As a challenging and unconventional year draws to a close, we reflect back on the trends and developments that have impacted the world of sustainability and ESG over the past 12 months. Having been thrown into a state of chaos by the COVID-19 pandemic, societies, businesses and governments alike have had to face up to a myriad of challenges. Yet, the case for a Green Recovery is now stronger than ever. Here’s our top sustainable business trends that have evolved during the year:
- ESG accelerates
The continuing rise of sustainable investing has been impossible to ignore, as investors increasingly look to ESG to achieve risk-adjusted and enhanced returns. Signatories to the UN-backed Principles for Responsible Investment (PRI) initiative are now collectively responsible for AUM totalling ~US$90 trillion, and many studies – including analysis from S&P Global Market Intelligence – show that investments with strong ESG credentials outperformed others during the pandemic.
The world of reporting is undergoing significant change, with a myriad of emerging disclosure requirements seeking to solve issues around data consistency and comparability – one of investors’ largest challenges to accurately judging ESG performance and making informed decisions. See our recent insights on the ESG ‘alphabet soup’ and the CFA’s ESG Disclosure Standards for Investment Products’ consultation for more on ESG reporting.
Additionally, we have seen the progression of ESG as an investment and management tool, with research from Morningstar, S&P Global Ratings and AXA Investment Managers showing that companies with strong ESG governance have been better equipped to manage uncertainty, fostering increased resilience developed from many years developing a comprehensive understanding of risk and stakeholder expectations. It is safe to assume that 2021 will see further moves to embed ESG into investment practice across all asset classes at both an EU and UK level – watch this space for more from us on this exciting and evolving area of business.
- Increased focus on the ‘S’ in ESG
The pandemic has brought into sharper focus our critical dependence on people – employees, colleagues and partners – that have been fundamental to the continued operation of many businesses throughout the Covid crisis. The increased focus on the ‘S’ – social factors – is moving the goalposts on the social dimension of ESG governance – with companies now reassessing and going further in demonstrating how they serve society. For example, rising unemployment, reduced spending power and increased vulnerability to exploitation is putting a spotlight on the measurable, financial impact of poor labour practices in communities and on company reputations.
There is no better case study of this than the accusations faced by Boohoo this year – from the suppliers they use, to underpaid employees in inadequate working conditions that may have increased the spread of coronavirus. While these allegations are not new, their case has shown that ‘S’ issues – particularly around supply chain responsibility – really do have a financial impact and, in Boohoo’s case, wiped off more than £1.5 billion in market value, leading the company to announce a supply chain overhaul (see our deep-dive here).
In the future we can expect to see: (1) increased scrutiny of exploitative labour practices, not only from consumers, but investors too; and (2) secure, resilient supply chains to become a new source of competitive advantage and a barrier to future threats (see our report New shocks, Better Solutions here).
- Black Lives Matter – and they matter for your business
Perhaps the biggest testament to the importance of the ‘S’ in ESG is the BLM movement, and the global protests that have started to provoke a shift in attitudes across all walks of life – from governments, businesses, celebrities and many more. In response, numerous organisations are asking what they can or should do. While financial contributions and supporting BLM organisations have significant impact, they are only the external moves. Businesses also need to make changes internally if they are to create meaningful change in the corporate world. This is not an issue which can or should be fixed by simply appointing a Diversity and Inclusion (D&I) Officer to – in blunt terms – sure-up reputation or pay lip service. It requires a sustained and fundamental shift from within the core of an organisation.
The lack of racial diversity is not a new challenge for UK business, or indeed those in other parts of the world. As of July 2020 there were only three black CEOs in the Fortune 500, nine BAME CEOs or Chairs in the FTSE 250, and over a third of FTSE 100 Boards did not have a single representative from a BAME background. Investors – for the twin reasons of morality, and that diverse boards have been proven to lead to better, stronger companies – are focusing on D&I to a greater extent, with it now proving to be a meaningful investment consideration rather than just a value-based focus area.
Those in charge of businesses should first listen and learn before working out what actions to take. They have an inherent responsibility to nurture their black talent, and it is essential for businesses to open their eyes and ears before their mouths. For more on the external and internal considerations for businesses in regards to tackling systemic racism, see our insight from earlier this year.
- Climate action heats up, particularly on TCFD
According to the Global Carbon Project, emissions have declined by around 7% this year, though it is widely recognised that this will do little to halt longer-term climate change. COVID-19 has demonstrated a systemic disruption to economies and societies, and the severe fallout of lockdowns and restrictions have been commonly cited as a “drop in the ocean” to the impacts of unchecked climate change.
With the pandemic delaying global climate talks (COP26) to November 2021, we have seen investors, businesses and governments begin to step up to the climate emergency. From the UK Government’s 10-point Plan for a Green Industrial Revolution to the announcement of a National Infrastructure Bank tied to net zero, the devil remains in the detail as to whether this goes far or fast enough.
TCFD has gone officially mainstream as investor demand continues to grow, with the latest TCFD status report showing an 85% increase in organisations showing their support since 2019. While this has not yet translated into more effective alignment between disclosure and implementation, it does indicate a significant proportion of investors and companies recognising the importance of TCFD as a valuable framework to manage climate-related risks and opportunities. There is now a clear direction of travel, with the Chancellor announcing mandatory climate risk reporting for listed/large companies and financial institutions by 2025, and as early as 2021 for some companies (see our briefing here).
In parallel, not a week has gone by without another corporate net zero announcement – Unilever most recently announcing that their climate plan would be put to shareholder vote at their AGM next May. While this may be the first step for many, we have seen companies further along their carbon journey start to turn their attention to more challenging Scope 3 emissions – encompassing supply chain and customer activities. At Sancroft, we’ve recently shared our insight on carbon offsetting, that has increased in prevalence over the past year in parallel with more companies targeting net zero. We look forward to helping our clients further their TCFD disclosures and sustainability strategies over the coming year.
- The changing future of retail
The most obvious symptom of the crisis for retail has been the lockdown of traditional brick-and-mortar stores. Even before the crisis, we witnessed an ongoing decline of the high street with many brands falling victim. Beyond the recent collapse of Arcadia and Debenhams, 2020 has seen many other high-street names fall into administration, with Edinburgh Woollen Mill, Bonmarché, M&Co, DW Sports, Harveys Furniture, Bertram Books, Victoria’s Secret, and many more facing challenges. Those who have managed to survive have faced tumultuous times – at one end of the spectrum, Primark recorded a drop in sales from £650m a month to zero earlier this year after it was forced to shut and without online trading. It is now forecasting higher overall sales and profits for its full year ending September 2021.
Unsurprisingly, online brands and retailers such as Ocado, ASOS and Amazon continued to outperform their high street competitors throughout national lockdowns as e-commerce platforms and technology enable a shopping experience compatible with a restricted world. It must be acknowledged that the last nine months have undoubtedly accelerated retail’s shift to digital, and for many to survive and thrive, they will need to renew their efforts in customer experience. ‘Online’ will continue to be a crucial aspect to building relationships with consumer audiences in innovative ways. However, it also brings new challenges around green logistics, packaging, customer service and care, employees and governance – none of which should be overlooked but attacked with renewed rigour in the year ahead.
2020 has been far from the start we had hoped for the “Decade of Action” towards the global Sustainable Development Goals, but the pandemic has put back the spotlight on where we need it most – a universal framework to realise our collective ambition to build back better. Far from business-as-usual, we have a unique opportunity to forge a new normal – to unite businesses in creating fairer, more resilient societies that are a force for good.
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