When we first published the SII Digest and Podcast we could not have known the pivotal year we were about to experience. It turns out we had plenty to talk about. The amalgamation of environmental, social, and corporate governance events has been truly epic. We could not be prouder of how our team took on the challenge.
Covid-19 continues as a backdrop of course. Many of the companies that are helping us to endure through both the pandemic and the fight against climate change seem to score higher on the ESG scale – and now, with more confidence, we see the values of their stocks reflecting this potential. There seems to be little doubt within the professional investment world that sustainability and social responsibility must be taken into consideration.
This edition focuses on the whole of this past year. What have we learned? How far have we come? What do we see ahead? In our SPOTLIGHT ON section, we asked experts from the industry to weigh-in on these questions.
The SIIPODCAST hosted by Pat O’Neill, is a retrospective of the previous podcasts our first season – all 9 of them. This episode, our 10th, recalls some of the most interesting contributions from our amazing guests, a real treasure of information. Many thanks to Sureita Hockley, who expertly produces these podcasts and Paul Ellis who takes on the responsibility of sourcing our experts. The PODCAST team comes together in a roundtable style for a very informative session.
Originally, we thought it would be helpful to amplify all the smarts around environmentally and socially conscious investing. Our mission continues to make socially responsible investing more user friendly and actionable. We will continue down that path as we move into our next season.
We see the world coming together over this time with more of a shared purpose and clarity around ESG. The “pack” is getting stronger and that should be inspiring to us all.
We reached out to leading experts in the ESG investing industry to find out their responses, and this is what we found…
QUESTIONA Year Like No Other – What have we learned? How far have we come? What do we see ahead?
ANSWERCarolyn Eagle, Senior Product Manager, Sustainable Investment at FTSE Russell
ANSWERWhen the United States reentered the Paris Agreement, it signaled its commitment to the global decarbonization of the economy – net zero – by the middle of this century. But large institutional investors, most of whom are broadly invested across the entire economy, are left to determine how their portfolios can reach net zero by 2050. We’ve found that many large investors cannot simply divest from oil and gas companies – and some may not be willing to. Instead, their challenge becomes determining which companies – across all sectors – are most prepared for the transition to a decarbonized world.
QUESTIONA Year Like No Other – What have we learned? How far have we come? What do we see ahead?
ANSWERGwen Le Berre, Director of Responsible Investing at Parametric Portfolio Associates
ANSWERWhile some feared that ESG was going to be sidelined by the pandemic, we experienced the exact opposite with investors better appreciating the impact that systematic ESG risks can have on the entire market. With a renewed 2020 focus on diversity, inequality, and climate change, we are continuing to see investor interest go beyond equities and into the fixed income and liquid alternatives space.
QUESTIONA Year Like No Other – What have we learned? How far have we come? What do we see ahead?
ANSWERAlexeyErmakov – Impact driven entrepreneur, Co-Founder of Impala Hub
ANSWERWhat have we learned? Clearly, it may take a bit of time for a widely accepted and globally recognized impact measurement framework to be developed, evidence and verification of impact serve well when assessing impact opportunities.
ANSWERHow far have we come? Both conventional and unconventional financial players are more committed than ever to provide “responsible” capital and are on active search for new emerging opportunities with impact-driven activity/business. Yet exposure of micro, small and medium impact-driven enterprises remains limited and fragmented.
QUESTIONA Year Like No Other – What have we learned? How far have we come? What do we see ahead?
ANSWERNimet Vural – Business Student, Bogazici University; Istanbul, Turkey
ANSWERAs far as I know, the impact of Covid-19 in 2020 jeopardizes the progress of the 2030 agenda for UN Sustainable Development Goals (SDGs). Before the current crisis, Less Developed Countries (LDCs) were struggling to achieve the SDGs. The Socio-Economic impacts of the Covid-19 require an ever more forward-looking perspective to build a better and greener future.
ANSWERMeeting the UNSDGs financing objectives will require a coordinated, many-sided, response and the use of innovative tools and risk mitigation instruments. Blended finance can help to catalyze much needed additional resources for SDG-aligned projects that private investors would otherwise overlook. Blended Finance can leverage digital technologies, finance the ‘missing middle’ gap, and address market failures that prevent LDCs from financing their development needs and reaching the most vulnerable populations.
ANSWERThe latest data shows that too little private finance is mobilised for investment in LDCs. A decline due to the global economic recession and less public revenues risks endangering gains and beneficial trends that have been made in the past few years.
QUESTIONA Year Like No Other – What have we learned? How far have we come? What do we see ahead?
