STR 2021
01 Economy & Finance
1.1 Key trends
1.2 What does “building back better“ really mean?
1.3 Cutting out the greenwash from sustainable investment

This has been a year of economic shock and transformation. In what has been a banner year for ESG, we highlight the need to tackle greenwash and put social equity to the fore. Key tipping points in this chapter include the rise of net zero as an organising construct for economies and capital markets, and diversity and inclusion becoming a boardroom priority.

After decades of improvement, poverty soared in 2020 as COVID-19 shook societies around the world

Global poverty is on a long downward trajectory. But global poverty rose sharply in 2020.

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The economic pain of COVID-19 has been unequally distributed, within and between rich and poor countries

Black and minority ethnic people are especially likely to have seen income losses from COVID-19. People in poor countries, with worse safety nets, have suffered disproportionately. Rich countries had far more ability to respond to the pandemic with stimulus dollars.

Generation analysis of IMF data indicates that stimulus spending per person in rich countries was over $8,500, but just $25 per person in poor countries.

Figure 18: Change in employment relative to pre-pandemic, by neighbourhood type, US, 2020-21

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Climate-finance flows continue to rise, but are far below the levels required

Climate-finance flows have nearly doubled in a decade. This data, from the Climate Policy Initiative, includes local, national or transnational financing — drawn from public, private and alternative sources — that seeks to support mitigation and adaptation actions that will address climate change.

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The question, now, is what does “build back better” actually mean?

Many governments and organisations have adopted the phrase over the past year. Building Back Better was the major theme of the UK-hosted G7 summit.

Economic strategy has undergone a revolution in the past year

Economists and policymakers are keener on helping low- and middle-income families than they were even a decade ago.

Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy. It will require a society-wide commitment, with contributions from across government and the private sector.

Jerome Powell, Fed chairman

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Businesses have a vital role to play

In almost every country in the world private-sector employment is far higher than public-sector employment. Businesses therefore do a huge amount to shape people’s lives. Some corporates have stepped up to offer at-cost vaccines or to allow their IP to be freely appropriated.

Image: Reuters/Dado Ruvic/Alamy

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A new age of government? Spending, if done wisely, can have huge social benefits

Governments enacted huge fiscal responses to deal with COVID-19. Fiscal stimulus was so generous that in America, average household income actually rose in 2020 (see Figure 22).

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The jury is still out on whether or not governments will adopt green stimulus

Many countries have pumped money into fossil-fuel industries in order to jump-start their economies. In recent months, however, the trend has been improving.

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The shift to sustainability can lead the economic recovery
Figure 25: Estimated job-years that could be created by efficiency-related stimulus announcements to date, by efficiency measure

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Policymakers have contained some of the collateral economic damage of the pandemic

In the last recession, defaults rose sharply. However, policy has prevented that from happening in the COVID-19 recession, providing important lessons for the future.

Figure 26: Mortgage deliquencies, auto delinquencies and the unemployment rate, America, during the Great Recession
Figure 27: Mortgage deliquencies, auto delinquencies and the unemployment rate, America, during the COVID-19 recession

Despite COVID-19, remittance flows remained resilient in 2020, registering a smaller decline than previously projected. Officially recorded remittance flows to low- and middle-income countries reached $540 billion in 2020, just 1.6 percent below the 2019 total of $548 billion

World Bank

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Governments will still need to grapple with high debt loads

In many countries public debt is higher than it was at the end of the second world war.

Many businesses have stepped up for their workers during the pandemic

Employees’ ratings of culture and values actually rose during the pandemic. Employee engagement rose too. Companies are also taking diversity and inclusion mandates more seriously.

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There are some signs that the quest for social justice is translating into meaningful action

Board diversity programmes are becoming increasingly mainstream, while more boards disclose their makeup.

Figure 33: Shareholder proposals to make corporate boardroom more diverse, US, 2011-20

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But in some areas the gaps are growing. The large-scale shift to working from home is leaving many behind

Even in rich countries, only a minority of the workforce can WFH.

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Sustainable investment reached a tipping point in 2020

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ESG volumes are rising across the board

Social bonds increased sharply in response to COVID-19

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A growing share of global emissions are covered by carbon pricing

By 2020 over a fifth of global emissions were covered by carbon-pricing initiatives, but there is wide variation in how these are implemented.

Figure 38: Share of global emissions covered by carbon-pricing, global, 1990-2021

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The declining influence of big oil is a sign of how far the economy has transformed

Energy companies have much lower weight in the S&P500 than they did only a few years ago. In 2020, Exxon left the Dow Jones Industrial Average after 92 years of continuous presence, to be replaced by Salesforce, the tech company.

2020 figure is as of August 24, 2020

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Tech players are among those making the boldest commitments to climate action

Microsoft is aiming to go beyond net zero, to eliminate all its historical emissions.

This is a sign that mindsets are changing. To be seen as a leader on sustainability, companies now need to offer a positive impact on the world, rather than minimising the damage they cause.

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Finance sector commitments to net-zero climate goals also snowballed in the run up to COP26

Net-zero initiatives have emerged across the financial sector in recent months. There is now a home for net-zero committed institutions across asset owners, asset managers, banks and (soon) insurers. Other parts of the ecosystem are not far behind.

