State of Sustainability
Sustainability Trends Report 2021 identifies tipping points across the landscape of sustainability that set the scene for COP26 and the post-pandemic recovery – from the mainstreaming of net zero to action on social equity, and the rise of clean technologies and natural solutions. But as we enter this exciting new phase for sustainable investing, stronger guardrails are urgently needed.
STR2021 is the fifth edition of this annual publication by Generation Investment Management. The report takes a comprehensive look at the landscape of sustainability trends from a business and investment perspective.
In this Welcome chapter, we take a helicopter view of the State of Sustainability. The rest of the report is organised under six chapters, displayed in the animation below. Click the three-line icon at the top left for a full contents page.
We find evidence of tipping points across multiple dimensions of sustainability, from capital allocation and government commitments, to technological innovation and societal awareness.
Governments are still wrestling with what building back better really means, but there remain huge opportunities to invest in areas that boost jobs and wellbeing, accelerate the transition to net zero and also put the economy on a sustainable footing.
There is no agreed way to measure trends in sustainable finance comprehensively, but it is clear that these flows number in the trillions. In the five years we have been producing this report, we have seen a step change across many areas: among them, flows to ESG funds and sustainable debt issuance; investments into solutions for net zero; deal flow in private equity and venture capital in sustainability-related areas; and the market capitalisation of companies focused on the green economy.
These trends reflect the growing business and investor relevance of the energy transition and net zero, the rise in natural solutions, and investment that improves social wellbeing and creates more resilient economies.
Since 2015, we have seen a 10x increase in flows to ESG funds in Europe, a 9x increase in sustainable debt issuance, a 2x increase in PE/VC deal flow in the sustainability space and investments in the energy transition have increased by 1.5x. Over 6% of market cap is now estimated to come from the green economy, up from 2% in 2015. Sources shown in chart legend.
The tipping points we observe give us confidence, but there is no room for complacency. Huge increases in deployment of sustainability solutions are needed to limit global temperatures to 1.5°C above pre-industrial temperatures and to address injustices in society.
For climate, increases in deployment rates of the order of 5 to 10x from current levels are needed over the next few years for many technologies.
Despite important new commitments by some governments in recent months, we are nowhere close to being on course for 1.5°C. CO2 emissions must be cut in half this decade.
Greenhouse-gas emissions have rebounded since the height of the pandemic in most countries, putting the prospects of building back better at risk.
The gap is 20-23 GtCO2e in 2030. This is the difference between current pledges (high and low estimates) and a 1.5°C pathway. This gap closed by around 2.6 to 3.9 GtCO2e (or 11 to 14%) due to new pledges announced since September 2020.
There are no new oil and gas fields approved for development in our pathway, and no new coal mines or mine extensions are required
“Net Zero by 2050: A Roadmap for the Global Energy Sector“, IEA, May 2021
Net zero will soon be the law of the land, where this isn't already the case. Over three-quarters of the global economy is now covered by national-level commitments to net zero, whether these are in law or in proposed legislation and policy documents.
Yet many governments and companies have not made interim commitments consistent with these long-term goals and taken the steps required. There is a huge difference between commitments, plans and action.
Based on IMF estimate for GDP in 2021 and the ECIU net-zero tracker
* 160 global companies that have significant greenhouse gas (GHG) emissions and/or are critical to the net-zero emissions transition and to meeting the objectives of the Paris Agreement
Concern over ecological and climatic tipping points is rising. Species diversity continues to decline. Climate scientists have identified multiple tipping points that could irreversibly alter our climate.
While around half of the Fortune 100 mention biodiversity in their reports, only five have made specific, measurable, and time-bound commitments on biodiversity. Targets on nature have often been missed in the past, not least on avoided deforestation. There is much work to do.
An RLI value of 1.0 equates to all species qualifying as Least Concern (i.e., not expected to become extinct in the near future). An RLI value of 0 equates to all species having gone extinct.
Our economies, livelihoods and wellbeing all depend on our most precious asset: Nature.
Dasgupta, Partha. The Economics of Biodiversity: the Dasgupta Review. HM Treasury, 2021.
Natural solutions for sustainability are taking off. Investment and innovation are accelerating. Defined in broad terms, nature now offers some of the most exciting areas for sustainable investing. Regenerative solutions promise to heal and rebuild our ecological and social landscapes, going far beyond minimising damage.
Soybean plants with cover crop. Image: Sarah M. Golonka / Alamy
Last year, we highlighted a palpable restlessness for change in society. We now find growing evidence that social issues are hitting the mainstream for investors and companies.
Social equity and justice are central concerns for sustainability on their own terms, but they are also indivisible from action on climate and nature.
Recovering from COVID-19 is a global challenge. As well as scaling up investment at home, richer countries must do much more to support developing countries on climate finance, vaccine access and debt relief. The lack of progress here risks undermining the prospects for COP26 and our shared future.
May 2020. Image: Reuters/John Sibley/Alamy
There was a noticeable spike in protests after the murder of George Floyd on May 25th 2020. Data from the Carnegie Endowment for International Piece, analysed by Generation, suggests that there were 73% more protests in 2020 than in 2019.
Global ESG volumes are soaring, driven in particular by renewed focus on the S in ESG.
Financial institutions are stepping up on net zero. Launched in 2020, the Net Zero Asset Managers Initiative now has 87 signatories with $37 trillion of assets under management. Similar commitments are being made across the financial sector. Investor engagement with companies on climate change also reached a new level this year.