ANSWERSarmad Kashan ali- Pharm.d (Doctor of pharmacy) MBA
ANSWERI believe that the impact of covid.19 on the global economy, as well as environmental and sustainability related issues, are viewed in a similar perspective by the decision makers and provide insight and opportunities in this year like no other. In ESG Investing we have to focus more on green bonds, which provide the opportunity to invest in a lower risk instrument with a constructive purpose of creating good in the society. Companies, governments, and municipalities can develop a competitive edge and raise much-needed capital. Key investments should be in renewable energy, green buildings (energy-efficient buildings), water investments, agriculture investments, (Biofuel), and technology projects such as the use of broadband and its potential to reduce emissions.
ANSWERAll stakeholders should understand and folloow the EU taxonomy governed by universal rules and regulations for all countries. Violation of these regulations should require heavy fines to be paid to global environmental funds. Together we can conserve the resources for our future generations in order to make Earth a better place to live.
MSCI, one of the leading providers of indexes for the financial markets, is seeing demand for environmental, social and governance ratings and index products outstripping growth in its traditional index business, Baer Pettit, chief operating officer of MSCI (ticker: MSCI), said in an interview with Barron’s.
Approximately $200 million of the firm’s revenues are now “tied to ESG and climate,” and are growing “in the 30 percentages in this area,” Pettit said. “It’s growing dramatically, faster than even the second major closest category, the index business.” The latter is growing “in the low teens.” MSCI had $1 billion in revenue in 2020, up 10.4% from a year earlier.
MSCI is one of the most prominent firms in ESG ratings and has ridden the growing interest in sustainable investing. Money has flooded into the category, with U.S.-domiciled sustainable investments totaled $17.1 trillion at the beginning of 2020, up 42% from two years earlier, according to trade group US SIF. That number represents about a third of U.S. assets under management.
Index providers generate revenue by creating and licensing indexes to banks, fund companies, and other financial firms for the creation of investment products and internal use. MSCI also sells analytics services. Increasingly, more institutional investors are asking for “ESG-tilted benchmarks” over traditional, market-cap weighted indexes, Pettit said. In addition, executives in the C-suite of the firm’s clients are increasingly interested in sustainability.
According to a recent MSCI survey of 200 institutional investors across the globe, 73% plan to increase ESG investment by the end of 2021. Among the largest firms, or those managing more than $200 billion in assets, the pandemic was a critical driver of plans to boost ESG integration. For the same firms, climate change is a critical risk, with more than 50% saying they actively use climate data to manage risk.
By comparison, smaller firms were more concerned about market volatility. “There’s a sense of precariousness for smaller funds with less staff and less infrastructure, a nervousness and fragility that’s very telling,” Pettit said. “Unless we have perpetually wonderful markets, it will be more challenging.”
The popularity of sustainable investments, especially with the new Biden-Harris Administration pursuing a green agenda, may produce a “brown rally” as the lockdown ends, airlines resume flying and renewed economic growth bolsters share prices of greenhouse-gas emitters, Pettit predicted. Still, he sees that as a short term phenomenon, given ongoing demand for green products and services.
Reducing earnings gap for Black women could increase U.S. GDP by as much as $450 billion, Goldman research shows
Goldman Sachs has pledged to invest $10 billion over the next decade in an initiative to improve the economic standing of Black women, which will focus on areas including access to capital, housing, healthcare and job creation.
The new initiative, called “One Million Black Women,” will address the “dual disproportionate gender and racial biases that Black women have faced for generations, which have only been exacerbated by the pandemic,” Goldman said in a statement on Wednesday.
The goal of the program is to affect the lives of at least one million Black women by 2030. Goldman GS, 0.25% will also set aside $100 million for philanthropic causes focused on Black women.
Some of America’s biggest companies, including technology giants like Alphabet’s GOOGL, -1.31%Google, Facebook FB, 0.01% and Apple AAPL, -2.26%, as well as consumer groups such as Walmart WMT, -0.73% and PepsiCo PEP, -0.31%, have pledged tens of billions of dollars to help tackle systemic racism in the aftermath of the police killing of George Floyd last year, which led to weeks of protests across the country.
Major Wall Street banks are behind some of the other biggest pledges. Bank of America BAC, 0.50% led the way in June last year, when it committed $1 billion to help local communities cope with the widened economic and racial inequality caused by the COVID-19 outbreak.
More recently, JPMorgan Chase & Co JPM, 0.34% said in October that it would commit $30 billion to address racial inequality over the next five years. The package includes providing $8 billion in new mortgages for Black and Latino borrowers, $14 billion in loans for affording housing projects, and $2 billion in small business loans.
