Mar. 18 2019 — ESG issues are gaining a lot of momentum, and there are three important trends Libby Bernick, Managing Director Global Head of Trucost Corporate Business, S&P Global Market Intelligence believes you should be aware of for 2019:
- This year will transform the way companies manage climate-related issues.
- The importance of ESG to the bottom line is capturing mainstream investor attention.
- ESG issues are reshaping and reinventing business models.
Let’s look at each of these in turn.
This year will transform the way companies manage climate-related issues.
Climate goals and risks are being redefined. For example, we see companies shifting the dialogue from ‘how do we impact the climate with our carbon emissions’ to ‘how does the climate impact us’? This is putting a spotlight on physical risks, such as water scarcity, and policy risks, such as the financial impact of regulations on high-carbon emitting industries and their counterparties. In addition, many companies are now working to update their climate and carbon reduction goals, which end in 2020. More ambitious, science-based carbon reduction targets will likely be established, which will require significant investments. We are also seeing business leaders step in to set direction where policymakers are not, as evidenced by initiatives like the RE100 coalition, where over 150 large companies have committed to source 100% renewable energy.
The importance of ESG to the bottom line is capturing mainstream investor attention.
The trend toward more corporate transparency will continue as investors across a wide range of asset classes show a growing interest in ESG issues. For example, the UN Principles for Responsible Investment has now been signed by 345 large asset owners, credit ratings are accounting for ESG considerations, and Amundi, Europe’s biggest asset manager, has pledged to fully screen for ESG in 100% of its investments by 2021. Social and human capital issues are also on the rise, as diversity, data privacy, and the treatment of labor in supply chains are being looked at with a closer lens. It is clear that company disclosure on ESG issues will be very important now that 49 stock exchanges have committed to publish ESG disclosure guidelines. Companies in the U.S., where there are no mandatory disclosure requirements, will be in the curious condition of competing for capital with companies located in emerging economies that have better ESG disclosure.
ESG issues are reshaping and reinventing business models.
There are many examples of how ESG topics are triggering a wide range of changes in the economy. To name a few: the Transportation sector is forecasting the growth of electric vehicles from 3 million today to 125 million by 2030; fuels sourced from renewable materials have experienced more than an 8% growth over the past 9 years (IEA); the Agriculture and Food sector is introducing new technologies to increase yield in water scarce areas; and, the Building sector has gone from 5% new construction being green certified in 2005 to 38% today. The UN Sustainable Development Goals are expected to be a roadmap for innovation, with revenue and savings opportunities estimated at over $12 trillion per year through 2030. The backlash against single-use plastic entering the ocean has catalyzed leading chemical companies and plastic manufacturers to invest in innovation and recycling infrastructure. For example, SC Johnson has committed to make 100% of its plastic packaging recyclable, reusable, or compostable by 2025.
What are the implications of these three trends for corporations?
It will be important to have both an ESG defense and offense. Corporate sustainability teams will need to be on the defense to identify and manage their ESG risks, while having a strong eye on the offense to innovate on products and services that will capture opportunities being created in new markets. In addition, corporate boards of directors will need to build their understanding of, and competency around, these ESG issues and make sure the governance practices for their respective organizations are sufficiently robust.