- Environmental, social, and governance (ESG) will gain greater prominence in 2021 as a litany of ESG issues from a turbulent 2020 linger.
- The pandemic and social and racial equality will continue to dominate the sustainability landscape as government and corporate leaders around the world contend with these pressing concerns.
- Global climate action will gain momentum in the run-up to COP26, including from the new administration in the U.S.
- With ESG issues converging into the mainstream, we expect more ESG-linked issuance and continuing advances in ESG reporting as investors apply greater scrutiny to companies to avoid the risk of "good washing" and further integrate ESG into their investment processes.
- Finally, the value of biodiversity will likely gain ground as better frameworks for assessing its financial materiality are developed and investors mount pressure to prioritize preservation.
Over the past year, the global economy faced an unprecedented string of compounding ESG-related disruptors that have irreversibly shaped how companies do business and, in 2021, these ESG forces will continue to play out on a larger stage. The most notable among these was the outbreak and spread of the novel coronavirus pandemic, and the resulting measures to attempt to both contain it and develop a vaccine. In May and June, however, the world shifted its attention to a different ailment: racial injustice, with the wound opened anew by the killing of George Floyd. Millions poured into the streets globally to protest the injustice, but the incident also prompted a response from top corporate executives, who historically had been less engaged publicly on the topic. Punctuating these events was a torrent of climate-related catastrophes, starting with devastating wildfires in Australia.
Despite these calamities, or, more appropriately, because of them, ESG came into sharper focus in 2020. Another year of record temperatures reminded a population weary from COVID-induced lockdowns that the climate crisis is getting more urgent without an obvious solution, while the race-related protests around the world and the uneven economic and social impacts from the pandemic have heightened awareness of social risks. Added to this, numerous high-profile governance failures have brought a renewed focus on ethics that will become increasingly important as global economies seek to equitably distribute stimulus funds to help emerge from the COVID-19-induced economic malaise.
As we enter 2021, we expect the ESG landscape to continue to evolve as current ESG issues mature, new themes emerge, and the growing awareness of the intersections between our global society and the natural world make ESG even more pertinent. We anticipate that these top five ESG topics will dominate the zeitgeist in 2021.
1. The Social Impact Of The Pandemic Persists
When the story of COVID-19 is ultimately told, we may recall the toll it took on our lives in 2020, but, if the first month is any indication, 2021 will not be a mere footnote. During 2020, we commented on the disparate impacts of the coronavirus on employment prospects and workforce and customer safety. At the dawn of a new year, these challenges continue, but another glaring disparity has emerged. Despite the rapid development of a series of effective COVID-19 vaccines, little has been done to ensure equitability in its distribution; so severe are the expected shortages in developing economies that the head of the World Health Organization (WHO) has warned of a "catastrophic moral failure" that will accentuate the economic gap between the richest and poorest countries.
Unequal access to health care remains a major social risk even in the U.S.; the gap is even more pronounced when considering that most so-called essential workers are lower-income employees who, more often than not, have limited access to health care and greater exposure to the virus. Even with close to $15 trillion (and counting) globally spent on stimulus to revive shell-shocked economies, the disparities persist, with considerable sums being given to already deep-pocketed companies.
At some point, the pandemic will end. But there's likely to be a legacy impact on workforces. Companies will begin to reintegrate employees into their physical locations, and, with that, will inevitably face a cultural disruption, especially if greater numbers of white-collar employees elect to continue to work from home. This can even be opportunistic: large service companies with expensive real estate footprints will likely consider whether they can duplicate their success in 2020 remotely in the future while lowering the necessity of costly business travel. And, we anticipate that manufacturers, retailers, and food producers, among others, will consider how their supply chains were upended during 2020, and begin making supply chains and distribution channels more resilient in response to disruption, even beyond pandemics. Despite all the trepidation of the past year, the pandemic has created an opportunity to, per the new Biden Administration, "Build Back Better;" that is, to alleviate the serious structural inequities predating the pandemic if stimulus packages passed in 2021 consider the needs of a broad range of stakeholders.