Black women currently make 15% less than white women and 35% less than white men, Goldman said, citing its own research, called Black Womenomics. Reducing the earnings gap for Black women could create as many as 1.7 million new U.S. jobs, and increase the country’s annual gross domestic product by as much as $450 billion, the research found.
It echoes similar research from Citigroup C, 0.01%, published in September, which showed that $16 trillion could be added to U.S. GDP if racial gaps for Black Americans in wages, housing, education and investment had been closed 20 years ago. If these gaps are closed today, $5 trillion could be added to U.S. GDP over the next five years, Citigroup researchers noted.
“Black women are at the center of this investment strategy because we know that capital has the power to affect change, and we know that Black women have the power to transform communities,” said Margaret Anadu, global head of sustainability and impact for Goldman Sachs Asset Management.
“If we can make our economy work for Black women, we all benefit,” she added.
In addition to joining with several Black sororities, Goldman is working with Black women’s organizations such as Black Women’s Roundtable; The National Coalition on Black Civic Participation and The National Council of Negro Women.
Goldman’s initiative will be overseen by its Advisory Council of Black leaders, which includes Walgreens Boots Alliance WBA, -1.41% Chief Executive Rosalind Brewer, Lisa Jackson, vice president of environment, policy and social initiatives at Apple, and former U.S. secretary of state Condoleezza Rice.
Racial justice investing is a form of socially-responsible or impact investing aimed at adding investments that promote racial justice, inclusion, and diversity. The idea is to screen for investments in companies that promote these social goals, which can be accomplished in several ways. These may include, among other tactics, owning shares of black-owned businesses or companies with diversity-hiring mandates, and avoiding investments in companies that disproportionately impact communities of color in negative ways, such as gun makers or operators of private prisons.
Among the motivations behind racial justice investing is to recognize institutional investors’ influence and power in the markets, and that the investor community has contributed to and benefited from structurally racist systems and the entrenchment of white dominance among investors and financial sector employees.
Understanding Racial Justice Investing
Impact investing, which aims to generate specific benefits that promote social gains, has grown in prominence over the past several years. The point of impact investing is to put money and investment capital to work for the good of society, often targeting traditionally underserved communities or sectors. This can be done by investing, for example, in nonprofits that benefit the community or in clean-technology enterprises that benefit the environment. Impact investing attracts individuals as well as institutional investors including hedge funds, private foundations, banks, pension funds, and other fund managers.
One form of impact investing involves promoting racial justice, equality, and inclusion. Known as racial justice investing, the purpose is to leverage both institutional and retail dollars to invest in ways that advance this and other anti-racist causes. Racial justice investing can take on many forms, including seeking investment in black-owned businesses or startups with founders who are people of color.
Financial firms and institutional investors are also increasingly looking internally to their own practices and employee demographics, signing racial justice pledges and issuing statements to publicize their position. Others are actively fostering racial diversity and inclusion, while also favoring vendors and suppliers that have made similar pledges. According to Forbes, “within their portfolios, institutional investor actions span from promoting board diversity to making investments that support job and wealth creation for underrepresented minorities.”
In 2020, and especially following the social movements that responded to police brutality and killings of unarmed black men in particular, several financial firms signed on to public pledges admonishing persistent racism in America and seeking to use their influence as institutional investors to instead promote diversity, inclusion, and justice.
The 2020 Belonging Pledge, put forth by the group Confluence Philanthropy, seeks the following call to action among its signatories: “We commit to discussing racial equity at our next investment committee meeting. We will move our agenda forward on this. We will share our next steps and results (perhaps privately), so that we can help to identify industry-wide barriers and the technical resources required to advance the practice of investing with a racial equity lens.” As of February 2021, 187 institutional investors, ranging from hedge funds to pensions, have signed on to the Belonging Pledge, representing nearly $1.9 trillion in assets under management (AUM).
A second pledge was issued by RacialJusticeInvesting.org (RJI). Its Investor Statement of Solidarity to Address Systemic Racism and Call to Action states that “As investors, we stand in solidarity with protesters and call for the dismantling of systemic racism and recognize our responsibility to act. We recognize that the investor community has contributed to and benefited from racist systems and the entrenchment of white supremacy… We acknowledge the deep roots of structural racial inequity. Since its founding, the United States’ society and economy have been rooted in racist beliefs and systems designed to extract wealth and maintain the power of a white elite…” This pledge has been endorsed by 186 institutional investors as of February 2021.
Several other pledges that have similar mission statements are also available and gaining signatures from investors large and small.
