Interview with Stefano Napoletano, Global Leader Infrastructure & Capital Productivity, McKinsey & Company. «Today, environmental, social, and governance (ESG) issues can affect company business and financial performance: in the post-pandemic world, ESG is not a fad or a feel-good exercise. Organizations that succeed in reinventing themselves will likely discover new opportunities for growth».

The Covid-19 health crisis has had a major impact on the economic system. Which economic sectors are suffering most? What are the sectors that will suffer permanent structural impacts, and which will have positive impacts on their growth?

COVID-19 has had a devastating effect on people’s health and well-being on a global scale. One of the most striking features of the pandemic is how broad its impact on consumers’ lives has been. According to our surveys, as consumers experience a prolonged period of financial uncertainty, they intend to continue shifting their spending largely to essentials, such as grocery and household supplies, and cutting back on most discretionary categories, such as apparel and travel. While some sectors will recover earlier as consumer start shopping again, for others the recovery will be longer, such as large events and air travel. More in general, organizations that succeed in reinventing themselves will likely discover new opportunities for growth. An area where companies have already adjusted well is using technology to address changing work environments and to stay competitive. Our survey also shows that organizations that are successfully responding to the crisis have deployed more advanced technologies, digital products, and tech talent to speed up innovation and they expect most of these changes to outlast the pandemic.

Covid-19 is a global pandemic with geopolitical implications. From an economic point of view, is it possible that the Covid-19 has different consequences for the different world’s geographical areas as well? And if so, which are those that will come out better or worse than others?

As knowledge partner of the ISPI ‘Centre on Infrastructure’, focus is given also to the analysis of geopolitical trends. As ISPI points out in its studies, the pandemic is acting as a threat-multiplier for countries that were already struggling with other threats, such as protracted conflicts, economic crises, and climate change. In this context, Africa and West Asia are in a more fragile position. But the pandemic has also exposed the vulnerabilities of wealthy countries: in the Gulf, for instance, where even rich economies are likely to face deep supply disruptions. Regarding the world economic scenario, as ISPI outlines, there are two big threats with a potential global impact: the increasing unemployment that could worsen the crisis of the global demand and the GDP contraction, and the rising global debt that could raise the risk of a new financial crisis.

Over the past six months, large companies have reorganized supply chains, set up remote operations and made difficult financial decisions, many of which demonstrate great resilience. With the aim of rebuilding in the long term, what do you think are the first steps of a path to help companies emerge stronger from the crisis?

In our survey of supply chain executives, 93 percent reported that they plan to take steps to make their supply chains more resilient and less vulnerable to shocks, including building in redundancy across suppliers, nearshoring, reducing the number of unique parts, and regionalizing their supply chains. Today technology – such as analytics and artificial intelligence, the Internet of Things, advanced robotics, and digital platforms – is challenging old assumptions that resilience can be purchased only at the cost of efficiency. The latest advances offer new solutions for running scenarios, monitoring many layers of supplier networks, accelerating response times, and even changing the economics of production. Some manufacturing companies will use these tools and devise other strategies to come out on the other side of the pandemic as more agile and innovative organizations. At the same time, as more physical assets are digitized, it is critical to step up investment in cybersecurity tools and teams.

With social distancing, the increase in production automation and agile work, what are the organizational and structural changes that big companies will face?

While remote working was already gaining currency before the crisis, the pandemic and the step-change in use of videoconferencing and other forms of digital collaboration has shown that remote working, where possible, is here to stay. That said, organizations should invest in effective long-term remote-working foundations, revamp their upskilling and retraining approaches, and adopt an agile approach to strategic workforce planning. They should also reimagine the role of offices in creating safe, productive, and enjoyable jobs and lives for employees.

The Covid alarm has accentuated a general awareness regarding environmental issues. From another point of view, in the economic recovery phase where the attention will be focused on growth, do sustainable investment policies for the energy transition risk to become less important?

The simultaneity of the Covid-19 crisis and the climate challenge means that the post-pandemic recovery will be a decisive period for fending off climate change. In the aftermath of Covid-19, a number of factors could slow climate action, among which for instance the easing or delay of environmental regulations in the interest of economic growth, depressed oil prices that make low-carbon technologies less competitive. By contrast, a climate-smart approach to economic recovery could do much to put the world on an emissions pathway that would hold the average temperature increase to a relatively safe 1.5 °C. We need to keep in mind that, not only does climate action remains critical, but the transition to a low-carbon future can drive near-term job creation while increasing economic and environmental resilience.

Kevin Sneader, Global Managing Partner at Mckinsey, explains that the pandemic has exposed the deep interconnection between companies and the world in which they operate. Employees, clients and stakeholders expect the company speak out on sustainability issues as well. In the comparison between profit motivation and a company’s social purpose, what has changed since the coronavirus emergency?

Today it’s commonly recognized that environmental, social, and governance (ESG) issues can affect company business and financial performance. Expectations and scrutiny on ESG topics from investors, consumers, employees, and other stakeholders continue to grow, and taking action in these areas may help companies navigate rising pressure from stakeholders and distinguish themselves from competitors, creating additional value in five important ways: facilitating top-line growth, reducing costs, minimizing regulatory and legal interventions, increasing employee productivity, and optimizing investment and capital expenditures. To a greater extent in the post-pandemic world, ESG is not a fad or a feel-good exercise. Global sustainable investment tops $30 trillion, up 68 percent since 2014 and tenfold since 2004. This acceleration has been driven by increased social, governmental, and consumer attention on the wider impact of companies, as well as by the investors and executives who realize that a strong ESG proposition can safeguard a company’s long-term success.