing lower environmental impacts from infrastructure development. Firms who operate in the infrastructure sector will be able to share their best practices with developing countries to enhance ecological efficiency for new projects.

For firms operating in developed countries, assisting in developing countries and providing technology investments where feasible can help accelerate sustainable development. For example, substantial investment in mobile phone networks in Africa has enabled a wave of entrepreneurship and innovation to take place in previously unconnected communities.

Board and Senior Executive Considerations

Boards and senior executives in other sectors may not think they can have any impact on this particular goal. However, UN SDGs are a broad church of targeted outcomes for a global society. One of the more effective ways that any business can make an impact on these goals indirectly related to your business is through due diligence and standards for your broader value chain.

The first exercise is a current operating model assessment that looks at your present purpose, strategy, and operating model. The outputs of this exercise can be mapped at a high-level to each of the 17 UN SDGs to provide input into the next activity.

The second exercise is mapping the current operating model outputs to each of the UN SDGs and identifying the positive or negative social impacts your business currently has. There may be somewhere there are none, there may be others where some substantial impact is possible.

The third exercise is taking the first two exercises into account and re-examining the purpose of the business. Why do you do what you do? Is your goal relevant in the 2020s? Are you a sunrise or a sunset business?

The fourth exercise is then revisiting the business strategy. Does it help or hinder the achievement of sustainability outcomes? Are there any products or services that need changes or closing down in light of changes in community expectations today or anticipated changes in community expectations tomorrow?

Once the current operating model, mapping exercise, purpose re-examination, and strategy re-examination are complete, a broad group of stakeholders should participate in the development of a responsible operating model.

The current trend in transformation is to speak of the target operating model; however, in the 2020s, it will be necessary to design and implement a responsible operating model. Sustainability outcomes must be incorporated into the design and planning stages of any transformation program. If they aren’t, they won’t be delivered.

One of the changes in thinking about ESG risk is that the business case is about the enterprise value of the business itself. Issues that even five years ago may not have merited a mention in a footnote to a presentation could now present themselves as existential crises for a board of directors.

Over the past decade, the cost of implementing appropriate systems and controls to manage compliance risk has been billions of dollars for the financial services sector. The coming decade will see a further increase in required technology and project expenditure to give boards and regulators assurance that a framework is in place and monitored actively at all levels of a business when it comes to ESG risk.

Other industries have faced similar costs, such as the impact of health & safety legislation on the construction sector. But no one would argue that making sure everyone goes home from a worksite at night is less important than making a profit at any cost. However, 30 years ago, those arguments were undoubtedly being made by some construction sector executives and boards.

Times have changed, and old attitudes towards ESG risk will need to be updated. The current economic environment globally, where the asset markets have boomed, and many companies rebounded from the Global Financial Crisis after brief tests in 2008 and 2009 of their operating model, means that the next downturn will provide an opportunity for deep introspection and consideration of what a responsible operating model needs to look like for a secure strategic position relative to your competitors in the coming decade.

Sustainable Economic Growth And ESG Risk Management

An environment of ever-increasing expectations on corporate leaders to do the right thing when it comes to sustainable business means it’s an issue to be taken seriously from the board-level down. The identification, active management, mitigation, or elimination of ESG risk from your operating model is a vital part of building a sustainable business that makes a positive social impact as well as delivering a profitable business for shareholders.

The UN Sustainable Development Goals provide a useful high-level framework for assessing your firm’s ability to deliver sustainability outcomes and is increasingly used by global firms as the core 17 areas for reporting their sustainability focus in their annual report.

You can map the 17 UN SDGs against your current operating model to identify the areas where your firm is making a positive or negative social impact. This exercise could assist in the analysis work before a transformation programme begins, ensuring that the development and deployment of the target operating model incorporate sustainability outcomes.

Ever-increasing community expectations around what businesses are doing to reduce ESG risks and deliver a positive social impact for a full group of stakeholders means that thinking about what a responsible operating model for your business incorporates can help the process of positioning your firm ahead of the curve.