Investor Direct Action
In addition to signing public pledges and making efforts to diversify and address racial issues internally, institutional investors are also putting their money where their mouth is. This starts by investing in firms owned and operated by people of color, as well as investing with sub-advisors and portfolio managers that have diverse teams. Doing so not only promotes racial justice but also can enhance returns. In fact, a recent research paper authored by Harvard Business School’s Josh Lerner showed that portfolios managed by more diverse firms outperformed their peers, on average. Similarly, the National Association of Investment Companies (NAIC) found that private equity funds with greater diversity outperformed in nearly 80% of vintage years.
Investing in companies with more diverse corporate boards of directors also seems to be a social strategy that yields above-average returns. One recent piece of industry research put out by the Carlyle Group finds that after controlling for industry, fund, and vintage year, companies with more diverse boards generate earnings growth that is five times faster, on average, with each diverse board member associated with a 5% increase in annualized earnings growth.
Other direct actions investors can take to promote racial justice include putting capital into real estate investments, such as REITs, that promote affordable housing or invest in under-served residential communities, making improvements and offering fair terms and rent for their tenants. At the same time, investors may seek to negatively screen out investments that could prove detrimental to the cause of racial justice, for instance in banks known for predatory lending practices or redlining, or that engage in activities that overburden communities of color such as private prisons.
Investing in Racial Justice Investments
While much of racial justice investing involves actions taken by large institutional investors, individual retail investors can also get involved. In addition to researching and investing in stocks that align with these causes, there is now a racial justice-focused exchange-traded fund (ETF): The Impact Shares NAACP Minority Empowerment ETF (NACP), which is, to date, the only financial product that explicitly addresses issues of racial inequality, doing so with the backing of one of America’s oldest and most prestigious civil rights groups, the NAACP.
The top 10 holdings of NACP, as of February 2021, are:
The term climate finance has both broad and narrow uses. In its broad sense, it refers to an enterprise that uses financial institutions or technologies to advance the cause of environmental sustainability, such as by developing or deploying new solar panels or other renewable energy sources. In its narrow usage, climate finance refers to the transfer of capital from developed to developing nations in adherence to the recommendations laid out in international agreements such as the 2016 Paris Agreement.
How Climate Finance Works
Climate change is the long-term progression of patterns in the world’s climate. These changes are commonly related to human activities such as the use of certain nonrenewable resources like fossil fuels. Once burned, these energy sources help raise the Earth’s temperature by increasing greenhouse gases in the atmosphere. Climate finance is a way for individuals and nations to help fight climate change. In the most general sense, climate finance refers to any type of financing used to tackle climate change. Financing normally takes place on the municipal, national, or international level and comes from various sources—both public and private.
IMPORTANT Climate finance—which takes place on the municipal, national, and international levels—may come from either public or private sources.
The topic of climate finance is growing in international importance, as countries and companies become increasingly aware of the risks and opportunities associated with climate change. For instance, the United Nations Environment Programme (UNEP) reported in September 2019 that between 2010 and 2019, global investments in renewable energy technologies exceeded $2.5 trillion, roughly quadrupling the global energy capacity associated with renewable sources.1
Various financial institutions and technologies played an essential role by facilitating this shift in global energy infrastructure. Among the examples of how finance plays a role in this process include the use of:
Banks and other intermediaries to transfer capital overseas
Stock exchanges and investment vehicles to facilitate investment in renewable energy companies
Climate finance encompasses all of these activities, which are likely to accelerate even further in the coming years.
As noted above, the term also has a more narrow meaning. In this sense, it relates to the question of how developed countries should support developing ones in their transition toward energy sources and other technologies with improved environmental footprints. These discussions are frequently contentious—at times, implacable—raising a slew of morally ambiguous questions.
Example of Climate Finance
Let’s look at an example to show how climate finance works in the real world. A common demand from developed countries, such as those in North America and Europe, is that developing nations, such as those in Asia or sub-Saharan Africa, should refrain from relying on new coal-fired power plants. On the other hand, these developing countries often contend that this demand is hypocritical since developed countries were able to achieve their current level of development in part by exploiting coal and other inexpensive fossil fuels during their own periods of industrialization.
For this reason, many believe that developed countries have a moral obligation to subsidize developing countries by helping them invest in more environmentally friendly energy sources such as wind, solar, and hydroelectric power. Of course, this debate becomes increasingly difficult when one seeks to find the exact definition of a developing country. Should the United States provide subsidies to China, for example, due to the fact that its per capita income is still far below that of the United States? Many Americans are likely to consider this politically unacceptable, citing China’s rapid development in recent years.
Political discussions surrounding climate finance can also prove contentious around the question of which investments should be considered eligible for funding under the climate finance programs. For example, some would argue that child education should receive funding, on the grounds that it would reduce population growth and therefore help curb emissions. However, others may wish to restrict climate finance initiatives to projects with a more direct and near-term association with climate change, such as the installation of renewable energy sources.
