For cruise ship operators, pandemic highlights long-term ESG risks April 16, 2020By Cheryl WilsonESG Senior Research Analyst, Calvert Research and ManagementWashington -- It has been rough sailing for cruise ship operators in the wake of the COVID-19 pandemic. The largest listed firms have experienced illness aboard their ships and will have to prove to customers that they can be trusted to contain and quickly respond to future shipboard outbreaks before most will feel safe taking to the high seas again. Facing months of sailing restrictions from governments around the world, which will negatively impact revenue through the 3Q peak travel season, the path to returning to service remains unclear. The situation highlights how analysis through a critical ESG lens can pinpoint challenges that may have long-term performance implications.Some global cruise operators perform well on ESG metrics that measure how companies aim to manage risks - such as using external health and safety standards, developing treatment and disposal plans for wastewater, and following government cleaning and disinfecting guidelines to minimize illness spread -- but the nature of ship operations introduce substantial long-term ESG risks that can be tough to mitigate, ranging from environmental issues to customer and employee health and safety. Calvert takes ESG exposure risk into account, in addition to management practices, when assessing companies in the cruise industry.For example, ships using US ports are required to adhere to the US Centers for Disease Control and Prevention's (CDC) Vessel Sanitation Program, which sets disinfection guidelines, trains crew and inspects ships to minimize the risk of gastrointestinal illnesses. These illnesses can spread on cruises because ships collect passengers from a variety of port locations that may have different local disease conditions, while customers are consistently in close proximity to others and use shared amenities. Yet companies that follow best practices have still encountered large outbreaks of gastrointestinal bugs in recent years, despite the overall incidence being relatively rare.1 The COVID-19 pandemic has presented an illness containment challenge of a new scale for cruise operators. Media has reported that group activities were permitted to continue on some ships even after customers on board had begun to show symptoms, and that ship management experienced confusion over which national authorities' guidance should be followed and how to engage with local authorities to plan itinerary changes and customer evacuations.2 While a more proactive approach may not have substantially altered the prevalence of the illness on any company's fleet given its global spread, the responses call into question the preparedness of companies to handle fast-moving and widespread health and safety risks where entire fleets need to be coordinated. An ongoing risk that is likely to continue to unfold in the months ahead is the impact of the illness on cruise ship employees. On April 9, the US CDC indicated that there were about 100 ships still at sea in the vicinity of the US, with close to 80,000 employees still on board.3 Considerable health risks remain for those employees, and so far, operators have not been transparent about how long crew will be aboard ships, what measures operators are taking to minimize risk and whether employees will continue to be compensated.4 5 Operators could face litigation risk if employees are dissatisfied over how the pandemic was handled, and in the longer run, could face challenges in attracting and retaining employees. The industry has faced criticism in the past over low wages for some crew despite demanding work that requires long stretches away from home, which heightens scrutiny over labor management practices through the pandemic. Although cruise lines are aiming to preserve liquidity, including by reducing workforce sizes - payroll can account for approximately 10%-15% of operating expenses - companies should prioritize the health of workers and continue to provide the necessary benefits that allow workers to handle health-related consequences, including extending contracts and compensation for those stuck at sea.Bottom line: Customer perception will be an important driver of recovery and long-term performance for cruise lines. It will remain a challenge for operators to contain future illness risks due to the nature of cruise travel, and management may be wise to increase transparency on how safety protocols are changing and how companywide responses will be coordinated with global and national authorities in the future to enable quicker disembarking. Assessing cruise lines on ESG factors has long highlighted that inherent health and safety challenges are difficult to manage and are likely to persist for operators.