The World Economic Forum’s manifesto for Davos 2020 declared ‘a company is more than an economic unit generating wealth’. At the time, this statement reflected mounting pressure on businesses to prioritise stakeholders over shareholders through the adoption of Environmental, Social and Governance (ESG) principles.
Since then, the COVID-19 pandemic has swept across the world. With one fifth of the world’s population under lockdown as of 24th March 2020 and the global economy now in recession, prioritising stakeholders is now more important than ever and banks are under pressure to suspend dividends and limit bonus payments.
Undoubtedly, investment banks will play a key role in the economic recovery efforts from the COVID-19 pandemic. However, by putting ESG principles at the heart of their response they have an opportunity to build a more sustainable financial sector that can deliver value for both their shareholders and for society.
This blog mini-series will examine the impetus that COVID-19 is providing for capital markets firms to accelerate their commitment to ESG principles, highlighting some of the key challenges they face in doing so.
Unprecedented disruption to ways of working
In recent weeks, existing banking practices have undergone a seismic change and as banks have rapidly deployed their business continuity arrangements, ESG initiatives, such as flexible working, have played a crucial role in their COVID-19 response.
Almost overnight, flexible working arrangements became the norm. In permitting traders to execute their role remotely, banks have had to establish replacements for trading turrets and redesign how they meet compliance requirements that mandate traders to use recorded lines in order to prevent insider trading. Despite some early challenges, firms have embraced a more digital and agile way of working and, as a result, some clear ESG benefits have emerged that will be difficult for firms to ignore once normality returns.
Prior to COVID-19, business travel was estimated to contribute to 50% of corporate emissions. However, with domestic and international travel on hold, banks are now reliant upon videoconferencing technologies to stay in touch and executives are no longer flying round the world to meet in person. The environmental benefits of this have been staggering with pollution levels dropping across the globe and researchers predicting an overall decrease of 0.3% in global emissions in 2020.
As banks continue to access digital capabilities that connect their global workforce in seconds, for a fraction of the cost and without the high environmental impacts of air travel, the industry will have to redefine what counts as essential international travel going forward.
While some staff are unlikely to continue to work remotely once normality resumes, particularly those in Front Office and Trading Operations, COVID-19 has shown that it is not impossible to conceive a future in which large amounts of trading and other investment banking activities are carried out remotely.
Having staff in different physical locations is less of a barrier than firms had previously presumed and this unprecedented disruption presents an opportunity for banks to gather new data that can be used to revise their ESG targets. Banks must now reflect on how they will sustain the working practices embraced during this pandemic and establish long-term behavioural changes to the benefit of their cost base and to ESG initiatives.
Focus on people
While some market participants have undoubtedly capitalised on increased market volatility caused by COVID-19, many investors have retreated to safety, as deal makers have experienced reduced access to capital markets and increased scrutiny on deal terms. As their ability to generate revenue grows less certain, banks must look to reduce their outgoings where possible.
In early 2020, several banks had announced large-scale redundancies in response to declining profits. As the COVID-19 pandemic has spread, however, political pressure has mounted on the big investment banks to safeguard jobs. As a result, we have seen these banks stop their planned redundancies and a number of other banks reassuring staff that no job cuts will occur in the immediate future.
With existing cost pressures continuing and new challenges arising, banks must be innovative in their approach, accelerating their commitments to automate processes where possible and re-training employees to fill emerging skills gaps. Following the end of this pandemic, banks should look to redefine their long-term cost management strategies and consider how best to optimise the size of their organisations going forward. If they are able to successfully implement alternative methods during this time, the method by which strategic cost reduction is managed in the future could take a significantly different form.
Certainly, COVID-19 has highlighted some important questions about the responsibility investment banks have to their workforce. While there is a balance to strike between delivering shareholder value and maintaining the interests of their stakeholders, there is mounting evidence to suggest that firms who are able to look after their stakeholders through the adoption of a range of ESG practices can increase their shareholder returns.
Enablers of social and economic recovery
During the 2008 crisis, hundreds of thousands of people working in the financial services sector lost their jobs. Furthermore, the government stimulus packages boosted investment in fossil fuels and as a result, carbon emissions increased by 5% between 2008 and 2009. With this in mind, banks today must put ESG principles at the heart of their approach to financial recovery.
The COVID-19 pandemic has generated unprecedented challenges and forced banks to implement solutions that were once considered unworkable. This disruption has changed the way banks operate, and they need to learn how to embrace this change over the longer term, acknowledging that once perceived catalysts of economic destruction can become enablers of economic and social recovery.