Week 51: Which ESG trends will dominate 2021?

In this issue: ▸ Your Majesty, many did see it coming ▸ The first truly global event ▸ The year in climate ▸ ESG trends in 2021 ▸ The end of market neutrality ▸ Ecocide ▸ Investing in the SDGs

Dear all,

I hope everyone is well and ready for a new edition of ‘ESG on a Sunday’.

Today, we look at a number of things. The (crisis) year that is coming to a close. ESG trends in 2021. Ecocide. ESG in the younger generations. And, not least, how you can invest in the SDGs.

Your Majesty, many did see it coming

But we start more than a decade ago. During a briefing on the 2007/2008 global financial crisis, Queen Elizabeth II asked academics at the London School of Economics why nobody saw it coming. The response was:

Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.

In reality, many did see it coming. But they were simply looking at it from a different angle. In the future, let’s make sure we cover all the angles.

The first truly global event in history

Year 2020 will go down in history as the year our world was brought down to its knees.

The COVID-19 pandemic has altered all levels of societies, reshaped the way we live, communicate, interact and in many ways reminded us how vulnerable and interdependent we are.

The current pandemic is probably the first global event in the history of the human race. By ‘global’ I mean it has affected almost everybody, regardless of country of residence or social class.

If, in a couple of years, when hopefully it is over and we are alive, we meet friends from any corner of the world, we shall all have the same stories to share: fear, tedium, isolation, lost jobs and wages, lockdowns, government restrictions and face masks.

No other event comes close. Wars, even world wars, were limited: people in Switzerland, let alone in New Zealand, did not have meaningful war stories to share with those from Poland, Yugoslavia, Germany or Japan. And in the past 75 years wars have been local.

In an earlier newsletter we touched upon the narratives that shape our perceptions and views. In his new book Capitalism, Alone: The Future of the System That Rules the World, Branko Milanović, an economist specialised in development and inequality, gives a perspective which is worth a Christmas gift – or simply a good book to read during the holiday season. 

The year in climate

There can be no two ways about it. 2020 was a crisis year. A pandemic, economic turmoil, social upheaval. And running through it all, climate change.

The pandemic, in many ways, echoed the threat of climate change: It was global in scale, hit the vulnerable the hardest and required collective action to avert the worst. But it moved more swiftly.

In this excellent summary from New York Times, you can read about the year in climate.  

ESG trends in 2021

So, what will 2021 and beyond look like? What are the trends related to ESG that will amplify the transformation to a sustainable future?

It’s certainly time to redefine ‘normal’. As we reboot our society and economy, there is a huge opportunity to create a world which is happier, healthier, and more equal. But it will take bold strokes, collaboration, and strong, measurable targets to achieve this.

In this piece in Forbes you can read about some of the ESG trends that will dominate 2021. Front and centre of it all is mental health.

During March and May, 64% of people recorded common signs of depression, while 57% suffered from anxiety, according to research. Businesses are feeling the impact too, with 42% seeing employees quit due to a lack of emotional support, including highly valued employees.

One likely outcome is an even bigger push towards flexible outcome-based work models that allows for more time for social interaction, leisure activities and other hobbies.

The end of market neutrality

In July 2020, Christine Lagarde, the President of the European Central Bank (ECB), promised to explore every avenue for greening the ECB’s operations, including the asset purchase scheme undertaken to help stimulate the Eurozone economy.

Indeed, the rapid and profound economic devastation brought on by the coronavirus pandemic illustrates the vulnerability of our economies to catastrophic shocks and should prompt central banks to hasten progress towards a low-carbon transition. The ECB simply cannot afford to address one crisis whilst neglecting – if not worsening – another.

In this paper, the authors argue that ECB needs to reconsider the so-called ​‘market neutrality’, the underlying principle that guides corporate asset purchases and hardwires a carbon bias into its unconventional purchases.

The ECB has recently admitted that market neutrality might be problematic as a benchmark given that the markets have failed to produce climate-efficient outcomes.