In response to demand and regulatory drivers, the quality and quantity of ESG data will continue improving. Meanwhile, in the U.S., the new Biden administration will reinvigorate ESG policies and climate urgency.
With this growing global urgency around climate, conversations about energy transition will become increasingly nuanced and the nature of transition conversations will shift from climate mitigation to climate resilience.
While threats to nature and biodiversity will take centerstage in ‘E’ discussions, social issues will gain traction with investors and in global policy discussions.
In 2020, the world learned a hard lesson: Despite our best-laid plans, we don’t know what is immediately around the corner. In 2021, that lesson reinforces our view that a long-term, sustainable approach centered around strong environmental, social and governance (ESG) principles is more important than ever.
Here are some of the seven ESG trends we expect will shape the sustainability agenda in the months — and years — ahead.
1. In response to demand and regulatory drivers, the quality and quantity of ESG data will continue improving.
As many countries and supervisory authorities in the financial system begin to require climate risk disclosures, we expect continued drive towards transparency around climate in the lead up to the United Nations Climate Change Conference, or COP26, taking place in Glasgow in November.
The world’s largest asset managers are taking a proactive stance on issues across the ESG spectrum, and that will continue to drive discussions around disclosure and data quality. In his annual letter released last week, BlackRock’s Larry Fink urged companies to disclose how they are preparing for a “net zero world” where net greenhouse gas emissions are eliminated by 2050.1 At State Street Global Advisors, the main stewardship priorities in 2021 will be the systemic risks associated with climate change and a lack of racial and ethnic diversity on company boards.2
Simultaneously, a number of international and regional policy and regulatory initiatives are driving in the same direction. The IFRS Foundation’s proposals around sustainability reporting represent an important international attempt to make progress on disclosure.3 The Network for Greening the Financial System is also coordinating best practice in the world of financial supervision of climate-related risks. The new sustainability disclosure requirements for market participants in the EU under the Sustainability Disclosures Regulation and the Taxonomy have created new impetus for better ESG information and data. The review of the EU’s Non-Financial Reporting Directive this year aims to provide companies with a streamlined framework to report on ESG matters. The UK also has announced that it will make TCFD reporting mandatory.
Perhaps most importantly, companies are responding to the pressure. Earlier this month, Exxon Mobil was first US oil super major to disclose greenhouse gas emissions data related to customer use of its petroleum products. The company said it will provide Scope 3 emissions data reports annually.4
But data remains uneven, with a patchwork of reporting frameworks around the globe. About 90% of companies in the S&P 500® publish sustainability reports, but only 16% have any reference to ESG factors in their filings, creating a mismatch between what is disclosed in regulatory filings and what companies voluntarily publish.5
Standardization is lacking, and as a result, regulators across jurisdictions are facing pressure to address this gap. The private sector and companies like S&P Global can play an important role in facilitating international dialogue to align on better disclosure standards, which will lead to better ESG data. We are engaging to lend our expertise to these policy initiatives trying to find solutions.
Ultimately, agreement on standard definitions of ESG information will reduce reporting burden and will provide better and more meaningful ESG data to market participants to help them identify, compare and act upon ESG risks and opportunities.
2. The new Biden administration will reinvigorate ESG policies and climate urgency in the U.S.
The new administration in the U.S. brings a significant change in tone on addressing climate risk. On Day 1 in office, President Joe Biden took steps to rejoin the Paris agreement on climate change and pledged to set the U.S. on the path to net-zero greenhouse gas emissions by 2050 with an interim target of decarbonizing the U.S. power sector by 2035. Biden is expected to use his first 100 days to start the nation down that road and has committed to make climate policy, renewable energy and green infrastructure top priorities for the new administration.6
Furthering the U.S.’s position on climate risk, the Federal Reserve recently joined the Network for Greening the Financial System, a group of central banks and supervisory authorities from around the world that are collaborating to develop climate risk management tools for the financial sector.7
These moves come alongside stark evidence of the economic costs of climate change. According to S&P Global Trucost, almost 60% of the companies in the S&P 500 have at least one asset at high risk of physical climate change impacts. In 2020 the U.S. broke an unsettling record, experiencing 22 extreme weather and climate change-linked disasters that each cost in excess of $1 billion, according to figures recently published by the National Oceanic and Atmospheric Administration. Those events collectively caused at least $95 billion in damages, killed at least 262 people and injured scores more. Prior to 2020, the largest number of annual major disasters was 16.
