In a year when the pandemic sent the world into a tailspin,
there was a silver lining for the world of ESG investing.
The strategy moved from the peripheries of finance to the
mainstream. So did many of the “S” issues that seasoned environmental, social
and governance investors have for years pressed companies to address, such as
racial disparities, worker pay and safety issues, and fair access to health
In response, corporations said they would become more
socially conscious, adding to the momentum behind ESG. For instance, Bank of
America Corp., Sephora USA Inc. and Nike Inc. were among the companies that
have either earmarked funds, formed task forces to address racial inequality or
pledged support for Black-owned businesses.
“ESG was firmly put on the decision-making table in 2020
after being a strategy that was ‘nice to have,’” said Felix Boudreault,
managing partner at Sustainable Market Strategies, an ESG research firm in
Montreal. “It’s now a performance issue that senior executives must address,
whether they believe in it or not.”
Investors said they will put increased pressure this year on
companies to address racial and gender diversity, as well as climate change.
BlackRock Inc., the world’s biggest money manager, said it will support more
shareholder proposals that hold directors accountable on both topics and added
that it will vote against those who fail to act. The company also said it will
focus on issues that affect biodiversity and the natural environment.
Here are some of the main ESG topics (in alphabetical order)
that investors say they plan to focus on in 2021:
The “E” in ESG has typically been shorthand for carbon
emissions and climate change. Now though, a growing number of investors at
firms including Fidelity International and Axa Investment Managers are focusing
on the separate but interrelated threat of biodiversity loss: an impending
natural catastrophe that could have enormous economic consequences, with more
than half of the world’s total gross domestic product dependent on natural
resources from food to ingredients for medicine.
“Biodiversity loss and climate change present critical
financial and economic risks,” said Jenn-Hui Tan, global head of stewardship
and sustainable investing at Fidelity International. “Investors have a key role
to play in protecting biodiversity and creating positive biodiversity outcomes.
While good progress has been made in our understanding around the pricing and
integration of climate-change risk, it’s now incumbent on us to learn to price
natural capital correctly.”
Clean energy jobs
As renewable-energy companies grow, in some cases eclipsing
the size of oil majors for the first time, so are green jobs. The U.S. Bureau
of Labor Statistics has said solar installers and wind-turbine technicians will
be the two occupations that have the fastest employment growth in the 10 years
through 2026. But the rate of unionization of such jobs is low.
Domini Impact Investments, one of the pioneers in socially
responsible investing, plans to press renewable companies on worker protections
and rights, as the job market transitions away from oil and gas companies to a
“It’s past time to focus on the ‘S’ in these green
companies,” said Corey Klemmer, director of engagement at Domini in New York.
“There’s huge job creation in the emerging energy sector, which is good, but we
want to make sure those jobs are as good or better than the ones they’re
replacing.” She declined to name the companies that Domini will pressure.
While 2020 was pegged as the year of climate action, 2021
may prove a more decisive one. In November, the U.K. will host world leaders
for the United Nations climate summit, COP26, a landmark event in which
governments are expected to submit ambitious emissions-reduction targets six
years after the signing of the Paris Agreement.
The event also will focus on how financial-services
companies are contributing to the fight against global warming, with former
Bank of England Governor Mark Carney leading efforts to refashion the industry
to accommodate a transition to net-zero emissions.
“COP26 gives us perhaps the only opportunity we will have to
put markets on the trajectory of delivering the Paris Agreement,” said Steve
Waygood, chief responsible investment officer at Aviva Investors in London.
Waygood set up the International Platform for Climate
Finance last year to facilitate finance industry discussion on how to support
the Paris objectives. He’s now lobbying for the creation of an accord at COP26
to formalize commitments from banks, insurers and exchanges on contributing to
a lower-emissions future.
The chasm between employee and executive compensation got
wider in 2020 as workers were laid off, while managers with share-based
incentive packages benefited as stock markets rallied. Chief executive officers
of the biggest U.K. companies will have made more in the first three business
days of 2021 than the median worker will earn for the entire year, according to
High Pay Centre, a London-based think tank.
Money manager Federated Hermes said it will make the case
again in 2021 for switching to simpler executive pay arrangements that are
aligned with long-term success.
“As the impacts of the pandemic continue, we expect boards
to use their judgment to ensure executive pay can be justified in the context
of the experience of other stakeholders,” Amy Wilson, who works in engagements
at Federated Hermes, said in a 2021 outlook.
Human capital management
While environmental issues have historically been easier to
measure, “S” data on employee welfare are becoming more granular by measuring
such things as turnover, retention and employee happiness. Calvert Research and
Management, one of the biggest socially responsible fund managers, plans to
press companies on whether, and how, they are using the data to ensure employee wellbeing in the
“Social science shows that a greater sense of wellbeing
causes employees to perform better,” said John Wilson, director of corporate
engagement at Calvert, a unit of Boston-based Eaton Vance Corp. “We plan to
have more robust conversations with companies about how they are engaging with
their employees, and if their workers feel well-treated and have a sense of
After the killings of unarmed Black people by police last
year, Americans underwent a reckoning over its centuries-old issue of race
relations. BlackRock and Vanguard Group Inc. have said they will push companies
to address racial and gender diversity in 2021. And other investors have filed
shareholder resolutions asking companies to carry out civil-rights audits to
assess how their operations, products and services affect minorities and
contribute to systemic racism.
“A 360-degree review of their impacts is important to assess
how anti-racist they say they are,” said Jonas Kron, chief advocacy officer at
Trillium Asset Management.
Some financial firms are shifting jobs to Florida and
Tennessee from New York, and out of London to other cities in the European
Union. At the same time, some technology companies are relocating their
headquarters to Texas from California and elsewhere. Given this backdrop,
Vanguard plans to track whether companies are moving simply to avoid
state-specific regulatory issues.
“We will be looking to ensure companies aren’t making
short-term decisions at the expense of long-term shareholder value,” said John
Galloway, head of investment stewardship at Vanguard.
Social impact of gaming
The wave of lockdowns in 2020 has resulted in a boom for the
gaming industry. But that has deepened the social cost on users, as well as
developers. Gratuitous violence in some of the games and online abuse of young
users are prevalent these days. In addition, the lack of diversity among
developers sometimes leads to stereotyped representations of minorities in the
games. ESG investors are increasingly seeing the need to address those issues,
along with the working conditions for the developers themselves.
“The time is right for investors” to take on the industry as
demand for gaming accelerates into 2021, said Peter van der Werf, an engagement
specialist at Robeco, a Dutch money manager.
The need for greater transparency on global supply chains
was made clear by the COVID-19 pandemic. While companies will need to consider
the risks of disruptions caused by climate change and other big events,
investors will be asking companies to provide greater visibility into their
operations related to labor practices, health and safety, and human rights.
Robeco said it will push automakers, technology hardware
producers and apparel companies to boost due diligence of human rights in their
“Respect for human rights is strongly associated with
value-chain resilience and a stable business operating environment,” Van Der
Werf said. “In parallel, investors are increasingly aware of and concerned
about the significant operational, financial, legal and reputational risks
portfolio companies might face when they fail to manage human-rights risks.”
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