Transparency and Innovation: Six ESG Trends in 2021 | OpenInvest

There’s no denying it: ESG trends in 2021 spring from the context of a historically tumultuous 2020.

Beginning about a year ago, people all over the world sat at home and watched through screens as the world turned to chaos around them. Rising pandemic death tolls, protests against racial injustice, a highly contested presidential election – many of us experienced these in some degree of isolation from the world we knew, many of us (the lucky ones) from our living rooms or kitchens.

In this disorienting new reality, where “unprecedented” somehow had to coexist with “business as usual,” many of us experienced these world events and solitary time as a powerful prompt for reflection. What do I really care about? When the world returns to normal, what do I want it to look like?

In this spirit, investors have emerged from 2020 with a renewed focus on ESG priorities and on using their investments to help build a better world. The lessons from 2020 have been numerous, for corporations as well as communities. Companies are learning that, alongside pricing products appropriately and differentiating from competitors, their success relies on aligning with the values of their consumer base. This realization is influencing companies to fundamentally reassess their relationship with the public – what they disclose, what their priorities should be, and where to focus their resources. The shift toward engagement with ESG unlocks new opportunities for both companies and investors and shows promise for a rise in accountability and transparency in the corporate world. The following are some ESG trends to watch in 2021 that will continue to fuel this positive momentum.

Racial Diversity and Equality

Witnessing the police killings of George Floyd, Breonna Taylor, and other unarmed Black Americans released a shockwave across the world in 2020. These events and the massive public outcry that followed have forced the business world to confront the racial injustice regularly experienced by Black Americans and to consider companies’ own participation in broader systems of inequality.

Companies have responded to this powerful social reckoning in various ways, including expressing solidarity with the Black community, pledging money to fight discrimination and making commitments to embrace diversity in their workforces. For instance, PepsiCo has pledged to expand its Black managerial population by 30% by 2025, while Google has pledged to scale its Applied Digital Skills program to reach 400,000 Black middle and high school students. Corporate commitments on racial equality and the necessary concrete actions that companies take (or don’t take) to make good on these commitments will be closely scrutinized in 2021, as consumers and investors are engaging more closely with institutions on racial equality than ever before. Diversity and inclusion being encoded in company policies and enacted in workplace cultures is of increasing importance to investors, and companies are learning that when it comes to fulfilling commitments to racial equality, they can expect to be held accountable by their shareholders.

Energy Transition

The rejoining of the Paris Climate Accords by the Biden Administration has strengthened a renewable energy movement that was already well underway; Ford, BP, and American Airlines were joined by a slew of other major companies that committed to net-zero emissions in 2020. The Biden Administration has additionally proposed an economic plan that includes direct financial incentives for companies and industries to transition to lower carbon emissions, including in some cases direct cash rebates and directly sponsoring new job creation.

Even without these added incentives for the energy transition, renewable technologies are rapidly becoming the cheapest source of power generation in multiple markets. McKinsey anticipates that demand for electricity will be seven times higher than for other energy sources by 2050. As growing awareness of the environmental toll of greenhouse gas emissions is joined by competitive product pricing and a government-sanctioned transition to a green economy, renewable energy alternatives are poised for a period of explosive growth. The moving pieces required in the transition to renewable energy will bring together multiple additional areas of investment, including infrastructure and smart grid development and the electrification of the transport sector.  

Political Spending and Fair Compensation

2021 will see investors and consumers holding companies accountable for their treatment of employees and their impact in broader communities. The widespread halting of corporate political contributions in response to the events following the 2020 Presidential Election – by a list of companies including Facebook, Goldman Sachs, Microsoft and AirBnB – marks a surge in demand for companies to be transparent about political spending to advance corporate interests. This is reflective of a growing concern about the impact of business interventions on the integrity of democracy. Divesting from companies that won’t disclose their financial relationships with political entities is one way that investors will continue to hold companies accountable.

Alongside political spending, the increased scrutiny into corporate governance has led to a sharpened focus on corporate executive compensation. According to the Economic Policy Institute, CEO compensation on average has grown 940% since 1978, while typical worker compensation has risen just 12% during that time. EPI’s study found that not only does excessive CEO pay exacerbate income inequality – the dramatic increase in CEO pay over the past decades also has no clear link to a corresponding increase in CEO productivity. Companies increasing the average wage of their employees, however, may have reason to expect positive results for their bottom line. Gravity Payments, a Seattle-based credit card processing company, made a media splash in 2015 when the CEO substantially reduced his own $1.1 million salary and implemented a $70,000 minimum wage. The company’s business has tripled since then, while personal 401(k) contributions have doubled and employee turnover has dropped, and it was announced in 2020 that Gravity Payments will expand the $70,000 minimum wage to its Idaho location. In recent years, some multinational companies have also changed their compensation structures while facing mounting public pressure on worker pay disparity: Target and Amazon have raised their minimum wage to $15 an hour, while Wal-Mart just this month announced that it would increase average pay to above $15 an hour for 425,000 workers. The economic hardships of frontline workers during the COVID 19 pandemic have made the issue of fair pay more visible than ever, and 2021 will continue to see an enhanced investor focus on exposing unjustified CEO pay and encouraging major companies to create greater equity in worker compensation.

