Photo by Max Bender
2020 was set to be the year that ESG took centre stage, inciting companies to change the way they approached long-term, strategic decision making. However, the worldwide disruption that resulted from COVID-19 saw many businesses struggling to stay afloat. The effects of a pandemic, civil rights movements and a new US president has left the ESG landscape looking different in 2021.
The ‘S’ in ESG:
The economic devastation experienced by workforces and the underprivileged amid COVID-19, along with the killing of unarmed Black Americans, has increased the focus and scope around “S” data. Race relations, workplace diversity and employee health and safety are the social governance issues at the forefront of investor scrutiny in 2021.
The economic, mental and physical desolation of the world’s workforce in the wake of COVID-19 has left investors increasingly interested in the management of human capital. McKinsey & Co reported that companies who addressed employee needs during the pandemic were found to have happier and more engaged employees.
“Compared with respondents who are dissatisfied with their organizations’ (COVID-19) responses, those who say their organizations have responded particularly well are four times more likely to be engaged and six times more likely to report a positive state of well-being.”McKinsey & Company, June 2020
This is of particular interest to investors as positive work cultures have long been correlated with less absenteeism, productive employees and better economic performance. The steep incline in focus around “S” data resulted in the Sustainability Accounting Standards Board (SASB) announcing it was reassessing the scope of its human capital management standards. Jeff Hales, chair of the Standards Board at SASB, said “the types of things that we’re thinking about are really kind moving from traditional health and safety issues … and thinking more about some of the mental health issues around stress, depression and anxiety, the ability to provide workers with the benefits around paid sick leave.”
The collective outrage and mass protests that followed the killings of unarmed Black Americans resulted in investors wanting enhanced transparency on the action companies are taking around their impact on minorities and systematic racism. While the reporting of gender and race diversity is mandated in multiple countries, only a small minority of companies publicly disclose this data. However, there has been an increase in requests for companies to voluntarily disclose data around the racial and gender breakdown of their workforce, particularly around representation in board composition and company policy. The US, UK and Canada all have reporting guidelines or requirements in place and many investors, regulators and funds are pushing to make public disclosure of workplace diversity compulsory.
The Biden administration
The election of Joe Biden as president is expected to have far-reaching effects on the ESG landscape. The Biden administration has already pledged $2 trillion to help the US meet sustainable targets and mitigate climate change, and is set on reversing the near 100 environmental rollbacks under the Trump administration.
The United States officially re-joined the Paris Climate Agreement on February 20. The agreement is the first global pact aimed at reducing emissions of planet-warming greenhouse gases. Through Biden’s direction, there will be a large-scale review of nearly 100 Trump-era environmental policies, with many set to to be fundamentally changed or reversed altogether. This includes:
- The tightening of wildlife protection by restoring key language in the Endangered Species Act.
- Reversing approval for the Keystone XL pipeline and increasing prerequisites for future permits.
- Stricter rules around methane and carbon emissions.
- Environmental regulations to ensure air, land and water quality.
One flagship reviewal is a rule finalised by the US Department of Labor (DOL) that makes incorporating ESG funds in retirement plans more difficult. The rule states that funds will have to choose investments solely based on pecuniary (financial) factors that “are expected to have a material effect on risk.” During a 30 day comment window, the DOL received more than 8,000 comments, the majority of which argued that ESG factors are investment factors and omitting them could lead to sub-optimal performance.
Given the regulatory support and significant funding by the Biden administration, ESG-investing is unlikely to slow anytime soon.
Cohesive ESG reporting frameworks
As more companies are coming around to the idea of ESG reporting, many are finding it challenging to choose a framework given the vast amount of options available. The confusion around choice has led to requests for a comprehensive global framework, and this is resulting in many standard-setting organisations collaborating with each other.
In December 2020, five leading frameworks —CDP, CDSB, GRI, IIRC and SASB—published a prototype of a corporate disclosure system that included both financial and sustainability variables in its reporting. At the end of 2020, the IIRC and SASB announced that they were merging into a unified organisation – the Value Reporting Foundation. The foundation will maintain the Integrated Reporting Framework and advance the concepts presented by the group of five in the joint prototype.
Despite the changes in the ESG landscape and concerns a tumultuous 2020 would hinder growth, sustainability initiatives are set to gain greater prominence this year.