2. Growing Climate Momentum
While 2020 was dominated by COVID-19, 2021 will be a critical year for tackling climate change and fortifying the green transition. The Paris Agreement, signed in 2015, requires countries to raise their climate ambitions every five years, and while a year lapsed in the wake of COVID-19, all eyes will be on Glasgow in November 2021 (at the landmark UN climate conference COP26) to make up for lost time. Now that the Biden Administration has re-joined the Paris Agreement, reinstituted a slew of emissions and efficiency standards, and reintroduced the social cost of carbon, the U.S. is set to re-align with the Paris goals and perhaps assume a leadership position in the global climate effort. We expect countries around the world to continue to double down on climate as the economics of renewables continue to prove favorable and as peer pressure mounts to raise ambitions. Already over 110 countries, which according to the UN represent more than 65% of global emissions, have announced commitments to reach net zero by 2050. Europe continues to lead the pack, and despite the challenges of Brexit, both the U.K. and the EU have made their net zero commitments legally binding. China, which is responsible for over 25% of global emissions, has also made a bold announcement that it aims to reach carbon neutrality by 2060. How countries will meet and rachet up their commitments will certainly be on the agenda in Glasgow, as will progress made on negotiating the terms of a global carbon market.
The "Race to Resilience", which kicked off at the Climate Adaptation Summit, will also be a key theme in 2021 and we expect countries will refocus on adaptation and resilience as the realization that they may struggle to hit aggressive targets and the realities of a more volatile and extreme climate dawns on them. We expect local, regional, national, and even global initiatives to mobilize in support, taking action to build resilience, particularly for vulnerable groups and communities. We also anticipate these initiatives will be complemented by local government and corporates with net-zero commitments, backed by increasingly popular science-based targets, each of which have become the buzz of the moment as state and corporate actors adopt more stringent climate goals. We also expect transition finance to become more prominent to enable these shifts, with sustainable dept being reoriented from pure green (i.e. renewables) to hard-to-abate sectors where net zero is more challenging (i.e. steel). Climate resilience bonds, also known as green bonds for resilience, will also likely gain momentum as investors seek to support "building forward better." While climate action was somewhat deferred as the pandemic persisted, the collective slowdown was a boon to the world's carbon footprint which declined 8.8% following years of ever-increasing emissions. We also see signs that economic recovery packages will likely emphasize the dual goals of social stability and climate progress.
3. The Fight For Equality
While the pandemic has had devastating impacts around the globe, the most pernicious effects have been felt in minority and lower-income communities. This has been true from both a health perspective (where Black Americans have died at a higher rate than the broader population) and an economic perspective (where wealthy Americans have largely enjoyed the fruits of a booming stock market even amid meager stimulus checks and high unemployment).
The disparate impact of COVID-19 is, however, only the latest iteration of racial inequality in the U.S.; in addition to COVID, this social ill reared its ugly head with several high-profile killings of unarmed Black men by police officers in 2020, continuing a harrowing trend. It also spurred greater focus on the Black Lives Matter movement. And further, it also prompted a corporate response that we expect will continue in 2021. Social issues, especially those that break along party lines, have often been taboo in the discourse of corporate executives. But this time was different--the level of engagement after the killing of George Floyd was unlike what we had seen after similar incidents in the past, which shows, to some degree, greater emphasis on social issues and local movements going global.
Globally, we see the socioeconomic chasm widening in other ways, much of it revolving around the concepts of disparate access: to health care, education, transportation, and broadband, among many other tools that are needed to ensure equity in society. We anticipate that corporate leadership will begin to engage more on these too, in part because they directly affect many of their stakeholders. The pandemic may have made these gaps more apparent, but through economic stimulus, it may also present an opportunity to close them; for instance, the Biden infrastructure plan in the U.S. focuses on rural access to broadband and transportation for low-income communities to connect them with employment opportunities, as well as unionized labor to mitigate wage gaps.
Companies previously feared taking positions that might rankle providers of capital; now, the group of stakeholders include employees, clients, suppliers, and communities. This new audience not only is not averse to politically sensitive issues, but is staking out a position and wants management to do the same. We believe this engagement will manifest in better employee relations and improved reputation longer term, even if the effects are less quantifiable in the short term. But it's important that this extend beyond mere rhetoric, and that companies invest in making their workforces more diverse along racial, gender, and age lines to do their part to quash the structural prejudices that are at the root of these problems. In 2021, companies will likely feel pressure to show progress they've made to address these structural issues and be held accountable by both internal and external stakeholders.
