Building back better and greener
At the start of the Covid-19 pandemic in 2020, many questioned whether the resulting economic turmoil would result once again in climate change and other ESG issues being relegated to the back burner.
In fact, what we have seen is the exact opposite. Both Covid-19 and the Black Lives Matter movement have acted as “ESG accelerants”, shining a brighter light on the “S” in ESG in particular.
Not surprisingly, corporates and the financial sector alike are increasingly considering the environmental, social, human and economic impact of their business decisions and focusing more on long-term sustainable value creation.
Climate change will remain high on the investor and regulatory agenda
The Covid-19 pandemic has sharpened everyone’s perception of risk, leading some to question whether the health crisis is just a “dress rehearsal” for the climate crisis.
2020 saw a spate of high-profile climate pledges – from governments, banks, asset managers, pension schemes and corporates alike. The emphasis in 2021 will be on turning these announcements into credible action plans. Those who don’t, run the risk of being accused of greenwashing.
Moving towards mandatory TCFD-aligned climate disclosure
Investors and other stakeholders globally continue to press for more and better ESG data that is relevant, reliable and comparable. This in turn is leading to the roll out of mandatory climate-related disclosure regimes in some jurisdictions. The Task Force on Climate-related Financial Disclosures (TCFD) has become the global gold standard for climate disclosures.
Getting closer to a single global ESG reporting standard
Pressure is mounting to agree on a single global ESG reporting methodology. Although the TCFD is now widely accepted as the global gold standard for climate-related disclosures, the same cannot be said for the rest of the ESG “alphabet soup” – where there is a plethora of ESG reporting frameworks, standards and metrics.
Greater regulation of ESG data and ratings providers
ESG data and service providers play an important role in the investment process. The quality and reliability of these data, ratings and scores are vital for investors. However, there are serious questions about how the data is compiled and assessed and how ratings are derived, with correlation between scores ascribed by different providers varying widely. Up until now, providers of sustainability-related data and services have remained largely unregulated. However, this may be about to change.
Combatting greenwash: taxonomies and the many shades of green
As the interest in sustainable investment and ESG products continues to increase at pace, so too does the fear of “greenwash”, and its younger sibling “social wash”.
Achieving net zero by 2050 will require a significant reallocation of capital towards low carbon/more sustainable investments. But to do that investors need to feel confident that what they are investing in is indeed as green or as sustainable as it claims to be and not just the product of greenwash.
Increased investor engagement: turning talk into action
Investors – including influential groups such as Climate Action 100+, the Institutional Investors Group on Climate Change (IIGCC) and activist investors such as Chris Hohn – have warned that they do not intend to ease up on engagement with investee companies in 2021, in particular on climate change and diversity issues.
Investors have warned that, where their expectations are not met, there are three courses of action: engagement, voting and divestment. Some may have to brace themselves for a bumpier ride in the 2021 AGM season.
Regulations around business and human rights on the rise
With Covid-19 and Black Lives Matter bringing the social limb of ESG to the fore, there has been unprecedented momentum behind developments in the business and human rights space.
Previously viewed as the realm of NGO campaigns and CSR initiatives, legislation is now on the statute books in a number of jurisdictions, and regulators and industry alike are now working on numerous different proposals to step up efforts in this area.
Continued growth in green, sustainability-linked and social bonds
Green bonds alone raised $210.2 billion in 2020, surpassing the $188.3 billion for 2019. Social bond issuance raised more than $163 billion in 2020, more than 10 times the $13 billion raised in 2019.
In fact, the growth of social bonds precipitated by the pandemic is outpacing that of green bonds.
Volume and variety of sustainable derivatives and structured products to grow
We have seen a wide range of sustainable derivatives and structured products being issued over the last couple of years and expect the volume and variety to increase further in 2021 as investors actively seek more sustainable investment opportunities.
Boost in global carbon markets
The world’s largest carbon market, the EU Emissions Trading System (EU ETS), has continued to reflect the EU’s increasing green ambitions, notwithstanding the pandemic-related global shutdown. EU ETS carbon prices have maintained and even increased during 2020, and Phase IV (2021-2030) of the EU ETS will see changes introduced which will effectively tighten the system. The European Commission is consulting on yet further changes which will be introduced during Phase IV, including an expansion of the system to cover new sectors of the economy such as shipping. The EU ETS remains a central tool for the EU to reach its net zero target.
Litigation claims will broaden to include all aspects of ESG
ESG litigation is starting to develop beyond pure activist challenges and companies need to consider this area from a risk management perspective. For example, various civil claims are ongoing in which it is alleged that multinational parent companies should be held responsible for the conduct of foreign subsidiaries/joint ventures in connection with adverse environmental and/or human rights impacts. This is a trend that looks set to continue into 2021.