Environmental, Social and Governance (ESG) Consulting
Consulting services and advice to help you manage Environmental, Social and Governance (ESG) considerations, risks and opportunities.
How 2020 events will impact the 2021 environmental, social and governance (ESG) trends in the U.S.
With the numerous trends to monitor to reduce corporate risk, improve business strategy, and reveal untapped opportunities, it can be difficult to sort through what’s important to focus on. RPS has highlighted the top trends that unfolded at the beginning of 2020 and reviews how these trends will shape 2021.
These top trends include:
- Change, including corporate strategy adaptations, investment risk integration, and identifying investment decisions that solve associated challenges;
- Increased capital flows to funds accounting for environmental, social, and governance (ESG) factors;
- Corporate focus on human capital; and
- Increased focus on social topics.
With 2020 officially over, RPS reflects on how these ESG topics evolved in the U.S. over the course of the year, influencing the outlook for 2021. Although COVID threw a wrench into how the year unfolded, we still saw developments in all these areas, and COVID itself forced businesses to accelerate certain ESG trends, particularly with respect to human capital.
2020 Review
Increase in Extreme Weather Events
2020 brought significant extreme weather events that revealed the potential magnitude of annual impacts posed by climate change. Last year in the U.S., we witnessed:
- 22 weather and climate-related events with losses exceeding $1 billion each.
- 30 named storms, of which 13 became hurricanes (including 6 major hurricanes), making 2020 the most active year on record.
- Five of the six largest fires in California history, making 2020 the most active fire year on record.
- The second warmest year (in global temperatures) on record (behind 2016, bumping 2019 to third on the list).
Climate Risk
In recognition of the risks climate change poses to businesses (and as a result of increased stakeholder pressure), financial institutions and corporates turned attention to various climate-related initiatives; 2020 brought a wave of “net zero” climate commitments from international governments, corporations, and investment firms. The United Nations Framework Convention on Climate Change (UNFCCC) reported that 2020 saw a three-fold increase in net-zero commitments from companies (1,541 in 2020, up from approximately 500 in 2019).
ESG-Related Funds Continued to Flow
Capital has been increasingly funneled to ESG-oriented funds over the past decade. A 2020 socially responsible investing trends report published by the U.S. Forum for Sustainable and Responsible Investment (US SIF) found that U.S. assets under management using sustainable investing strategies grew from $12 trillion in 2018 to just over $17 trillion in 2020, and according to Morningstar data, Q2 2020 flows more than doubled to $54.6 billion; COVID may have highlighted the importance of sustainable and resilient business models, spurring increased capital flow to vehicles that account for and reward such practices.
The Principles for Responsible Investment (PRI) reported 662 new signatories during 2019-20, a 28% increase over the previous year. The Sustainability Accounting Standards Board (SASB) stated that more than 170 investor organizations managing $55 trillion in assets now formally support its materiality standards. Finally, the Task Force for Climate-Related Financial Disclosures (TCFD) saw 613 new supporters in 2020, compared to 375 in 2019.
COVID-19 Accelerated Already High-Profile Human Capital Topics
Recognition of the importance of human capital was on the rise in 2020 before the COVID pandemic. However, COVID-19 put human capital and social issues at the forefront of businesses. The World Economic Forum stated that COVID-19 “has brought a renewed focus on human capital and employees, from its impact on pay programs to employee well-being”. A UNPRI survey found that 64% of respondents believed that COVID “brought social issues that were not already a priority onto their radar. These include areas such as occupational health and safety, social safety nets, worker protection, responsible purchasing practices and supply chain issues, as well as diversity and digital rights, including privacy.” According to Blackrock, 88% of sustainable funds outperformed non-sustainable counterparts from January through April 2020; presumably, these funds would account for strong corporate performers in human capital areas, positioning them to communicate to their employees effectively, implement crisis management and health/safety protocols, and transition their employees to a remote working environment.
Summer of Social Justice Movements Highlighted Inequities in Society and Business
Following widespread protests following the death of George Floyd, many businesses responded issuing statements committing themselves to reduce economic inequities in society as well as advancing diversity and inclusion initiatives within all levels of their business. As the demographics of the business world continue to evolve, diversity and inclusion is seen to have financial business value by increasing employee engagement, driving innovation, and boosting corporate reputation. 2020 brought a renewed emphasis to diversity and inclusion efforts that should continue into the future.
2021 Forward Looking Thoughts
Reflecting on the trends of 2020, we anticipate similar macro trends to continue in 2021.
Continued COVID-19 fallout
No one predicted a global pandemic as potential negative macro-economic factor prior to the emergence of the coronavirus. The coronavirus fallout will likely continue through 2021, including bankruptcies, unemployment rate changes, continued remote working, supply chain resiliency planning, and changes to the real estate industry, to name a few. Variant strains may also produce new ripple effects, prolonging complete recovery. However, the business world has largely figured out how to navigate the current challenges and keep the economy moving, and with the COVID-19 vaccine distribution underway, the major business disruptions caused by the virus are likely nearing an end.
Increased climate and other ESG focused regulations
With a new EPA administration, certain environmental regulatory rollbacks that occurred under the previous administration will likely be reversed. The EPA is also expected to focus on both environmental justice (including air quality, drinking water, and emerging chemicals of concern) and climate change; rejoining the Paris Agreement became an immediate action item for the Biden administration. Others have reported that the SEC may require mandatory climate change related disclosures. Extreme weather events related to climate change are also likely here to stay for the near, medium, and long term, and businesses will continue to adapt to manifestations. The New York Times recently reported that the SEC may also include focus on reforming political donation disclosures.
Continual ESG integration into asset management
ESG integration into financial asset management vehicles is expanding and here to stay. Investor pressure, consumer preferences, and regulatory changes will likely drive financial institutions to continue increasing ESG integration. Continued alignment of different disclosure frameworks to create uniform disclosures will be key to streamline disclosure processes for corporations and information gathering for investors.
Human capital and social justice momentum
In the middle stages of the coronavirus pandemic, BlackRock CEO Larry Fink predicted that stakeholder capitalism would become increasingly important and that organizations embracing the needs and values of all stakeholders will be the future winners. Many corporations regarded as industry leaders already tout these beliefs; however, what continues to evolve and what remains to be seen is how corporate human capital initiatives continue to be implemented in a post-COVID world, as well as whether stakeholder capitalism continues to advance social justice and provides an alternative economic model to shareholder capitalism.
RPS Goals
RPS is monitoring these trends and we have applied our technical expertise internally to strengthen the sustainability of our own business. 2021 presents as many opportunities as challenges and we are focused on our key stakeholders: our people, our clients, and our investors.
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