A tiny hedge fund dealt a major blow to Exxon Mobil Corp on Wednesday, unseating at least two board members in a bid to force the company’s leadership to reckon with the risk of failing to adjust its business strategy to match global efforts to combat climate change.
Reuters, May 27th 2021. Since then Exxon confirmed a third would be replaced, too.
We are seeing a proliferation in sustainability-related commitments, such as on “net zero“, “nature positive“ and “regenerative agriculture“. Social issues have also come to the fore, with concepts such as “just transition“, “diversity & inclusion“ and “building back better“.
These offer big opportunities for sustainable investing. But they will do more harm than good if we fail to set a high bar. There is growing unease at the low quality of some net-zero commitments, the absence of guardrails for natural solutions and the sustainability performance of “offset“ markets. Misleading sustainability claims are also spreading online at an alarming rate.
National consumer protection authorities had reason to believe that in 42% of cases the claims were exaggerated, false or deceptive and could potentially qualify as unfair commercial practices under EU rules.
The quality of carbon offset markets remains a concern, even in regions with strong governance. California’s prominent forest carbon offsets programme falls far short of its claimed climate benefits, according to a recent study.
Clean crude? Oil firms use offsets to claim green barrels
Reuters, April 2021
About this report
Sustainability Trends Report 2021 is the fifth edition of this annual publication by Generation Investment Management. The report takes a comprehensive look at the landscape of sustainability trends from a business and investment perspective.
Below, you can access each chapter directly or jump directly to specific topics, organised under three major themes: COP26 and the race to net zero; nature and natural solutions; and social equity and justice. At any time, you can click the three-line icon at the top left for a full overview of the report.
All eyes are on COP26. Businesses and investors are coming to terms with cutting emissions in half by 2030, on the way to net zero. Although the path to 1.5°C is narrow, there is remarkable momentum – we highlight the mainstreaming of net-zero commitments in the capital markets, and three quarters of global GDP is now under net-zero commitments made by governments.
This is a big year for nature. Scientists have sounded the alarm on degradation of the natural world, species loss and the risk of ecosystem collapse. At the same time, some of the most exciting areas for sustainable investing lie in natural solutions. Many corporates are committing to be nature-positive. There are new insights on how to integrate the economy with the natural world. Guardrails and standards are of particular importance for all natural, nature-based and bio-based solutions.
Social justice and equity issues broke through to the boardroom this year. We are a long way from solving our deep, entrenched problems, but there is room for optimism too. Social equity and justice lie at the core of action on sustainability and a just transition. We explore dimensions of social equity and justice throughout the report.
STR2021 highlights tipping points across the landscape of sustainability. What do we mean by this? Tipping points are small changes at a critical point that qualitatively alter the future fate of a complex system. Strictly speaking, it is often hard to pin down the tipping point itself. What we can do is try to observe systems as they move into a new phase, a hard-to-identify tipping point having been crossed.
The tipping points concept is often used to describe the risk of systemic risks to our planet. But tipping events in society, policy, finance and technology are also necessary to move society into a sustainable and regenerative state, avoiding the worst kind of climatic and ecological tipping points. After all, we are all part of the same planetary system.
The need for safeguards around sustainable investing is a key finding in this year's report. There are several different types of challenges. Consumers face misleading claims online. Many companies are setting long-dated commitments with limited short-term plans. Studies continue to find major flaws in carbon-offset markets. Combining two of these concerns in one, some companies are even using offsets to claim that fossil fuels are green.
With natural solutions gaining much attention, this is a particularly sensitive area. As one study this year has found, biodiversity markets are part of the solution and a powerful vehicle for change, but they also need to be carefully governed to avoid the risks around excessive financialisation. How to scale and innovate natural solutions — but with safeguards — is a central dilemma we need to solve.
In Chapter 2, we highlight three areas where safeguards are key:
- Ensuring that companies place more emphasis on cutting emissions over carbon removals. Though both are required for net zero under most scenarios, some companies are leaning on offsets or removals to deliver the bulk of their net-zero commitments rather than focusing on near-term cuts in emissions.
- Effective long-term governance over carbon removals, and monitoring and reporting programmes. Recent studies have confirmed that this is a real problem, even in regions with strong governance regimes.
- Getting the guardrails right for nature-based solutions is key to ensure sustainability and deliver real climate and other critical ecological benefits. Financial innovation can’t run ahead of safeguards and governance. Nature-based solutions have important considerations beyond climate, including biodiversity, water and the livelihoods of people who live near or work in forests and agriculture.
Biodiversity markets can be one part of the solution and a powerful vehicle for change, but they also need to be carefully governed to avoid the downside of excessive financialization.
Expert Panel on Aligning Markets with Biodiversity, Mistra. See paper
This report has been prepared by Generation Investment Management LLP (“Generation”) for discussion purposes only and reflects the views of Generation as at July 2021. It is not to be reproduced or copied or made available to others without the consent of Generation.
The information presented herein is based on Generation’s analysis of publicly available data and is intended to present a global perspective on different areas that Generation believes represent a sustainable economy. The jurisdictions and time periods presented herein may vary, as the data shown is what Generation used in its own assessment and believes to be the most complete view to support each identified area of sustainability and the associated trends. 2021 and other historic estimates made throughout the report were extrapolated from cited research and based on previous trends and known current data. While the data is from sources Generation believes to be reliable, Generation makes no representation as to the completeness or accuracy of the data.