The Evolution of ESG in Light of War in Ukraine

Five weeks into the war in Ukraine, it is clear there will be both predicable and unpredictable ripple effects from the conflict with profound implications for environment, social and governance (ESG) considerations for businesses.

By Kate Olsen

In real time, we are witnessing the convergence of two macro trends. First, discourse about ‘deglobalization’ and a radical destabilization of a collective liberal global order. And second, the urgent call to accelerate progress against the 2030 sustainable development agenda and the Paris Climate Agreement.

All as the world addresses lost progress on development due to the COVID-19 pandemic.

Today, the world is not on track to achieve the Sustainable Development Goals (SDGs). Yet this decade remains a critical window to drive progress during what United Nations (UN) has asserted is the ‘Decade of Action’.

The war in Ukraine is further complicating the world’s ability to build back from the pandemic. The conflict is putting pressure on a global economy that is increasingly interconnected, but fractured by competing nation-first priorities, values and interests. As the international development community is relying upon this global cooperative model to solve climate change and other critical challenges, the implications are enormous.

All in all, making progress on the SDG agenda remains under grave threat. Given that the SDG agenda is tightly aligned with the private sector’s focus on ESG, it’s important to consider how the sustainable development landscape is evolving and what it means for the private sector’s focus on ESG. There are three key themes for corporate leaders to watch:

Real-time recalibration of priorities

The war in Ukraine has elevated two priority issues to date: energy and food security. In addition to the pandemic, these issues have significant implications for sustainable development and supply chain operations. The war is driving up prices of oil, wheat, and fertilizer, intensifying inflation, and potentially slowing post-pandemic economic recovery — with economists looking for the dreaded signs of stagflation on the horizon. At the same time, rising commodity and transportation prices are worsening hunger crises for countries in North Africa, the Middle East, and parts of Asia. With legacy oil and gas sourcing upended, especially in Europe, it is unclear if the new spotlight on energy will aid or impede efforts to transition to a net zero emissions economy by mid-century.

Energy and food security are likely to remain the leading indicator issues in the near-term. How the public and private sectors navigate these headwinds may be a reality check on the viability of the 2030 SDG agenda overall.

Financing and attention scarcity

Many developing countries have already had to make difficult decisions about what to prioritize to respond to the COVID-19 pandemic, which has caused a backslide on non-pandemic public health, education, gender equality and more, all creating greater poverty levels. With all eyes on the war in Ukraine and UN funding appeals focused on supporting the humanitarian and refugee crisis in Eastern Europe, attention and funding are being diverted from other important issues and regions. As the war further intensifies global food insecurity and threatens progress against the Paris Climate Agreement goal to curb global warming to 1.5°C, the global development community will face hard choices about what priorities receive funding. As public sector funding gets diverted to urgent near-term needs, pressure will rise on the private sector to make up the funding gaps.

As companies assess their ESG goals and programs within an evolving geopolitical context, it will be critical to think through where each company can serve as a force multiplier on the material issues most important to them and their industry. Innovative finance models and ESG-aligned investing will become more important to further align the SDG and ESG agendas.

Security as a new decision-making lens

Emerging nationalist concerns and fractured geopolitical alliances are upending the post-WII liberal global order, with long-term consequences for business. Companies that operate globally must now rely on an additional decision-making lens to align strategy, operations and purpose considerations: national security. Our Home Country as Stakeholder survey of multinational companies found that a company’s home country is a critical stakeholder — on par with customers and shareholders. In fact, multinational executives rated national security as more important than diversity, equity and inclusion (DEI), ESG and climate change when it comes to evaluating potential risks. Today, navigating sourcing and supply chains, technology and cyber security, and ESG requires a skilled corporate diplomacy mindset with clear positions on policies, commitments, governing principles and values.

As geopolitical issues become more complex and unpredictable, the decisions corporate leaders face about what to say, how to act and where to invest — to drive both shareholder and stakeholder value — will become more fraught and more closely monitored both externally and by employees.

As evidenced by the many multinational businesses that moved to hold Russia accountable for its actions against Ukraine, the private sector has become a geopolitical force in and of itself. Our War in Ukraine survey in March 2022 found that a majority of people across Europe, North America and Asia expect business to play a major role in working to stop the war and restore peace, with both citizens and employees saying companies should act.

How the private sector has responded to Ukraine has also set a new precedent for how business can and should respond to other current, and future, global events. It’s also opened the door to further scrutiny on private sector actions in support (or not) of human rights, rule of law, and other democratic principles.

In this era of stakeholder capitalism, there now will be even more expectations on business to uphold collective and cooperative models to advance sustainable development aims. Corporate leaders will need proactive communications strategies that take the above themes into account and adaptable decision-making frameworks to navigate an ESG agenda defined by volatility.

Kate Olsen

Author

Kate specializes in developing strategies and integrated engagement campaigns that help purpose-driven clients build brands and advance sustainable development.

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