According to Responsible Investor, biodiversity is expected to be one of the most important topics in the investment world by 2030. It’s easy to see why, with more than half of the world’s total GDP reliant on natural resources, especially in the case of food and medicines that we depend on to survive. Besides being a tragic externality of environmental devastation, biodiversity loss results in massive disruption of commodity supply chains and threatens to extinguish certain industries altogether.

Biodiversity as an area of ESG focus presents two key opportunities for companies and investors that will receive increased attention in 2021. The first is that effective prevention of biodiversity loss is all too often slowed by the scarcity of available data; accurate data is necessary for companies to identify the natural resource dependencies and impacts of their business operations and to make changes accordingly. Likewise, investors will be further encouraged to invest in biodiversity-enhancing projects when data is used to measure the impact of their investments. The second challenge is the absence of “pricing” or monetary valuation for natural capital, which has historically left biodiversity woefully underrepresented in corporate decision-making. Take bees, for instance: many of the industries that are entirely reliant on insect pollination for their success, such as almonds and coffee, are in fact contributing to key triggers for pollinator extinction by planting monoculture crops and using insecticides. Communicating the monetary value of vital natural resources will strengthen the economic case for preserving the world’s ecosystems and will further quantify the positive impact of corporate and investment decision-making that aids biodiversity. Given the deep industry interdependencies on biodiversity and the new EU Sustainable Finance Disclosure Regulation (SFDR) requiring disclosure of companies’ biodiversity impacts, biodiversity will be a top priority for investors and companies in 2021 and well into the future.

Ethical Supply Chains

The events of 2020 powerfully demonstrated the vulnerabilities in supply chains and production strategies globally. Alongside public health and climate risks, human rights violations in supply chains pose serious concerns for investors. Even before the additional pressures of the pandemic, supply chain workers across the globe faced poverty wages and unsafe working conditions with minimal protections. During the pandemic, this situation has only grown more acute, with workers commonly exposed to the risks of infection and job loss as well as worsening labor conditions. Poor supply chain governance has serious reputational and financial consequences for multinational companies, as demonstrated late last year when Apple, Nike and Coca-Cola were accused of lobbying Congress to alter a bill that would ban the imports of goods made with forced labor in China’s Xinjiang region. European Parliament earlier this month also proposed new EU legislation requiring companies to meaningfully address human rights and environmental standards within their value chains.

Legislative momentum and the many risks associated with supply chains have underscored the urgent need for increased supply chain transparency. In 2021, investors and consumers will demand greater visibility into the environmental impacts, labor practices, human rights protections and health and safety policies in company supply chains. Disclosure of the negative social and environmental impacts of company suppliers will likely be followed by mounting pressure on companies to enforce stricter ethical requirements in their supply chains, with increased monitoring and heightened sanctions for violations.

Plastic Waste

The COVID-19 pandemic has exacerbated a pre-existing crisis in plastic waste. 2020 saw a surge in demand for face shields, gloves, takeaway food containers, and bubble wrap for online shopping – most of which can’t be recycled. This compounds the problem of plastic waste pollution in oceans and landfills, which has deadly consequences for marine life and the acceleration of climate change.

In response to this crisis and mounting pressure from investors, many major plastic-intensive companies have made some form of commitment to reduce their use of virgin plastics and repurpose existing plastics in their product packaging. Some of these commitments are already coming to fruition: Danone’s Evian launched label-free, 100% recycled bottles in late 2020, Coca-Cola launched bottles made of 100% recycled material last month, and PepsiCo and Unilever have announced their plans to launch a fully paper-based bottle in 2021. Nike has also diverted more than 4 billion plastic bottles from landfills by designing a shoe made with 100% recycled polyester. While much work remains to be done, major companies are beginning to treat used plastic as an untapped resource that can be channeled into profitable business activities. This is a trend that shows promise for the reduction of plastic waste worldwide, and new innovations to avoid or reduce plastic waste will likely be pioneered by other companies in 2021.

ESG in 2021

All of the above trends represent issues that have been brought to top of mind for investors over the course of the past year and will only gain relevance for companies moving forward. 2021 will be characterized by raising the bar on human rights and inclusivity, a growing reliance on ESG data as a counter to greenwashing and new innovations to solve for pressing environmental challenges.

No single one of these trends represents a silver bullet for the ESG issues we’ll continue to face in 2021. With that said, ESG sentiment is emerging as an undeniable market force, and companies are beginning to wise up and make changes accordingly. The past year has proven beyond doubt that companies don’t exist separately from global environmental and political events; they have both a causal relationship and feel the effects of their involvement – bad or good – on their own bottom line.

The increased focus on ESG that came out of 2020 is not so much a pandemic-derived “reset” as it is an acceleration of a movement that was already gaining steam. Across the board, increasing demand and regulatory drivers are influencing companies to disrupt old business practices and think creatively about the future. This will present new opportunities for companies, consumers, and investors alike as they exercise their distinct voices in shaping a sustainable future we all hope to see.