Boards and senior executives might consider assessing their current risk management framework to identify whether the broad array of ESG risks as some choose to define them are present in their existing risk register.

Environmental, social, and governance risks can be much harder to quantify than many financial or operational risks. Firms should develop a defensible framework for estimating the cost of these risks and the severity of their impact on the operations of the business.

The business case for making significant investments into projects that reduce these risks and enhance the enterprise value of your business is clear. Increasingly, firms that do not take these issues seriously or engage in a press-release driven approach will find it difficult or impossible to raise capital.

Institutional investors in 2020 expect well-aligned corporate behaviours and communications on sustainability issues with their preferred responsible investing frameworks than even five years ago. Investor relations and corporate access teams at investment banks will have higher rates of inquiry from stakeholders who may previously never have engaged with them, and that means that the operating model for an investor relations function or corporate sustainability function needs to adapt and improve as part of the core operating model of the business, instead of being tucked away in a small department.

Goal 8: Promote inclusive and sustainable economic growth, employment and decent work for all

Goal 8 is about sustainable growth that cares about people. Eradicating global poverty depends on increasing the quality and compensation levels of workers around the world through raising productivity and sharing some of those gains.

In many developing countries, having a job doesn’t mean that your family is out of poverty. Roughly half of the world’s population lives on less than US$2 a day even with global unemployment around 5.7% according to the UN.

“Sustainable economic growth will require societies to create the conditions that allow people to have quality jobs that stimulate the economy while not harming the environment. Job opportunities and decent working conditions are also required for the whole working age population. There needs to be increased access to financial services to manage incomes, accumulate assets and make productive investments. Increased commitments to trade, banking and agriculture infrastructure will also help increase productivity and reduce unemployment levels in the world’s most impoverished regions.”

Some of the detailed sub-goals associated with Goal 8 include per capita economic growth, higher levels of productivity supported by investment in technology, a focus on high-value-added services, implementation of development-oriented policies, and eradicating forced labour and modern slavery.

8.1 Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 per cent gross domestic product growth per annum in the least developed countries

8.2 Achieve higher levels of economic productivity through diversification, technological upgrading and innovation, including through a focus on high-value added and labour-intensive sectors

8.3 Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services

8.4 Improve progressively, through 2030, global resource efficiency in consumption and production and endeavour to decouple economic growth from environmental degradation, in accordance with the 10-year framework of programmes on sustainable consumption and production, with developed countries taking the lead

8.5 By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value

8.6 By 2020, substantially reduce the proportion of youth not in employment, education or training

8.7 Take immediate and effective measures to eradicate forced labour, end modern slavery and human trafficking and secure the prohibition and elimination of the worst forms of child labour, including recruitment and use of child soldiers, and by 2025 end child labour in all its forms

8.8 Protect labour rights and promote safe and secure working environments for all workers, including migrant workers, in particular women migrants, and those in precarious employment

8.9 By 2030, devise and implement policies to promote sustainable tourism that creates jobs and promotes local culture and products

8.10 Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all

8.A: Increase Aid for Trade support for developing countries, in particular least developed countries, including through the Enhanced Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries

8.B: By 2020, develop and operationalize a global strategy for youth employment and implement the Global Jobs Pact of the International Labour Organization

https://www.un.org/sustainabledevelopment/economic-growth/

Board and Senior Executive Considerations

Boards and senior leaders will see that, like the other SDGs, there are several areas where any business can make a positive social impact. Procurement processes need to ensure that risks such as forced labour and modern slavery are not in your supply chain.

When you assess your current operating model, the key areas to explore when considering Goal 8 include people and culture processes and policies. If you are in financial services, finding what actions you could take to support the achievement of goal 8.10 would be a key focus. If you are in transportation or travel, exploring sustainable tourism such as going beyond net-zero or carbon neutral and thinking about carbon-negative operating models that create local jobs where you operate your business would be worth consideration.

