2021 – The Year of ESG

In 2020, ESG went mainstream. In 2021, it will dominate.

It seems clear that 2021 is going to be an extremely interesting year. Global hopes are high that the coronavirus vaccines will be efficiently distributed and highly effective, and while difficult winter months surely lie ahead, we can finally begin to see a glimmer of light at the end of the pandemic tunnel.

2020 was a perfect storm of simultaneous global crises: Covid-19, climate change, racial and social injustice, and dysfunctional geopolitics. In the dark days of March and April, many observers felt the momentum that had been building around ESG over the past few years would surely fade in the face of these overwhelming challenges. Incredibly, the opposite occurred – ESG principles provided the strategic and cultural roadmap for global organizations to navigate, adapt and emerge from the pandemic with their businesses not only intact but thriving.

The data around ESG investing is similarly conclusive – 2020’s extreme market volatility confirmed that investment strategies which incorporate ESG metrics have shown the ability to outperform in both up and down markets. Global investors are voting with their wallets – inflows into sustainable investment strategies overwhelm every other category, and now top $1 trillion globally, according to Morningstar.

Source – Financial Times

2020’s simultaneous health, environmental and social crises heightened global focus on each individual component of ESG, and this will continue and intensify in 2021:

1) Environmental

1. Climate change will remain a dominant global imperative. Companies and governments around the world will now need to implement and execute upon their transformed corporate and governance strategies to deliver against carbon-neutral/net zero commitments over the coming decade.
2. As Larry Fink has emphasized, climate risk is investment risk. The momentum around clean energy will continue to build, with companies like NextEra continuing to thrive while companies lagging in their energy transition will be punished. In 2020, the top 2 performing funds in the entire US equity market were BOTH clean energy ETFs managed by Invesco, each of which were up over 200% for the year.
3. With the US now poised to rejoin the Paris Climate Accord, momentum will steadily build during the course of the year toward the UN Climate Change Conference (COP26) in November.

2) Social

1. Stakeholder capitalism is here to stay – companies around the world are subscribing to “triple-bottom-line” goals of people, planet and profit. It is becoming increasingly clear that these goals are NOT mutually exclusive, but in fact are mutually reinforcing.
2. Organizations will need to deliver upon their revised 2020 mission statements – “purpose” will be a key differentiator of forward-looking corporate cultures. Diversity, equity and inclusion initiatives will continue their ascendancy as core pillars of any credible corporate strategy.
3. Investors, customers, employees and regulators will all be demanding a clear articulation and execution of sustainable business principles; failure to do so will engender material repercussions in terms of stock price, market share, talent retention, supply chain disruption, and governmental pressure.

3) Governance

1. As the 2021 proxy season kicks into gear, the world’s largest global asset managers look ready to finally deliver upon commitments to hold management and boards accountable for implementing sustainable business principles.
2. When these trillion-dollar asset managers actually begin to support shareholder resolutions, as BlackRock formally pledged to do last month, C-suites and boards around the world will feel the pressure to embrace ESG across the organization. Activists claimed a major victory last month when they forced former Exxon chief Lee Raymond to retire from the board of JP Morgan Chase after 33 years.
3. A survey by Willis Towers Watson released last month reported that 4 out of 5 companies are planning to change their executive pay plans over the next 3 years to link bonuses to delivering upon ESG targets. The boards of Volkswagen AG, BMW AG and Continental AG have already done so, and look for this list to expand in 2021.

In addition:

• The incoming Biden administration will lend wind to the sails of the global ESG movement.
• The regulatory environment in the US seems poised to begin catching up with EU standards.
• There is finally progress being made toward ESG measurement and reporting standardization.
• Sustainable finance will continue to boom, as the projected issuance of green and sustainability bonds is projected to exceed $500 billion this year.
• ESG investment strategies will continue to dominate global inflows.
• The demand for senior executive ESG talent, which hit a fever pitch in 2020, is already carrying over into 2021.

It seems clear that 2021 will indeed be The Year of ESG.