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Pandemic highlights need for engagement

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      By John WilsonDirector of Corporate Engagement

      Washington - Calvert has a decades-long record of advocating with companies for greater attention to environmental, social and governance (ESG) concerns, but our engagements have never been more vital than they are right now.

      The COVID-19 pandemic has exposed numerous vulnerabilities in our market system. Increased corporate specialization has left many companies highly dependent on a global network of suppliers and business partners, which can lead to greater efficiency and productivity in normal times, but can make it difficult for a company to adapt to radically changed circumstances. For example, food waste (and the associated losses for food and agricultural companies) has skyrocketed even as people go hungry because supply chains designed to serve restaurants struggle to adapt now that people mostly eat at home.

      Widespread economic insecurity resulting from rising income and wealth inequality has emerged as a second vulnerability. The novel coronavirus has exposed the degree to which the economy depends on workers whose low pay leaves them vulnerable to disruption of their lives or income. For example, many workers now risking infection because they are considered "essential" may suffer catastrophic loss because they lack access to health care or other resources to manage a health crisis. The nearly 22 million people (so far) who have lost jobs or businesses may never regain their incomes or have the opportunity to reach their full economic potential, especially the young and people of color.

      The current health crisis will recede in time, and we will rebuild our economies. But a truly sustainable recovery will only be possible if companies confront the ways in which they failed to build resilience into governance and business strategy. While governments bear primary responsibility for managing pandemics, companies have a responsibility to anticipate risks arising from business disruption. Pandemics are only one such risk that will emerge in the coming years and decades.

      For example, the likely ecological and social effects of climate change have become much clearer over the last few years, including mass migration, risk to physical infrastructure and, yes, increased virulence of disease. The growth of artificial intelligence and the associated explosion of data will disrupt labor and commercial markets, create new risks to privacy, increase the potential of cyberwar and threaten political systems. Perhaps even more concerning, the well-documented decline in popular support for governments across the world will create further uncertainty for markets, which depend on stable public sector support. Each of these risks is well understood, but insufficiently incorporated into many companies' business planning.

      Engagement can help connect the dots

      Through our engagement efforts, Calvert has consistently delivered the message that companies that maintain healthy relationships with key stakeholders, such as suppliers, workers and customers, will be best positioned to manage societal disruptions to achieve good financial performance over time. The importance of this principle has never been clearer, but barriers remain for companies to fully integrate long-term, global thinking into governance and business strategy.

      One barrier is the contrast between long-term issues facing the planet and society with the shorter tenures of top executives. Climate change and inequality have potentially profound but uncertain impacts that play out over many years or even decades, which makes them difficult to plan for. Because companies are not directly or solely responsible for these issues, it may be easier to assign responsibility elsewhere and count on others to solve the problem.

      Moreover, managers may also be susceptible to common human biases. We tend to assume the future will be like the past, and discount the possibility of potential future events with which we have no experience. We place greater weight on the opinions of those who are most like us, and less on those who are different. For corporate executives, this may result in a weaker understanding of the lives and needs of ordinary workers, especially low-income workers.

      Finally, in the absence of clear metrics about how effectively companies are addressing stakeholder risks, companies may assume they are handling them well and concentrate their attention on typical business matters that may appear more urgent, undervaluing key risks to the company and the economy or perhaps missing important business opportunities to be part of the solution.

      For these reasons, companies benefit from independent, objective perspectives that challenge management and board thinking. Investors are credible both because we bring a knowledgeable, outside view of corporate governance, strategy and responsibility, and because we approach companies as fiduciaries who are aligned with the interests of management over the long term.

      In our engagement with our portfolio companies, we help them "connect the dots" between the experience of the present crisis and the importance of their stakeholders to their future success. We help them overcome the biases that may hinder them from anticipating risks and elevate the voices of stakeholders who might be otherwise ignored.

      Bottom line: We believe that companies may be more open to our perspectives now more than ever before, offering us an opportunity for change that will be beneficial both for investors and society as a whole.