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ESG implications of an increasingly virtual economy.
As the world grapples with the immediate and tragic human toll of the coronavirus and its enormous economic repercussions, it’s increasingly clear this pandemic’s impact on every aspect of society will extend far into the future, giving sustainable investing a whole new meaning. Although much remains unknown, one factor—the necessity of virtual interactions—has caused the following ESG impacts to emerge:
- Environmental In a matter of weeks, the entire airline industry has experienced a hard landing with its near-term solvency literally up in the air. Nearly all major countries have travel restrictions in place, which has quickly grounded a material share of the estimated 100,000 flights per day worldwide. According to the United Nations aviation body, a nonstop flight from London to New York emits between 2-3 tons of carbon dioxide per business-class passenger. The carbon cost of flying for billions of annual travelers is high and may be structurally altered by the corona-crisis.
Chances are you’re reading this in your pajamas or sweats as across the globe, conference calls and work-from-home requests have replaced the urgency to travel beyond one’s home office/living room. Telecommuting dreams of movies from the 1990s are becoming a part of everyday life today. Fear of future public health emergencies likely will have a long-term impact on corporate travel as companies evaluate net cost savings, virtual productivity and even their environmental impact. Reduced carbon emissions from more selective business travel may emerge as one of the few positive externalities of today’s crisis.
- Social “Social distancing” may well be 2020’s phrase of the year. While current quarantine measures will be transitory, longer term, the acute need to work remotely will likely result in an acceleration of virtual environments across business, education and health care. With so much confidential and business critical information at risk, data security is paramount. This will intensify greatly the demand for more robust cybersecurity and data privacy infrastructure by businesses, governments and individuals worldwide.
Even prior to the current pandemic, data security was one of the most relevant and material ESG risks our portfolio managers take into consideration when evaluating investments in the technology and communications sectors. Dr. Christine Chow, head of engagement in Asia for EOS at Federated Hermes and sector lead of technology, recently presented at the UN PRI forum on the importance of data governance. As Dr. Chow stated, “Search engines and media platforms have gathered such vast amounts of confidential and behavioral data that they literally know what makes us click. This is why more than ever, data privacy and informational security are critical engagement topics to better understand long-term risks and opportunities in the technology sector.”
- Governance Businesses around the world have had to transition to virtual workplaces with unprecedented speed. In the very recent past, the concept of “business continuity” had largely focused on moving employees to other physical locations. The necessary response to Covid-19 and lessons learned in the process have likely forever shifted corporate contingency and disaster planning to prioritize remote working capabilities. Those that take the lead in developing innovations and business models to thrive in this new work-from-home reality will emerge from the crisis in a far stronger position, rewarded by forging more resilient internal controls.
The current travel recession sparked by Covid-19 may serve as the inflection point that accelerates the move from the digital age to a virtual economy. As Dorothy told Toto, “we’re not in Kansas anymore!” When considering ESG factors in any investment decision, it is essential to focus on what is financially relevant and material within any given company and industry. Air traffic may structurally compress, but leading airlines and aerospace manufacturers also will need to innovate more fuel-efficient designs. The technology and communications sectors represent the backbone of a virtual economy. As such, their data security management will distinguish leaders from laggards, with billions in brand value at stake. For many, this crisis will become an opportunity to embrace change, refine corporate policies, engage employees and move forward with greater purpose and resilience in tackling the inevitable challenges to come.