Scientists project that as average global temperatures continue to rise due to human-caused greenhouse gas emissions the number and intensity of extreme weather events would rapidly increase.8 A 2020 report by S&P Global Ratings found that water scarcity will affect 38% of counties in 2050 under a high-stress climate scenario (RCP8.5), raising risks under this scenario for their municipal water utilities, public-owned power utilities, and local governments. Heat wave risk will continue to increase across all states and under all scenarios to midcentury with Florida particularly exposed.9
3. Threats to nature and biodiversity will take centerstage in ‘E’ discussions.
According to an S&P Global Trucost analysis of 3,500 companies representing 85% global market cap, 65% of company business models align with the United Nations Sustainable Development Goals (SDGs), but less than one percent of business models align with SDGs 14 and 15, “life below water,” and “life on land.” We expect this to change in 2021 with businesses shifting focus on growing threats to nature and biodiversity. The World Economic Forum estimates that $44 trillion of economic value generation representing more than half of world GDP is moderately or highly dependent on nature.
The Taskforce on Nature-related Financial Disclosures (TNFD) calls nature loss “a planetary emergency.” Similar to the Taskforce on Climate-related Financial Disclosures (TCFD), the TNFD working group of financial institutions, private firms, governments, regulators and think tanks aims to create a framework for corporates and financial institutions to assess, manage and report on their dependencies and impacts on nature.10
That discussion will continue and gain momentum throughout 2021. ‘How to Save the Planet’ was a theme of last week’s Virtual World Economic Forum in Davos, with sessions focused on biodiversity and ocean health.11In May, the United Nations Conference of the Parties (COP 15) to the Convention on Biological Diversity (CBD) will convene to review a strategic plan for biodiversity and likely to make a final decision on the post-2020 global biodiversity framework.12
4. With this growing global urgency around climate, conversations about the energy transition will become increasingly nuanced.
I mentioned in my last letter that we saw an absolute explosion of net-zero commitments from companies and countries surrounding the 5th anniversary of the Paris Agreement. With these new pledges, the United Nations estimated that by early 2021 countries representing around 65% of global CO2 emissions and around 70% of the world’s economy will have committed to reaching net-zero emissions or carbon neutrality.13 This is especially relevant when considering that the S&P 500 is on a CO2 emissions trajectory that implies a more than 3°C temperature rise globally, according to S&P Global Trucost.
China, which represents nearly 30% of global CO2 emissions, committed to halt its rise in carbon emissions before 2030 and become carbon-neutral by 2060. That will be no simple feat. S&P Global Platts analysts say that for China to reach net zero, “an unprecedented shift in the energy mix would need to take place” as fossil fuels currently account for 85% of its energy consumption.14
These ambitious targets mean companies and investors will be having some difficult discussions around the energy transition in 2021. As Laurence Pessez, head of corporate social responsibility at one of France’s largest banks, BNP Paribas, put it: “It’s obvious that we will have to exit the relationship with at least 30% to 50% of our current clients in the power generation business.”15
5. The nature of transition conversations will shift from climate mitigation to climate resilience.
As the planet looks to “build back better” after the pandemic, we expect conversations to shift from simply mitigating the negative effects of climate change to include more discussion about adaptation and climate resilience.
Some groups are already working to address this, like the Coalition for Climate Resilient Investment. CCRI seeks to build on TCFD disclosures by finding practical ways to integrate physical climate risks into investment decision-making.16
Looking ahead, we also see that rebuilding from the pandemic presents opportunities for capital markets. In Europe, for example, 30% of the €750 billion recovery fund is dedicated to green and sustainable. With so much government-issued debt that will be tagged to sustainability, private markets are likely to crowd in, creating a boom in sustainable debt.17
After a record year for sustainability-related debt issuance, demand for sustainable and green bonds is set to “go through the roof” in 2021. According to S&P Global Ratings, global sustainable debt issuance is expected to surpass $700 billion in 2021, up from $500 million from 2020. With the increase in companies and governments making net-zero commitments, transition bonds are emerging as a potential solution by enabling carbon-intensive companies to raise capital and use the proceeds for activities that help them reduce their carbon footprint.
6. Investors will continue pressing companies on social issues, particularly around COVID-19, worker safety, and diversity.
Conversations about disclosure are not limited to the ‘E’ in ESG. On the contrary, when the pandemic hit it brought widespread social unrest around income inequality and worker safety. The death of George Floyd while in police custody put a necessary spotlight on the ugly systemic racism that for so long has gone unspoken in the U.S. Amid this upheaval the ESG conversation evolved rapidly as investors, corporates and the public gave more priority to social issues — the ‘S’ in ESG.
In 2021, we expect that focus will intensify, and data will evolve as a result.