4. ESG For The Masses: Implications Of Mainstreaming
During 2020, we saw the sustainable debt market expand, even amid a cratering global economy. But not only did the quantum grow, the diversity did: the past 12 months showed a marked increase, for instance, in social and sustainability debt issuance. Of course, this came in response to the oft-discussed social implications of the coronavirus pandemic. In 2021, we anticipate that these use of proceeds bonds, both green and social, will continue to proliferate, with sustainable debt issuance exceeding $700 billion globally. But we also anticipate we'll see some growth in linked instruments, which have fewer limits around how proceeds can be spent, and instead link financing rates to some predetermined metric, including science-based climate targets. Issuers as diverse as Enel and Chanel have used this mechanism over the past two years to tie financing rates to the U.N. Sustainable Development Goals. We expect to see rapid growth in the coming year as these types of instruments open the door for new issuers, which prefer not to rely on the use of proceeds model to enter the market. Transition finance will also be a hot topic for 2021 as the market community works to coalesce around what "transition" really means and how it can be implemented in ways that avoid greenwashing.
And beyond sustainability-oriented issuance, an emphasis on entities' overall ESG credentials will grow. With the long overdue mainstreaming of ESG in investment decision-making, concerns abound about "good washing" or "green washing" or even "purpose-washing": with a flood of issuers attempting to best position themselves in front of an increasingly ESG-savvy group of investors, there's understandable apprehension. While we generally expect financial reporting to be done uniformly, sustainability reporting is not yet quite as advanced, despite significant progress in adoption of the Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD). Investors already intuitively understand that the physical impacts of climate change and energy transition represent existential risks to some sectors, and that social risks are increasingly material; as the investment community comes to coalesce around a unified set of metrics, we expect that the benefits of mitigating these risks could be borne out in pricing, but not without a sufficiently deep supply of such instruments. And as ESG awareness matures among the investment community, asset managers and investors alike will likely have to demonstrate that their ESG decisions go beyond ticking a box and instead promote meaningful improvement in ESG performance.
To sort out these questions, the investing community (and the companies they invest in) relies on a growing number of frameworks to assess materiality. We expect to see material progress in the long journey towards developing and implementing more standardized and relevant ESG standards. While we still believe that integration with financial reporting is not likely in 2021, we anticipate that more companies will continue to adopt SASB, TCFD, and Global Reporting Initiative recommendations. But beyond this, we expect regulations requiring greater disclosure to proliferate and some harmonization. In the EU, substantial advances have already been made, and we expect nonfinancial reporting requirements for sustainable investment funds under the Sustainable Finance Disclosure Regulation to be completed in the first quarter and compliance required in 2022. The EU is also reviewing the Nonfinancial Reporting Directive, which governs ESG disclosures by corporates, with plans to kick off the review in first-quarter 2021. Contrarily, during the Trump Administration, the SEC had largely avoided a dialogue on nonfinancial reporting, but under new leadership, especially an administration that purports to make climate resilience and energy transition a priority, we anticipate this discussion will resume.
5. Biodiversity And Natural Capital
While climate often receives the lion's share of attention, the biodiversity crisis is emerging as an important theme in the ESG zeitgeist. Biodiversity refers to all living species on earth, including plants, animals, bacteria, and fungi. Awareness is growing of companies and their supply chains' interdependence on nature and the need to better monitor and manage nature-related risks. The economy's reliance on nature is vast, with more than 50% of global GDP relying on the riches biodiversity offers. Yet the World Economic Forum (WEF) reports that human activity has destroyed 83% of wild mammals and 50% of plants, severely altered 75% of ice-free land and two-thirds of marine environments, and warns that one million species are at risk of extinction in the next several decades. Indeed, WEF lists biodiversity loss as an existential threat over the next five to 10 years in its 2021 Global Risks Report and ranks it as the fifth top risk by likelihood and fourth top risk by impact. Agriculture, in particular, is far and away the biggest driver of habitat destruction through land use change activities, which in turn decreases biodiversity.
