If you are feeling like us, you will be heartily glad to see the end of 2020. But what will 2021 bring? We are not going to place bets on when the pandemic might end or economic recovery start. But here, in the last edition of Moral Money for 2020, are our thoughts and forecasts for what the new year is likely to deliver for environmental, social and governance issues in these peculiar times. Please tell us if you agree — or not.
The ESG boom lives on
There are not many silver linings to the dark cloud of Covid-19. However, here is one: to the surprise of many (including us), the pandemic accelerated interest in environment, social and governance issues in 2020, and Moral Money predicts this will intensify in 2021. There are at least five reasons:
The ESG boom is now being driven as much by risk management as activism: Covid-19 has shown company executives and financiers around the world the perils of ignoring so-called “externalities”.
The “externalities” around climate change will be increasingly on the agenda in 2021 due to the COP26 meeting, more instances of extreme weather and polls that show society broadly cares about global warming. Covid-19 proved the perils of ignoring science; it also showed that behaviour can change in surprising ways when the public understands the nature of the emergency.
Big money increasingly has a stake in promoting the ESG agenda, for its own benefit, and will lobby for this in 2021. Larry Fink, chief executive of BlackRock, recently told Moral Money that he viewed climate finance as the second big structural shift of his investing career (the first was the rise of securitisation — which he spotted early on, and used to launched his career). And while longtime ESG enthusiasts scoff that Mr Fink is late to the game compared with earlier activists, the key point is this: since Mr Fink (and others) have spotted a momentum trade in ESG, they are determined to maintain this momentum.
Transparency is rising in a manner that will make company boards and investment committees nervous about falling foul of ESG norms in 2021, particularly in the face of millennials who have used transparency to demand change (be that employees, customers or anyone else). The shock of the #MeToo movement in 2019 and Black Lives Matter in 2020 has shaken executive attitudes. Even if you hate the idea of “stakeholderism”, ignoring ESG can be bad for shareholders.
Politics will back ESG momentum in 2021 too. In the UK, Prime Minister Boris Johnson has thrown his weight behind green reforms. The European Commission is pressing ahead with its green taxonomy and green stimulus plans. The incoming administration of Joe Biden has put climate policy at the centre of its staffing decisions, and is likely to push for rapid ESG investing reforms. China pledged to go carbon neutral and Japan has followed with its own promises. Indeed, these days it is tough to find any government — except Brazil — that is not trying to get a green halo in some form.
To be clear: we are not predicting that the growth of ESG will have a smooth trajectory in 2021. There are big problems dogging the sector such as a lack of accounting consistency, different transatlantic policy approaches, too much money chasing too few viable investment products and the difficulty of deciding how the “E” of ESG should be balanced against the “S”. This will probably produce some scandals and greenwashing complaints in 2021. But the direction of travel is clear: ESG is moving from the margins to the main stage.
So what should investors watch for in particular? Here are a few thoughts . . .
Will COP26 succeed?
COP26, the UN summit in Glasgow, is seen as a make-or-break moment for the fight against climate change. The meeting, which was postponed from last month until November 2021, will bring world leaders together to discuss how they plan to achieve the goals of the 2015 Paris climate accord. Key issues on the table are set to include global carbon pricing and a chance to make up for the failure of 2019’s COP25 in Madrid.
The meeting is likely to demonstrate a rising chorus of support for green policies. At the beginning of 2020, “nobody thought there will be any chance of delivering at COP26”, said Daniel Klier, global head of sustainable finance at HSBC. “Now, we have almost entered an arms race of who can be better.”
What will be really interesting to watch, though, is not just what the public sector does, but how companies and businesses respond. Mr Klier, for example, forecasts that private sector action during the COP26 meetings may have a much more lasting impact than some of the things governments agree to in conference rooms. This private sector emphasis represents a shift toward a bottom-up, business-first approach that the UK prefers rather than a continental European top-down government approach.
What will Biden do next on climate?
Joe Biden was elected US president on a green(ish) platform — at least when compared with Donald Trump. But what shade of green will his administration actually embrace? The appointments made thus far suggest that his team is aiming to put “green” at the centre of economic policymaking — but rolled out in a pragmatic manner that tries to win broad-based establishment support.
His Treasury secretary nominee, Janet Yellen, just co-authored a vast G30 paper calling for practical climate change policies (such as carbon taxes). Brian Deese the man who has been running ESG policy for BlackRock, is now the chief economic adviser to the White House. John Kerry, the seasoned wily diplomat, was named special global envoy on climate change. Mr Biden has selected environmentalists to helm the Environmental Protection Agency and other key agencies.