Often when we talk about diversity, we talk about gender— a data point that is frequently easier to measure than other kinds of diversity. There is evidence that gender diversity improves results. S&P Global Market Intelligence’s Quantamental Research team looked at companies from year-end 2002 through May 31, 2019, and found that those with female CFOs generated $1.8 trillion more in gross profit than their sector average. Companies with female CFOs also experienced bigger stock price returns relative to firms with male CFOs during the executives’ first 24 months in the role, the analysis found.18
The definition of diversity is evolving beyond just gender as investors and corporates expand their expectations.
In December 2020, Nasdaq proposed a rule that that will require most of its more than 2,500 listed companies to have at least one director in the coming years who identifies as a woman and another who is Black, Hispanic, Native American, LGBTQ+ or part of another underrepresented community. Data on the race and sexual orientation of board members remains scarce, making it difficult to determine how many Nasdaq-listed companies currently comply with the diversity proposal. But an initial S&P Global Market Intelligence analysis of board gender diversity found that roughly 18% of the 2,707 companies listed at Nasdaq do not have a female director.19
Within S&P Global, we’re taking steps to correct enhance race-related data too. As a start we added a question regarding the number of board members from minorities to the 2021 S&P Global Corporate Sustainability Assessment.
7. Social issues will gain traction in global policy discussions, too.
We’re also seeing social issues coming to the fore in policy worldwide.
In Europe, after years of debate in politics and business about the best way to facilitate equal opportunities, German lawmakers backed a bill mandating female representation at the board level in the largest companies. It will make Germany one of the few countries in Europe with this kind of gender mandate.20
In the U.S., some states have gone a step further. Corporate diversity laws enacted in Illinois in 2019 and in California in September 2020 aim to make publicly traded companies embrace racial diversity on their boards, and in March for the first time the University of Illinois will publish a report card evaluating how public companies headquartered in the state are faring.
And at the federal level, Biden’s $1.9 trillion economic relief package includes proposals to bolster safety regulations for workers and expand the amount of paid sick, family and medical leave workers can receive. It comes at a time when many employees are struggling to care for children or loved ones amid widespread closures of daycares, schools and nursing homes.21
Family leave policies in the U.S. lag the rest of the developed world. The U.S. is the only country within the Organization for Economic Cooperation and Development that does not offer nationwide, statutory, paid family leave of any kind, whether maternity leave, paternity leave or parental leave, according to a 2019 UNICEF report on family-friendly policies. In addition, the federal government does not provide paid caregiving leave to its citizens nor mandates companies to do so.22
While a number of states have enacted paid family leave laws during the pandemic, the U.S. private sector has largely taken the lead in such policies in the absence of federal mandates, 2020 research conducted as part of S&P Global’s #changepays initiative found. Many parents and family caregivers saw their at-home commitments grow since the pandemic began, leading to increased stress and some feeling that they were being penalized at work for their increasing responsibilities, according to an S&P Global/AARP survey of nearly 1,600 people conducted in the late summer of 2020.23
We cannot know with certainty what is right around the corner, however, the events of this past year reinforced the importance of taking the long view — putting in place both policies and business strategies that look beyond next quarter or next year to create just, equitable and sustainable societies that will thrive over the next several decades and beyond. And that means understanding ESG risks and opportunities is a focus that we are invested in for the long haul.
2020 is the year that changed the world forever, touching the lives of every single person on earth. Yet, as the pandemic exposed our economic, institutional, and social vulnerabilities, we have recognized that we are all interconnected and share a mutual responsibility toward driving positive change towards ESG investing. The acceleration of ESG investing has been unprecedented, evidenced by the record inflows that poured into sustainable funds throughout 2020 and the research by Blackrock highlighting the on-par ( and in many cases outperformance) of the ESG indices in comparison with traditional indices with comparable volatility.
As we continue to make extraordinary progress in ESG investing, it’s critical to ensure that we rebuild our societies and economies upon foundations firmly built on an ESG approach that is integrated and intentional, which expands to an integrated approach to active ownership, as close investor engagement with corporate boards will continue to hold firms accountable for accurate ESG disclosures.
2021 will see the rise of the focus on the ‘S’ in ESG, as the pandemic not only continues to lay bare the most vulnerable aspects of our societies, but highlights the urgent need for increased transparency and accountability within organizational value structures. This in turn results in higher standards of corporate governance which increases access to ‘S’ related to a firm’s workforce and productive efficiency. In order to ensure ESG transparency, clear performance indicators created by better ESG data will be enabled by spatial finance- the integration of geospatial data into financial reporting. Spatial finance, with its combination of remote sensing AI and earth observation, has enormous potential to provide valuable insights across the ESG investment universe, in addition to providing a next generation framework to assess impact measurement and risk management.
