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A look at what we might see from ESG in 2021

John Tennaro, CIMA®, CSRIC™

February 11, 2021

Environmental, social and governance (ESG) trends appear poised for a momentous 2021.

As we turn the page on an unprecedented and tumultuous 2020 and start to look at the year ahead, environmental, social and governance (ESG) trends appear poised for a momentous 2021. The principles of ESG should continue to serve as an economic and cultural roadmap for organizations across the globe, and a blueprint for businesses to navigate, adapt and engage with issues that are meaningful and influential. With that as a backdrop, here are some ideas of what we might see with ESG in 2021.


 

Environmental

Climate change. This topic will likely continue to dominate the narrative, as governments and companies around the world will likely need to develop and execute actions to combat this existential threat. 

Divestment from fossil fuels. As this issue continues, the discussion will likely be about where to reinvest these funds. 

Clean energy, climate tech and sustainable infrastructure. These three issues should build off of their momentum from 2020 and continue to thrive in 2021, while those companies lagging in their energy transition could endure additional suffering.

Social

While the uprisings in 2020 raised the awareness of social discriminations and inequalities, the next phase will more than likely focus on how companies and businesses respond to these challenges.

Diversity, equality and inclusion. These initiatives will continue to ascend as key differentiators. Will corporations look to “check boxes” and meet quotas, or will they establish more sustainable and inclusive policies and procedures that can lead to systematic improvements? From this, we expect to see a significant demand for solutions that allow investors to mobilize capital and focus on racial equality and gender empowerment.

Governance

Stakeholder capitalism. This notion has gone from a fringe term to a mission statement. Companies across the globe are being tasked with implementing a “triple bottom line” approach that incorporates people, planet and profit. Employees, customers, investors and communities in 2021 will likely demand senior leadership to embrace these standards and lead by example.

The ESG evolution finds support and its stride

The Biden administration and a Democrat-controlled Congress will likely be supportive of the ESG movement. In 2021, we also expect more guidance and oversight to help put ESG on an enduring path forward.

Another outcome we should expect is further progress being made towards more commonality and standardization with ESG measurement and reporting.

It is also widely expected that ESG and impact investment strategies will continue to see massive inflows. This will consequently lead to a substantial increase in new products in 2021, as investment management firms jump in to participate in this so-called “green rush” of strategies that have some relationship or connection with ESG.

However, simply saying you incorporate ESG (or have been) may not be “enough” to meet all due diligence standards. We believe investors should actively assume the responsibility of determining the intentionality and integrity of prospective ESG strategies, and whether these investments suitably align with the investor’s goals and objectives.

Growth of ESG Incorporation by Money Managers 2005-2020

Source: US SIF, December 31, 2020.

The generational wealth transfer effect

The massive ongoing wealth transfer will be putting an estimated $30 trillion to $40 trillion into the hands of investors who broadly bring forth a different perspective on how to use their capital. We expect more clients to align their money with those issues that matter most to them. 

As this great transfer unfolds, we expect that the incorporation of ESG factors and the utilization of impact investing to function as a bridge between two sets of ideals. This approach allows younger investors to pursue positive impact while letting older investors develop their legacies.  

Furthermore, ESG can also serve as a translator or a shared language between generations. Given their nature, environmental and social issues can help generate a palatable setting for critical—yet difficult—conversations. ESG can help older investors facilitate interest and involvement from their children and grandchildren. Simultaneously, ESG can provide younger investors a platform to express themselves and better participate in their future. 

John Tennaro is the Head of ESG & Impact Investing Solutions, and is responsible for overseeing all aspects of our firm’s approach to ESG & Impact Investing.