The past year and COVID-19 pandemic had a profound effect on our already vulnerable and changing world. In a time characterized by increasing uncertainty and unprecedented risk, 2020 served as a wake-up call to policymakers, business leaders and investors. This has further fueled the already growing trend toward incorporating environmental, social and governance (ESG) issues into investment decisions.
According to Morningstar research, more than 70% of all investors are interested in socially responsible investing, while more than 80% of millennials seek to go socially responsible on their investment decisions.
Business leaders are similarly in on this trend with sweeping pledges around ESG behavior making daily headlines and a more sustainable or longer-term perspective toward growth fast becoming the norm. This growing opportunity to assume a position of sustainability leadership has inspired more businesses to implement plans to capture, manage and meaningfully share their ESG data. The volume of this ESG data and the need to leverage it to make key decisions, to attract buyers, employees, and growth capital will only continue to grow as businesses focus more on their role in climate change and social inequality.
Fortunately, there is lots of good news in the burgeoning sustainability sector today, as illustrated by the following ten ESG trends to watch right now.
1. Increased corporate awareness and investment in ESG efforts
As we turn the page of the first global pandemic in almost a century, bringing social justice issues front and center, more businesses are likely to implement stronger ESG policies and we can expect to see socially conscious investing continue to rise at an accelerated pace.
2. Outperformance and growth for ESG investments in capital markets
At the start of the pandemic investors flocked to sustainable funds and by the end of the year, the total assets in sustainable funds hit a record of almost $1.7tn. Moreover, several studies have shown better earnings coupled with lower volatility among businesses adopting a long-term view with ESG as an integral part of their operations and strategy. Close to six out of 10 sustainable funds delivered higher returns than equivalent conventional funds over the past decade, according to a study that undermines claims that investing based on ESG principles hampers performance, a Financial Times article noted.
3. The U.S. will lead the way in a new DEI regulatory framework
This past summer sparked important and often heated conversations in the U.S. around diversity, equity, and inclusion (DEI). California quickly signed into law a mandate to bring underrepresented communities into more leadership roles. Assemblyman Chris Holden, author of the CA bill explained how ESG policies are, “a win-win, as ethnically diverse boards have shown to outperform those that lack diversity.”
4. Downstream supply chain pressure for Scope 3 emissions and social issues
Until recently, companies rarely included Scope 3 emissions in their greenhouse gas (GHG) disclosure reports, despite these emissions representing a majority in many cases. Fossil fuel companies are now being forced to collaborate better, closely measure performance and provide more comprehensive emission disclosures in their ESG reporting to increase sustainability in supply chains. Further, community impact and employee health, safety and labor practices have come into central focus across the supply chain and we can expect the pursuit of healthier supply chains and people to be a significant part of the growing wealth of ESG measures.
5. A global commitment to reducing emissions
The U.S. rejoined the Paris Climate Agreement on President Biden’s first day in office and nearly 200 other nations in committing to reducing GHG emissions. The global pledge to take significant steps to address climate-change will have firms expanding their efforts to capture their most important ESG data to pivot dramatically to operate within an updated regulatory framework.
6. Setting in motion a regulatory catch-up
The EU’s Taxonomy initiative, China’s piloting of Cap-and-Trade markets, similar initiatives in Japan, Britain and Scandinavian countries are setting in motion new ESG reporting requirements for public companies that will result in possible competitive advantage as some firms will eagerly rise to the occasion and others will be left behind playing catch-up.
7. New emission reporting requirements announced in the U.S.
President Biden is proposing to make U.S. electricity production carbon-free by 2035, and plans to have the U.S. achieve net zero emissions by mid-century (2050). Driving down emissions means a lot of things, such as banning fracking on federal land and planting more trees. It also means more stringent emission reporting requirements and the need for a better handle on ESG data and reporting in the year to come.
8. Green financial instruments will continue to grow in popularity
Green financial instruments (e.g., green bonds) are gaining in attractiveness to investors as valuation is increasingly tied to ESG performance. The largest institutional investors and exchange-traded funds invest a hefty percentage of their portfolio in assets associated with environmentally friendly activities and are increasingly divesting away from stranded assets. Younger generations are also driving the fast growth of sustainable finance as Millennials and Gen Xers begin to take over the Baby Boomers in positions of influence.
9. More companies will require sustainability leadership & ESG expertise
Topics of clean technology, energy, and sustainability have been central to the global economy for the past decade, and this trend shows no signs of slowing. ESG considerations are reinforcing the growing need for companies to hire sustainability leaders, teams and technical experts. As sustainability practices become further embedded in competitiveness, we’re likely to see these roles rise in popularity.
10. ESG data will explode, and that’s a good thing
Investors have an appetite for ESG data, fueled in part by a continued lack of data standardization. Further compounding the data volume and complexity are the countless streams feeding into serious ESG strategies, including internal and external company, third party statistics, real-time signals and external unstructured data. This creates a tremendous opportunity for management to gather ESG insights on a real-time basis. Given this volume, more companies will be looking for experts and solutions to help them collect, manage, analyze and gain those actionable insights from their ESG data, not to mention find new formats to meaningfully report their achievements on to the investment community.
With 2020 squarely in hindsight, we can now appreciate the positive shifts in corporate ESG efforts coming to the forefront and setting a new tenor for the future of value creation. Wherever your team is on its sustainability journey, our ESG data experts can help you to embed relevant ESG data strategies into your business operations and ultimately to enhance your financial and non-financial returns for 2021 and beyond.