ESG as the driver of value creation ensures corporate resilience as it becomes increasingly backed by governmental and regulatory support. As global recognition and consensus of the systemic risk of climate change, increased ESG integration into investment decisions by both institutional and retail investors alike, and the demand for ESG transparency increases, ESG investing will continue to be solidified as the future of investment.
Green bond issuance last year hit a record—the pandemic couldn’t stop the surge in investor appetite for anything related to renewable energy and environmental responsibility. This year, this new market is set for even stronger growth as energy sustainability becomes the theme of the decade. Last year, total sustainable debt hit a record high of $732.1 billion, BloombergNEF reported earlier this month. This was up by 29 percent on the year despite the pandemic or maybe because of it: the pandemic proved an opportunity for some governments to reinforce and strengthen their commitments to their green agenda.
Take the European Union, for example. The EU already had ambitious green energy goals before the pandemic ravaged its economy. But instead of worrying how it would juggle these goals with the billions of euros in relief and recovery programs it needed, the EU is tying the two together. Member states will only receive relief funds if they pledge to invest a substantial portion of it in green technology.
In fact, earlier this month, the ECB went even further. The eurozone’s central bank was, at the start of this year, allowed by Brussels to buy ESG bonds in its asset purchase offensive aimed at propping up the zone’s ailing economy. This makes it the first central bank in the world to add ESG bonds to the range of assets eligible for purchase as part of quantitative easing efforts.
What are these ESG bonds, then? Environmental, social, and governance debt issued by companies could either be used to address social issues (social bonds), environmental issues (green bonds), or be used to target both social and environmental problems (sustainable bonds). Sustainable bond issuance last year shot up by 81 percent compared to 2019, according to BloombergNEF, eclipsed only by social bonds.
According to Reuters data, the issuance of bonds to fund sustainable projects rose twofold last year, to a record high of $544.3 billion. Together with loans for sustainable projects, the amount lent for sustainable projects hit $750 billion, the news agency reported last week, citing data from its service Refinitiv.
There seems to be little doubt that the market for green debt is thriving. There is also little doubt as to the drivers behind this thriving. The EU is one example, but it is not the only one. U.S. president-elect Joe Biden’s pandemic recovery plan, worth $1.9 trillion, also ties the distribution of funds to renewable energy targets. Even the IMF’s chief recently named green projects crucial for the world’s recovery from the pandemic.
No wonder then that analysts expect the boom in green bond issuance to continue this year: Swedish bank SEB toldthe Financial Times it expected green bond issuance to hit $500 billion this year. That would compare to an estimated $270 billion in sales of green bonds last year. The EU alone will issue more than $270 billion in green bonds this year, the FT notes, as part of the loan part of its pandemic relief program, which is worth over $905 billion.
Given this growing interest in the green transition – growing so strongly that even Wall Street banks are now jumping on the green bandwagon – chances are we are about to see a true boom in green and sustainable bonds. But since this is not a perfect world, there are challenges.
The biggest of these were laid out back in 2018 by the World Bank’s Director of Economic Policy and Poverty Reduction programs for Africa, Marcelo Giugale. Green bonds, Giugale noted, are not exactly cheaper than “normal” bonds. But they are fungible. That is, they could be used for a purpose different from the one stated as the purpose of their issuance. It is the latter that today seems to be of particular concern: the EU is now on a quest to regulate the nascent green debt market in order to make sure the money raised for sustainable projects is indeed used for sustainable projects.
“It is hard to overstate the impact that the regulations will have,” Thomas Tayler, senior manager at Aviva Investors’ Sustainable Finance Centre for Excellence, told the FT’s Siobhan Riding earlier this month. “It is going to change the way people run their businesses by putting sustainability right at the heart of the investment process.”
In other words, the regulation push will aim to make sure the money poured into green investments is indeed used for these investments. This will mean asset managers offering sustainable funds to investors will need to verify these funds are indeed sustainable, making a market that has been quite opaque so far rather more transparent. Regulation should also take care of concerns regarding “greenwashing” by companies without actual plans to become more sustainable but eager to improve their reputation.
The green debt market seems set to really flourish this year thanks to the rush to decarbonize economies and businesses. And maybe the best part in this rush is that now even big polluters can use green bonds to reduce their emissions: there is now a new type of green bonds that include a specific commitment by the issuer to reduce its greenhouse gas emissions by a set amount by a certain date. This sort of commitment would likely make polluting issuers more credible in the eyes of bond buyers, expanding the green bond market further.