This means that in 2021 we will not just see the US rejoin the Paris climate accord, but also move ahead with substantial policy discussions. Expect some form of a carbon tax, a clamp down on carbon emissions and noise about shale gas. And watch for changes to the Department of Labor and to Securities and Exchange Commission rules that would make it easier for asset managers to invest in ESG products. If these transpire, the impact will be significant.
The battle around supply chains
Three or four years ago, when companies said that they wanted to “be sustainable” they usually had their own operations in mind. No longer.
Companies today are facing growing demands from investors, employees and clients to not just raise standards in their own businesses, but those of their supply chains too. Walmart is one American pioneer in this respect: it is urging its suppliers to cut carbon emissions, improve their biodiversity footprint and will soon move to social issues too.
Others will undoubtedly join the conversation in 2021, not least because it seems that investors seem minded to reward companies that are raising ESG supply chain standards. This is partly because investors have realised that if a company is able to monitor ESG standards among suppliers, it is probably fairly well run in general.
The accounting alphabet soup will keep swirling
2020 was the year that Moral Money got utterly fed up with the confusing mess of acronyms linked to ESG accounting standards (TCFD, SASB, GRI, to name but a few). So did many investors.
Happily, 2021 is likely to deliver (slow) movement towards creating a more rational world. Moral Money expects that eventually some form of a system based around TCFD and SASB will shape how most companies report on ESG issues, possibly within the frame being championed by the World Economic Forum (even thought many continental Europeans still love GRI).
We rather hope that the easy-to-understand label “impact accounting” that has been launched by Harvard Business School professors and Ronald Cohen becomes the more popular tag since it is so much easier to pronounce and explain.
The olive yield curve
The European Commission will press ahead with efforts to introduce its green taxonomy in 2021. It deserves kudos in this respect for being a pioneer (and, by default, the global standard setter since the Trump administration withdrew from Paris).
But 2021 will also be a year when investment bankers and companies push for a more nuanced definition of “green” to ensure that brown companies, such as fossil fuel giants, are rewarded in the markets and court of public opinion as they travel in the general direction of green.
Call this, if you like, the rise of olive finance. Some activists deride this as greenwashing; others argue that it is the only way to encourage (or force) more companies to transition to a cleaner world. Either way, expect to see more “transition” or “sustainability linked” bonds that offer cheaper finance if green(er) goals are met. That, in turn, will encourage the creation of more platforms to monitor how companies and their projects are moving along this “olive” scale.
The 2020 Tokyo Olympics in 2021
The Olympic Games in Tokyo were a hard sell to begin with. Tokyo is not a desirable place for the summer games due to the extreme summer heat in recent years. The International Olympic Committee even decided to move the marathon to the cooler northern city of Sapporo. Not all Japanese were convinced by the “hosting the Olympics will kickstart the economy” logic.
Then came the Covid-19 pandemic. The games are delayed about a year, causing an extra cost of ¥294bn ($2.8bn) on top of the existing ¥1.35tn budget. Shinzo Abe, a proponent of the Tokyo games, is no longer the country’s prime minister. A recent poll showed that a majority of the public opposes holding the games next year, favouring a further delay or outright cancellation.
Japan needs to establish a new model of success for the Olympic Games. Pre-pandemic-style success, a packed stadium full of local people and overseas tourists, is unlikely to happen and may not even be desirable — inside or outside of Japan. But a clear blueprint of the post-pandemic games has not yet been provided by the new administration of Yoshihide Suga — or the IOC.
The local mood is sour, but Kenji Fuma, chief executive of Tokyo-based ESG advisory company Neural, sees a bright spot: global co-operation. As multilateral meetings are on the decline under the pandemic — even virtually — Mr Fuma thinks that the games can act as a reminder of global collaboration. “I hope that [the] Tokyo Olympics in 2021 will be remembered as a turning point that fortifies bonds among countries and creates a mood to fight for the sustainable society together”, said Mr Fuma.
Investors raise the stakes in proxy season 2021
Companies’ annual general meetings used to be torpid affairs, brightened only by the free snacks. But, now, the gatherings have become battlegrounds for ESG activists — punctuated in 2020 by a record year of support for environmental and social shareholder proposals.
Climate change will remain a top concern for shareholders in proxy voting season 2021. UK hedge fund billionaire Chris Hohn’s “Say on Climate” initiative will be coming before US shareholders. Investors will continue to fight coal. Amundi plans to broaden its coal engagement beyond European banks to insurance companies and other financial services businesses on other continents.
And social issues focusing on paid leave and diversity disclosures will gather steam. First up: BlackRock. Mr Fink’s all-important letter to companies in the weeks ahead could be a bellwether for social concerns just as his 2020 letter was for climate change causes.
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