As the unusual year of 2020 ends, we want to highlight some of the significant trends that might help to shape sustainable investing in 2021. Here are some key considerations as they relate to environmental, social and governance trends on the road ahead.
Environmental (E) Trends to Watch in the Coming Year
Presidential Changeover: While President Trump spent much of his term rolling back environmental policies, President-elect Biden’s campaign detailed a robust plan for tackling climate change and increasing clean energy usage. He has made it clear that climate change is a priority for his administration and has pledged to rejoin the Paris Climate Agreement as one of his first acts as president. In addition to re-strengthening environmental protections, he is also expected to cancel oil drilling leases in arctic reserves that were put in place by President Trump. Investing in improved infrastructure, focusing on the effects of climate change in low-income communities and financing clean energy are also part of the new president’s agenda.
Renewable Energy: Spending on renewable energy power projects will continue, with Goldman Sachs predicting that capital expenditures will surpass those for the oil and gas industry for the first time in 2021. Growth in spending is also expected to lead to significant job creation over the next decade.
Hydrogen: Hydrogen as a fuel source is expected to continue to make headlines as the second annual World Hydrogen Summit is scheduled for March. Toyota is set to unveil the Mirai, which is powered by hydrogen fuel cells, and a power plant in Ohio that is partly managed by General Electric will begin shifting to hydrogen as one of its power sources.
Green Bonds: Green bond issuance set a record level in 2020, and growth in the market is expected to continue in 2021, with some analysts expecting $500 billion in new issues to come to market. Emerging markets may account for a growing piece of new issuers. The UK is also planning to issue a sovereign green bond next year to help in reaching its goal of zero net carbon emissions by 2050.
Social (S) Trends to Watch in the Coming Year
Inequality: Society is becoming increasingly aware of inequality within established systems. The pandemic is only worsening socioeconomic inequalities with higher unemployment, forced business closures and limited childcare options. This year, we have also taken time to reflect upon racial inequalities within our society. Stakeholders now have a heighted sensitivity to inequality and will expect companies to work toward a solution. While inequality in our society cannot be solved by a single company, top ESG performers can help take steps to address this issue. Depending on the industry, businesses may have an opportunity to focus on inequality through their regular business operations, by servicing disadvantaged communities or directing supplier spend to racially diverse and minority owned businesses. Other companies tackle inequality through charitable giving or volunteering.
Labor Management: The trend of addressing inequality will inevitably cross over into labor management in 2021 and companies will need to continue building out a diverse workforce. ESG leaders are those that set and achieve goals for diversity, particularly among management. Best practices also include examining pay equity between workers, developing a substantial pipeline for diverse talent and investing in diverse leaders in terms of training and education. As the pandemic continues to play out, labor management in relation to the virus will also impact companies in 2021. Businesses must have good practices to keep their workers safe to not only avoid business disruptions, but to also be able to attract new talent.
Emergency Preparedness & Crisis Management: In 2020, COVID-19 highlighted the need for companies to have strong crisis management and emergency preparedness. Well organized companies with capable management were able to pivot quickly at the beginning of the pandemic to avoid business disruptions. Companies that lagged their peers in terms of response time and effectiveness have had a chance to reflect on their operations and will likely seek process improvement in 2021 and beyond. Now, more than ever before, companies and their stakeholders recognize the need to be prepared to handle civil unrest, localized business closures, extreme weather events, cyber events or other unexpected crises.
Data Privacy & Security: Data privacy and security has been a significant risk in some industries for many years now. As a result of COVID-19, more activities and services are being performed virtually. People rely on online platforms to work, shop, socialize, receive medical care, etc. These activities result in the exchange of sensitive personal data that companies must safeguard. Businesses that are operating remotely should also be concerned with the digital security of their internal documents and customer data. In 2021, safeguarding data will be a top priority for more companies than ever before as we continue to rely on virtual interactions.
Governance (G) Trends to Watch in the Coming Year
Enhanced ESG Disclosure: As investors, regulators, and employees all seek increased disclosure of ESG-related data, companies have little choice but to enhance their reporting of everything from climate mitigation metrics to workforce diversity progress. While these disclosures are voluntary in many parts of the world currently, new ESG-specific regulatory initiatives around financial reporting are taking root in some countries and will only expand from here. Recent research by MSCI/S&P shows that companies are discussing sustainability-related matters on 45% of quarterly earnings calls in 2020, up from 19% in 2015.
Board and Executive Diversity: Gender and racial diversity among the leadership ranks in organizations has received greater attention recently, a trend that should continue to gain momentum in the years ahead. According to Catalyst’s Women CEOs of the S&P 500, women currently hold just 6% of the CEO seats while, in 2019, they occupied 26% of the board seats (per Spencer Stuart). Change, however, is afoot as 46% of the newly appointed independent members to boards of S&P 500 organizations last year were women and 23% were minorities, as highlighted by Spencer Stuart in their Board Trends 2019 report. (We are also pleased to see Cambridge Trust ranking at the top of a recent Nasdaq list.
Executive Compensation: As ESG-related disclosures ramp up, it is likely that a portion of executive incentive compensation will become linked to a corporation’s progress on sustainability-related efforts. Enhanced disclosures will allow investors to track a management team’s progress more easily against specific expectations and goals.
We hope this roundup of current trends is helpful. The landscape for SRI and ESG investing continues to evolve, and we look forward to bringing you more commentary and analysis in 2021. The SRI team at Cambridge Trust wishes all of you happy holidays and a great new year.