The use of the UN SDGs as a high-level framework to map your current operating model against the ability of your business to deliver a positive social impact is a useful exercise for businesses. Many leading global firms already incorporate this reporting in their annual reports.

The decade ahead will be necessary for firms as they strategically position themselves to be ahead of their competitors on ESG issues. Moving beyond reporting and engagement to actively choose where your operating model (people, processes and systems) can adjust to improve positive outcomes or reduce adverse consequences will be tables stakes.

Institutional and retail investors are growing their awareness of ESG risks and expectations of the pace at which boards and senior executives will respond decisively if any controversies arise. Waiting it out or sending out a press release won’t cut it. Resignations and ending supplier relationships will become far more frequent and building a responsible operating model with in-built flexibility that can respond if a critical supplier needs to be changed because of an unacceptable level of ESG risk will increasingly mark the leaders in this space distinctly from the laggards.

Sustainable Energy Goals And ESG Risk

The UN Sustainable Development Goals are a useful high-level framework to assess your firm’s ability to make a positive social impact. They cover a wide area of topics including equality, energy, climate change, responsible growth and more.

There are many frameworks that governments and NGOs try and get business behind. Each has its pros and cons. The UN Sustainable Development Goals are a global framework which enables comparison sustainability reporting between companies that operate in different jurisdictions or industry sectors.

Boards and senior executives should assess their current operating model against the 17 high-level SDGs to capture a baseline. They can then identify the areas of their operating model that make a positive or negative impact on these goals and generate sustainability reporting to track their progress in moving towards a responsible operating model that incorporates sustainability outcomes into the transformation process.

Goal 7: Ensure access to affordable, reliable, sustainable and modern energy

Goal 7 of the UN SDGs is to ensure access to affordable, reliable, sustainable and modern energy. Almost 1 billion people still don’t have access to reliable electricity, half of them in sub-Saharan Africa. Energy production and consumption are responsible for nearly 60% of total greenhouse gas emissions globally.

Globally, not even one-fifth of global electricity production is from renewables. There are many areas of energy that will need to improve over the next decade including energy efficiency, battery storage technology, renewable energy production, and reliable energy supplies for developing countries that doesn’t cost too much.

The benefits of clean energy for our planet are enormous. Reliable and affordable energy sources mean that cooking, cleaning, and necessary business activities become possible for people in developing countries.

In developed countries, increasing energy efficiency, even more, means that marginal energy producers that rely on fossil fuels such as coal, natural gas, and oil can sunset older plants and invest in renewables such as solar, wind, geothermal, and hydropower.

 Some countries have already made enormous progress in developing their renewable energy sources, including China which has some of the most significant solar and wind power initiatives in history in operation and under construction.

The ability to make an impact on goal 7 isn’t just for businesses in the energy sector. Responsible electricity consumption and energy efficiency initiatives are realistic in a company that uses electricity.

Thinking about the energy efficiency of your entire value chain including the energy efficiency of your suppliers and partners means that operational due diligence on suppliers should start to include questions around their electricity provider, their investments in energy efficiency, their analytics and insights into their energy use, and developing a strong understanding of their strategy to reduce their carbon emissions and increase the proportion of their electricity supply from renewable sources.

Board And Senior Leader Considerations

There are many different frameworks and reporting guidelines for sustainability and ESG risk. As at January 2020, there are no global standards like IFRS that enforce certain levels of disclosure. Some companies will not care about transparency on these issues because, for some, it could be “brand destroying” to be open about some of the ESG risks that exist in their value chain.

Boards and senior leaders should start with a high-level assessment of their current operating model. Working through the basics of your business model is necessary before launching into exhaustive ESG risk analysis.

  • What is your purpose? Why do you do what you do?
  • What is your business strategy?
  • How do you deliver your strategy?
  • Who delivers value to your customers?
  • Where are your operations located?
  • Who are your key suppliers?

