How The Industry Fared on Key ESG Predictions in a Truly Unpredictable Year

By David Rutherford

As 2020 comes to an end, we’re revisiting some common predictions issued at the start of the year about responsible investing trends. In a year that absolutely defied prediction, which predictions materialized, and which ones what missed the mark?

  1. Responsible investing is all about mitigating climate change

In many quarters, 2020 was predicted to be the year that the environment, and specifically climate change, took the commanding lead in ESG (Environmental, Social and Governance) issues. It started off promising enough, as global COVID-19 lockdowns demonstrated the positive impact on the planet of shutting off much of human activity. Then the environment took a backseat to the S in ESG, as a number of important social and racial issues rose to the forefront, from “hero bonuses” for frontline workers to the Black Lives Matter movement. But with the World Economic Forum’s risk map declaring that all five top risks are now climate-related, we’re confident that climate and the E in ESG will have its day in 2021.

Conclusion The global pandemic helped everyone understand the S in ESG.

  1. There will be progress on S factors, too

No can deny 2020 was the year of the S, with social issues dominating. People get it now: companies and investors understand the concept of social risks as never before. D&I or “Diversity and Inclusion” was, no doubt, a top search term. But as with a lot of ESG-related stuff this year, there was plenty of mainstream talk without a corresponding degree of action. We think it’s only the beginning.

Conclusion: Businesses are just getting started on addressing S-related risks.

  1. Central banks will step up to address climate risks

While central banks talked a lot about climate risks in 2019, they now have a much bigger challenge on their hands heading into 2021: how to get the COVID-ravaged global economy back on track. With every challenge comes opportunity. One way to do that is to bankroll the green economy. So we’ll get to those climate risks, ultimately.

Conclusion:  2021 has to be the year of real action on climate.

  1. Climate change mitigation is a big business opportunity

It’s fair to say that global warming will cost us more than it will make us — at least in the short term. But as former Bank of Canada governor Mark Carney has said, we have a chance to turn the existential risk of climate change into “the greatest commercial opportunity of our time.” While some of the businesses seizing the opportunity aren’t yet turning big profits, the market is increasingly valuing these companies. This is clearly where the puck is going.

Conclusion: Expect innovative advances in addressing climate change.

  1. Fossil Fuel Free will become the latest catch phrase

2020 was indeed the year that “fossil fuel free,” or FFF, officially became part of the conversation around reducing emissions. More and more people are discussing the merits of FFF investments. But we think the issue is considerably more complex than simply walking away from fossil fuels. Why? Because divesting your portfolio of fossil fuel companies doesn’t change the consumption habits of individuals or companies. This is why we still have investments in fossil fuel companies: we choose to talk to them about transitioning their businesses to reduce climate risk. Plus, we ask all companies to set net-zero emissions targets.

Conclusion:  FFF makes a great mantra, but it’s not a strategy.

  1. ESG will become the clear performance winner

In 2020, ESG funds outperformed their traditional counterparts. We’re gratified to see investors recognize that companies focused on managing ESG risks will have better financial performance. But there’s more to this story. Many ESG funds profitted  from holding big tech companies, with their low carbon footprints and net-zero pledges. But those same companies also present significant social and human rights risks. Should those risks continue to evade consideration by investors? We don’t think so, which is why we’re pushing so hard on Alphabet, Facebook and the like to look more closely at digital rights.

Conclusion: The value of managing ESG risks is clear, but long-term financial performance will need to consider all risks.

  1. Corporate reporting will get more specific about ESG risks

There’s growing awareness of the need to disclose climate and other ESG risks in corporate reporting — but the actual disclosure of ESG risks is another matter entirely. Until one of the broadly accepted standards for disclosing ESG risks, such as the Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD), becomes mandatory, reporting will remain murky.

Conclusion: One day, full disclosure of ESG risks will be as natural as reporting on earnings. That day did not arrive in 2020.

  1. Stakeholder capitalism will become the new buzzword

At last — a prediction that nailed it! We not only heard a lot of talk about stakeholder capitalism; we also got to see it in action in the immediate aftermath of COVID-19. Though temporary, consideration of multiple stakeholders — not just shareholders — got sufficiently embedded into the mainstream that we made stakeholder capitalism a key topic of our engagements with a bunch of companies in 2020. As JUST Capital CEO Martin Whittaker said, stakeholder capitalism “is the systems reboot we need.” As always, implementation is the biggest challenge.

Conclusion: Stakeholder capitalism has arrived. We need to show companies how to apply it.

  1. Expect the unexpected

If 2020 taught us one thing, it’s that you don’t get to pick your ESG risks. They pick you. Yes, climate is a big one – maybe still The Big Risk — but then we experienced a global pandemic, and 2020 showed us there’s more than one fire to put out. The key to resilience is planning for ESG risks proactively before the sparks erupt into flames.

Conclusion: 2020 put us on the cusp of real change in how companies manage their businesses. There will never be a better opportunity to take ESG mainstream.

Learn about responsible investing opportunities in a post-pandemic world in the 2021 Market Outlook report.