Criminalising the destruction of ecosystems

An expert panel of top international and environmental lawyers have begun working this month on a legal definition of ‘ecocide’ with the goal of making mass ecological damage an enforceable international crime on par with war crimes, crimes against humanity, and genocide.

Assembled by the Stop Ecocide Foundation at the request of several Swedish parliamentarians, the initiative to criminalise the destruction of ecosystems at the global level has already garnered support from European countries as well as small island nations highly vulnerable to rising sea levels. Read more in this piece.

Climate change leads the way within ESG

ESG, of course, stands for Environmental, Social and Governance. The three are linked and none of them can be ignored. But what part of ESG is most important?

Well, according to a report from research and consulting firm Cerulli Associates the answer is climate change, based on how they are used in practice. Nearly 77% of insurance companies address climate change explicitly in their responsible investment policies, as do 53% of the pension funds.

Another interesting finding in the report is that French, Dutch, and UK asset owners are more likely to address climate change explicitly in their responsible investment policies than their counterparts in Italy or Switzerland.

Greenwashing in finance

Meanwhile, in an interesting move, French and Dutch securities regulators have called for European Union rules to prevent “greenwashing” or inaccurate claims that investments are sustainable and climate friendly. Read more here.

They are on to something. We need to look beyond the greenwashing and ask: Are banks really doing what they should to help solve the climate crisis?

Well, according to BlackRock they are far from it. Europe’s banks are not integrating climate change and other sustainability concerns into their risk management systems as quickly as regulators expect. That’s the conclusion in a study by BlackRock for the European Union.

This indeed needs to change. The question is how – and how fast.

How finance is blowing the Paris carbon budget

In this joint report by 18 NGOs – a report that has not received the attention it deserves – you get an excellent overview of the climate issues within finance. Here, you can clearly see, feel and ultimately understand why banks are the solution to the transition to a sustainable future. 

In short, the report exposes the banks and investors that are providing financing to the fossil fuel companies developing large-scale, contested coal, oil and gas expansion projects. The 12 case studies in the report highlight the immense environmental damage, violation of Indigenous rights, negative health impacts, human rights concerns and expected CO2 emissions caused by each of the projects.

The NGOs behind the report has formulated concrete policy demands for the finance industry: The finance sector needs to rapidly move money and services such as insurance out of the fossil fuel industry. The first priority should be to no longer enable coal, oil and gas expansion projects to move forward.

ESG and the young generations

In order to transition to a sustainable future, we need to reshape capitalism. It’s up to our generation to solve it, but that doesn’t mean we cannot be hopeful that the next generation will make an even bigger push in the right direction.

In this HBR piece, the authors explore if Gen Z consumer behaviour can make capitalism more ethical. It’s not as easy a topic to cover as it may sound, and the piece does a great job of describing the complexity of hopes related to young generations.

If we look at the generational topic from an ESG investing perspective, the stereotype that it is just young people who are interested in ESG investing is quickly becoming out of date. The reality is somewhat different, as you can read in this very interesting article.  

The weakest link in fast fashion

I have previously written about fast fashion (you can read my ESG analysis of H&M here), and I question if fast fashion can truly shift its business model.

Most people buy fast fashion, and a lot of it. They must be hoping that the industry can clean up its act. One of the reasons why it is unlikely to happen has to do with water.

In this article, you can read why wet processing is the weak link in the attempt to ‘green’ fast fashion supply chains.

A solution is to invest in the SDGs

I would like to end this newsletter on a positive note, by focusing on a solution, not a problem. A few weeks ago, I did an interview with my colleague Florian Esterer. He is the Lead Portfolio Manager of our rather new SDG fund entitled SDG Opportunities.

The basis of the fund is that you can, in a way, invest in UN’s Sustainable Development Goals. And that it makes a lot of sense to do so. Or as Florian told me: “In my long investment experience, I have rarely seen such a good overlap between the interest of investors and the interest of society.”

That’s it for now. Merry Christmas everyone!

Best regards, Sasja