The business model needs to be understood and decisions made on the boundaries of how much the board and senior leaders are willing to change the business model to achieve the targeted level of ESG risk in their business.

The risk management framework and risk registers will already include many of the risk themes that emerge during a strategic review of this nature. However, some of the ESG risks like social risk and environmental risk, are facing ever-increasing community expectations.

Boards and senior leaders need to be forward-looking in their identification, mitigation or elimination of these risks. They need to be ahead of the curve because an acceptable business practice today could be completely unacceptable from a social license point of view after one newspaper article or one tweet goes viral.

A great example of an ESG risk related to energy is the proportion of your electricity supply that comes from renewable sources. Some organisations have changed their procurement procedures to ensure that only the suppliers with the best effort on increasing renewable sources of electricity supply are even in the running for tender opportunities.

What does this mean? It means that because the era of the press release is over, boards and senior leaders need to be thinking long-term about how to position their business strategy so that their operating model does not give rise to any potential ESG risks that will put their economic engine at risk.

The business case for building a responsible operating model and reducing or eliminating as much ESG risk as possible is not just about return on investment. Customer satisfaction, shareholder approval, cost avoidance, revenue retention, regulatory compliance, social license maintenance, and employee satisfaction all have some elements that can be quantified to support the financial side of any business case for a programme of work to build your responsible operating model.

The UN Sustainable Development Goals have one significant advantage for boards thinking about how to measure and monitor their social impact. They are a global framework, and many major global companies already include their SDG reporting in their annual reports.

One consideration is that some companies are already so far ahead on adjusting their operating model to deliver better sustainability outcomes, that they could already “lock-in” a strategic competitive advantage.

Costs to businesses not taking ESG risk seriously can arise in visible areas such as the ability to raise capital. Look at how thermal coal companies are on the way to becoming unbankable as an increasing number of financial institutions globally stop lending, cut lines of credit, don’t take commercial paper, and don’t invest in equity or debt raises for thermal coal companies.

Thermal coal miners are currently losing their ability to raise capital. Retail and institutional investors will increasingly demand near-perfect delivery from boards and senior leaders on the reduction and elimination of their preferred definition of ESG risk.

The rising community expectations on these issues will impact a firm’s social license to operate, and focusing on short-term operating model changes that deliver outcomes will be judged better than long-term ambitions that will take decades to achieve.

Zero Hunger, Your Business And Sustainable Development

The Sustainable Development Goals are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate change, environmental degradation, peace and justice. The 17 Goals are all interconnected, and in order to leave no one behind, it is important that we achieve them all by 2030. 

https://www.un.org/sustainabledevelopment/sustainable-development-goals/

The UN Sustainable Development Goals are a useful high-level group of global sustainable development goals that can be used as a framework to assess how your business makes a positive social impact.

This series of posts explores each of the goals and proposes some considerations for boards and senior leaders. The rising pressure on business leaders to make genuine changes in their operating model to ensure that their people, processes and systems work together to make a positive social impact means that trade-offs must be made with scarce resources.

Considering how to benefit all stakeholders means that careful consideration of your firm’s purpose business strategy and target operating model to realise that strategy is a crucial part of building a sustainable enterprise.

Traditionally, value creation for shareholders was achieved by delivering value to customers and earning a reasonable profit. Today, value creation for stakeholders is the more popular terminology.

What does this mean? It means keeping customers happy, shareholders happy, regulators happy, politicians happy, industry partners happy, suppliers happy, employees happy, and certification authorities happy.

This mixed group of actors is outside the traditional boundaries of the firm, meaning that when it comes to approaching ESG issues, a press release won’t cut it.

Environmental, social and governance risks have to be identified, triaged, managed, mitigated or eliminated through the risk management process. A board should set clear expectations around how the operating model of the business ensures that the capabilities developed to deliver value to stakeholders actively consider these risks both during project phases and in a business-as-usual environment.