The striking realization that our economy faces a biodiversity crisis is prompting financial market participants to place a sharper focus on the state of biodiversity, and in turn is driving the creation of new standards on how best to value and account for ecosystem services. In 2021 this emphasis on biodiversity will gain a foothold, in our view. This will be supported by the Taskforce on Nature-Related Financial Disclosures (TNFD), an initiative to provide a framework for corporates and financial institutions to assess and report on dependencies and impacts on the natural environment to support nature-positive outcomes, development of which will be expedited as the scope, plan, and team are formalized and established by year end. If the TNFD is as successful as the TCFD in uptake, then we're likely to see much better biodiversity protection efforts.
Deforestation, especially in the Amazon, will also continue to garner attention, with a greater emphasis on zero deforestation goals and more aggressive action when threats emerge. Investor concerns over deforestation from soybean production in Brazil's Cerrado region are heightening with the EU-Mercosur trade deal falling down due to the destruction of the Amazon. Some consumer goods companies are even monitoring the biodiversity impacts of their supply chains, leveraging real-time satellite imagery. Regenerative agriculture will also be in vogue as a ready nature-based climate solution that can help improve soil health and make agriculture production more sustainable. All these forces will likely converge in 2021 into recognition of the financial materiality of biodiversity and prompt a tangible action plan for its preservation.
These are but a few of the many ESG trends that will emerge and evolve in 2021. Given the fast-moving ESG world, we know that some ESG topics that hide below the surface erupt suddenly while others simmer and bubble up slowly. We also can never rule out black and green swan events that fundamentally take over the global conversation. There are a slew of other hot topics that will likely garner some attention in 2021. This includes shifting consumer preferences and greater demand for sustainable products and services, digital ethics (especially in the technology sector), and the growing threat of cyberattacks. Further shifts in the energy sector, from the future of oil to the role of hydrogen, will also play out in 2021 (although 2021 may not be their year, progress will likely be made). As we make way into the new year, we'll observe how ESG-related rhetoric translates to real results as stakeholders hold companies to account.
- Sustainable Debt Markets Surge As Social And Transition Financing Take Root, Jan. 27, 2021
- Stakeholder Capitalism: Aligning Value Creation With Protection Of Values, Jan. 19, 2021
- How Hydrogen Can Fuel The Energy Transition, Nov. 19, 2020
- Clean Hydrogen Investment Is Still A Leap Of Faith For European Utilities, Nov. 16, 2020
- Diversity And Inclusion As A Social Imperative, Aug. 3, 2020
- Why Corporations' Responses To George Floyd Protests Matter, July 23, 2020
- The ESG Pulse: Social Factors Could Drive More Rating Actions As Health And Inequality Remain In Focus, July 16, 2020
- A Pandemic-Driven Surge In Social Bond Issuance Shows The Sustainable Debt Market Is Evolving, June 22, 2020
- Standardized Non-Financial Disclosures Will Clear The Path For Better ESG Analysis, June 19, 2020
- People Power: COVID-19 Set To Redefine Workforce Dynamics In Post-Pandemic Era, June 4, 2020
- The ESG Lens On COVID-19, Part 2: How Companies Deal With Disruption, April 28, 2020
- The ESG Lens On COVID-19, Part 1, April 20, 2020
The authors would like to thank the following team members for their contributions to this article: Paul Munday, Maurice Bryson, Bertrand Jabouley, Beth Burks, Ron Charbon, Rafael Janequine, Anna Liubachyna, Kurt Forsgren, Bernard De Longevialle, Karl Nietvelt, Imre Guba, Victor Laudisio, Hans Wright, Patrice Cochelin, Neesha-ann Longdon, Azul Ornelas, Catherine Baddeley, Florence Devevey, Henrik Cotran, Dimitri Henry, Ashley Yen, Caitlin Harris, Erin Boeke Burk, Thomas Englerth, and Lori Shapiro.
This report does not constitute a rating action.
|Primary Credit Analysts:||Corinne B Bendersky, New York + 44 20 7176 0216;|
|Michael T Ferguson, CFA, CPA, New York + 1 (212) 438 7670;|
|Secondary Contact:||Michael Wilkins, London + 44 20 7176 3528;|
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