Top ESG Trends for 2021: Stability and Sustainability in the Investment Community
Sustainability
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February 22, 2021
Sustainability
Going forward investors will create a clear separation between companies that integrate and prioritize ESG and those that do not.
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Refinitiv

Stability and Sustainability in the Investment Community 


An unwelcome black swan alighted on 2020. With a swift flap of its wings, it swept away all reasonable predictions, set new precedents, and opened our eyes to some harsh realities. There was nothing good about the COVID-19 pandemic, and it would be crass to suggest otherwise. Yet, as we gather our thoughts and refocus on the year to come, there are a number of key lessons to be learned - and some reasons to be optimistic. 

In this playbook, we’ve brought together some of the top minds and thought leaders in sustainable finance. They share ideas about the past year, their predictions for 2021 ESG trends, and outline how the ESG investment community can move toward a more sustainable and transparent future. 
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Trend 6: The Full Board ESG Integration Imperative Will Develop 
Measuring the execution and outcomes of ESG initiatives has become a top priority for investors. They are well aware the stakes have grown from a financial, regulatory, and societal reputation standpoint. 

U.S. assets under management (AUM) that mandate ESG factors rose by roughly $5 trillion in just two years (from $11.6 trillion in 2018 to $16.5 trillion in 2020), according to U.S. SIF. Experts at Deloitte believe that by 2025, this ESG AUM will reach close to $35 tr (or half of all AUM strategies in the U.S.). 

Investors will therefore be looking to enhance the rigor and sophistication of their ESG strategies in 2021. Chief among the trends expected in 2021 will be the clear demarcation set by investors between companies that integrate and prioritize ESG into their boardrooms versus those that do not. The latter will suffer greatly from their neglect. 

As pressures mount from virtually every stakeholder, investors are being challenged to better articulate and disclose their methods of screening for sustainable companies (and thus bestowing them with either a high or low ESG score). This has given rise to the long awaited outcome-driven ESG and stewardship or engagement data. 

The issue is: investors won’t be able to go at this alone and will need to place an increased onus on their portfolio company advocates - i.e., board directors - to pressure management to move faster as the integrity of the data depends on it. 

The only way to execute this in a timely manner is via the integration of ESG accountability and oversight responsibilities at the board level (putting aside potential regulation).​ 

For ESG initiatives to generate value, they will need to be integrated throughout both the enterprise risk management system and business strategy to capture material risks and opportunities. This is a fundamental change for most companies, and the resources and psychological safety required to execute at the management level will need to be granted by a supportive board of directors. 

This will also require the codification of accountability and oversight mechanisms in board committee charters along with the integration of ESG (particularly E and S) data into regular financial reporting. 
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In 2021, companies purporting to create value through their ESG initiatives will be duly separated from those that actually generate value. That codification of board accountability and oversight will be a key indicator for determining the likely outcome of this private ordering. 

The challenges are sizable and this should not be mistaken as some panacea that merely requires a rudimentary revamping of the board charters. This is a fundamental shift in the way that a company is valued, how it values its stakeholders, and its place in society. Risk is risk - opportunity is opportunity - and the integration of material ESG considerations into a board’s accountability and oversight responsibilities will be imperative in 2021 to increase the integrity of financial markets.​ 
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Find the full playbook here.