Goal 2: Zero Hunger

Goal 2 of the UN Sustainable Development Goals is Zero Hunger. In 2017, over 821 million people were under-nourished. Over the past few decades, enormous reductions in this number have occurred, but there is still work to do.

Differences in markets and institutions between developed and developing countries can explain much of the problem with hunger. Many states don’t have the infrastructure or even electricity to take advantage of agricultural productivity-enhancing technology at an appropriate scale.

One of the most disturbing statistics concerning hunger is the number of children who die every year from poor nutrition – 3.1 million each year. But merely sending more donations doesn’t solve the societal problems in these developing countries.

Businesses in developed countries can make a positive impact on the goal to reduce hunger in the world. An example of how technology positively impacts developing countries would be the spread of mobile phones, enabling farmers to trade more easily with neighbouring towns and villages to sell their produce or livestock, raising incomes and encouraging more trade inside countries.

One way the private sector can assist developing countries is helping the internal free movement of goods and services. Mobile phone networks, education, infrastructure investment in roads, and assistance with agricultural productivity are crucial.

How might a developed country firm help reduce global hunger? Consider pricing frameworks and intellectual property protections for agricultural productivity-enhancing goods and machinery. Is what makes sense in Canada, a wealthy developed country, necessarily appropriate in sub-Saharan Africa if you’re selling into that market?

How about the issue of subsidies and tariffs? Lobbying for tariffs on some goods predominantly produced in developing countries takes money out of the mouths of the global poor. Even more concerning is marketing cooperatives who play on fair trade to pay a fixed price for goods below the world market price and then capture the price premium for those goods in hipster neighbourhoods in developed countries.

One of the themes in the UN Sustainable Development goals is the removal of unfair subsidies and tariffs that disproportionately privilege farmers in developed countries over farmers in developing countries. If we consider global hunger, losing some farms in the West to keep bringing millions out of poverty in developing countries could be regarded as a reasonable tradeoff as long as the West budgets for appropriate transition payments and arrangements for the impacted farmers.

Banks and insurers don’t need to open a branch in a developing country to make an impact. Letting subject matter experts spend a month upskilling their peers or conducting a training course in a developing country is a modest cost but high impact way of sharing knowledge and capability.

If your global supply chain includes agricultural products exported from developing countries, performing due diligence on the supply chain is essential. Ending unfair labour practices and exploitation of small farmers is something any business trading with these countries should incorporate into their operating model.

One example of how adjusting your operating model to ensure that a positive social impact occurs is by physically tracing the entire value chain for a particular product.

  • Who does the work?
  • How is it done?
  • How are they compensated?
  • Is it fair, giving account to local realities and expectations?
  • Where is it done?
  • Who captures the value?
  • Are there any health & safety concerns?
  • Are there opportunities to provide upskilling or coaching to suppliers?

Corporate Governance Considerations

If your business trades with developing countries, you need to make investments in technology so that qualitative information associated with your supply chain can be captured and analysed for insights.

Setting up a framework for supply chain risk management with the right supporting policies and processes is a complex project. Many businesses are already doing a great job at ensuring the integrity of their supply chain, but this is a topical issue and emerging issues when it comes to agriculture must be monitored.

Eliminating global hunger is just one of the many UN Sustainable Development goals. As an exercise, working through the plans may convince you that your business can only make an impact on 1 or 2 of them. But the activity itself is valuable because using a high-level framework for considering social impact will enhance your understanding of your operating model and offer up possibilities for small adjustments that could make a positive impact on others.

The drive to have companies consider a more comprehensive set of stakeholders doesn’t mean that no one can make a profit anymore. Many sustainable business practices can lead to lower operating costs and enhanced shareholder value.

There is only one planet Earth, and using the UN Sustainable Development Goals as an initial broad set of considerations can help refine the purpose of a business. Simplifying your operating model and identifying business units that may no longer be suitable to own and need to be divested or shut down will be a natural outcome of more boards and senior business leaders thinking about these issues deeply.