1.1 Key trends
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.
- This has been a banner year for ESG
- Governments and businesses are making net-zero commitments
- Social equity has become a corporate priority
- But we need stronger safeguards to cut out the greenwash
Global poverty is on a long downward trajectory. But global poverty rose sharply in 2020.
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.
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.
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.
UK G7 Flikr
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
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
1.2 What does “building back better“ really mean?
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).
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.
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.
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
In many countries public debt is higher than it was at the end of the second world war.
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.
Board diversity programmes are becoming increasingly mainstream, while more boards disclose their makeup.
Even in rich countries, only a minority of the workforce can WFH.
1.3 Cutting out the greenwash from sustainable investment
Social bonds increased sharply in response to COVID-19
By 2020 over a fifth of global emissions were covered by carbon-pricing initiatives, but there is wide variation in how these are implemented.
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
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.
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.
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.
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
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.
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.
EMEA is well ahead of North America when it comes to the implementation of sustainable investment.
Academic research has shown that different providers of ESG come to radically different conclusions about the ESG commitments of big companies.
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 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”.
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.
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.
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.
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