In the run up to COP26, these commitments are now all part of the Glasgow Financial Alliance for Net Zero (GFANZ). This brings together over 160 firms, which are together responsible for over $70 trillion of assets.

The Race to Zero campaign is coordinating net-zero commitments by all non-state actors. The reach is impressive: it now spans 708 cities, 24 regions, 2,360 businesses and 624 higher education institutions.

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Shareholder resolutions in favour of tackling climate change are more popular, but progress is mixed

Issues of social and racial justice are becoming increasingly mainstream in board discussions.

In 2020 Vanguard, State Street and Fidelity increased support for shareholder resolutions aimed at tackling climate change, while BlackRock voted 'no' more than 80% of the time.

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There are big differences between net-zero goals, plans and action

All companies need credible, near-term plans for net zero. Few currently have them. The good news is that frameworks are emerging to judge the quality and credibility of net-zero plans. Capital allocation to zero-carbon business activities is a key dimension. Whether corporates are working to support a just transition in their net-zero plans is a priority for future assessment.

The time for celebrating vague, long-dated net-zero goals has passed. Investors need clarity over how companies will act in the next few years, with strong interim targets for 2030 or sooner.

Greenhouse-gas emissions cuts made today are worth more than cuts promised in the future, due to the escalating risks associated with the pace and extent of climate action. We call this concept the Time Value of Carbon.

* near term: 2025, ** medium term: 2026-2035

There is a troubling disconnect between the ESG take-off and the real economy

Capital markets are undereducated and overexposed on climate: not a good combination. Given the changes needed in the 2020s across environmental and social agendas, we are about to find out who is serious about sustainability and who is along for the ride.

As well as managing their portfolios in line with net zero, the finance sector needs to facilitate a huge increase in investment in key technologies to meet the 1.5 degree goal. Currently we are far below what is required.

Figure 44: Investment in climate solutions, versus investment needed each year in a 1.5°C scenario ($bn)

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Stronger foundations of climate and environmental science are needed to avoid potential tripwires

There is a growing concern among the investment community...that companies are not accurately characterising climate change risk in their reporting nor adequately preparing for its physical impacts. Estimates of the impact of climate change on the financial sector range from US$2.5–24.2 trillion, whereas valuations of risk to manageable assets range from US$4.2–43.0 trillion in net present value terms, depending on discount rates used

Goldstein, Allie, Will R. Turner, Jillian Gladstone, and David G. Hole. "The private sector’s climate change risk and adaptation blind spots." Nature Climate Change 9, no. 1 (2019): 18-25.

Assessment of future climate risk requires knowledge of how the climate will change on time and spatial scales that vary between business entities. The rules by which climate science can be used appropriately to inform assessments of how climate change will impact financial risk have not yet been developed.

Fiedler, Tanya, Andy J. Pitman, Kate Mackenzie, Nick Wood, Christian Jakob, and Sarah E. Perkins-Kirkpatrick. "Business risk and the emergence of climate analytics." Nature Climate Change 11, no. 2 (2021): 87-94.

Lessons sharing and coordination across markets must be stepped up

EMEA is well ahead of North America when it comes to the implementation of sustainable investment.

Confusion over ESG ratings has provided a perennial opportunity for greenwash

Academic research has shown that different providers of ESG come to radically different conclusions about the ESG commitments of big companies.

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But ESG metrics are finally starting to consolidate

International Business Council and WEF, with the key standard-setting bodies and accounting firms, proposed a single set of ESG metrics in October.

These 21 critically important metrics and disclosures (plus 34 optional ones) are designed to provide a consistent structure for sustainability reporting.

They are organised under four pillars:

The Four Pillars
1 – Principles of Governance

The definition of governance is evolving as organisations are increasingly expected to define and embed their purpose at the centre of their business. But the principles of agency, accountability and stewardship continue to be vital for truly “good governance”.

2 – Planet

An ambition to protect the planet from degradation, including through sustainable consumption and production, sustainably managing its natural resources and taking urgent action on climate change, so that it can support the needs of the present and future generations.

3 – People

An ambition to end poverty and hunger, in all their forms and dimensions, and to ensure that all human beings can fulfil their potential in dignity and equality and in a healthy environment.

4 – Prosperity

An ambition to ensure that all human beings can enjoy prosperous and fulfilling lives and that economic, social and technological progress occurs in harmony with nature.

The SEC’s renewed focus on ESG oversight could be the next tipping point for the sector. It needs to set a high bar

It is crucial that regulators set a high bar for sustainability claims, rather than lock in insufficient quality and ambition.

Moves by regulators in US, China and the EU show that net zero will soon be the law of the land. There is no single model for ESG governance that will satisfy all, but it is important to build bridges between these regimes to avoid fragmentation. Net zero and social justice must be the focus for all regulators.

United States Securities and Exchange Commission, Washington DC. Image: Pgiam/Getty

Investors increasingly want to understand the climate risks of issuers. Investors representing literally tens of trillions of dollars of assets under management are looking for consistent, comparable, decision-useful information to determine whether to invest, sell, or make a proxy vote one way or another.

Gary Gensler, SEC Chair, June 23rd 2021

G7 finance ministers made a commitment at the meeting to make it mandatory for corporates to report climate impacts and investment decisions, alongside new measures to strengthen central company beneficial ownership registries to crackdown on environmental crime.

EuroActiv, June 7th 2021