Increased ESG Focus Shows No Signs of Slowing Down in 2021
January 11, 2021
The focus on environmental, social and governance (ESG) matters at public companies continues to grow despite, or perhaps in part because of, the COVID-19 pandemic. ESG continues to mean many things, including company considerations around sustainability, diversity, human capital, corporate purpose and governance. While best practices, disclosure requirements and ESG ratings are developing, boards should continue to prioritize ESG issues, particularly as they relate to long-term company strategy and risk.
Institutional Investors Drive ESG
Large institutional investors started 2020 with a focus on sustainability and climate change, with an increasing push into issues surrounding human capital and diversity as the year went on. BlackRock’s January 2020 annual letter to CEOs emphasized the importance of confronting climate change risk. Following a summer of protests around issues of racial equity, State Street sent a letter to board chairs of public companies in August setting forth its heightened expectations regarding board and workplace diversity. In addition to a continued focus on ESG generally, influential investors have over the course of the year called for greater uniformity to address what is currently a hodgepodge of different ESG reporting frameworks and standards. Amidst talk of convergence by the various ESG standard setters, BlackRock has put out a call for a single global framework but in the meantime is encouraging companies to use the Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD) frameworks for sustainability and climate change disclosures, respectively, while State Street rolled out a proprietary scoring system that measures ESG performance.
Shareholders Continue to Engage Through the Proposal Process
Shareholders continue to make their focus on the environmental and social (E&S) prongs of ESG known, submitting more E&S proposals than any other type of proposal in 2020. While the total number of E&S submissions was down, the percentage of E&S proposals voted on and number of E&S proposals passed continued to increase. Similar to institutional investors, other shareholders are focusing on climate change, human capital, gender parity and board and workplace diversity. 2020 also saw activists joining forces with investors, pursuing their goals through the shareholder proposal process rather than just traditional activist board contests.
Key Drivers of ESG in 2020
The drivers of ESG focus in 2020 were very much linked to events happening in the outside world. The spread of COVID-19 increased the amount of attention paid to the “S” in ESG, as investors demanded to hear how companies were navigating the crisis and steps they were taking to address related human capital management issues. The pandemic also accelerated the rhetoric toward stakeholder capitalism and away from the pursuit of short-term profit, with an increasing public focus on how companies treat their employees and customers, as capital was retained through dividend reduction and the suspension of share buyback programs.
Racial justice protests across the U.S. elevated issues of racial inequality to the forefront of the corporate conscience, as companies rushed to highlight anti-racism platforms and revisit diversity and inclusion policies. Increased focus on disclosure of racial and gender diversity followed, with institutional investors and proxy advisors asking for increased disclosure and, in November 2020, Nasdaq proposing a new rule that would require listed companies to meet certain board diversity thresholds, or explain why they do not, and to disclose a consistent set of board diversity statistics. Focus on racial and gender diversity and calls for related disclosure have been increasing, and there is no reason to expect that 2021 will be any different.
A Banner Year for Sustainable Investing
2020 is on record as the biggest year for sustainable funds, with $20.9 billion of inflows into sustainable funds in the first half of the year alone (as opposed to $21.4 billion total for all of 2019). Green bonds, sustainability loans and other types of “green finance” are also on the rise. The largest institutional investors are getting in on the action; BlackRock, Vanguard, State Street and Fidelity have all opened ESG-focused investment funds in recent years. As money pours into ESG, concern over the lack of transparency around ESG performance, an absence of uniform ESG disclosure standards and “greenwashing” the impact of ESG activities has increased, leading to greater calls for regulation and standardization. In the UK and the EU, there has been a greater move toward regulating sustainability disclosure and defining what constitutes ESG investments. It will be interesting to see whether these trends toward regulation move from Europe into the U.S. market, particularly under a Biden administration.
Might the Biden SEC Embrace ESG?
The SEC’s approach to ESG has been split, with Democratic commissioners signaling an interest in using the SEC to enhance climate change and ESG reporting, but the Jay Clayton-led Commission declining to mandate line-item ESG disclosure. A majority Democratic Commission has been predicted to be more willing to move beyond principles-based disclosure and embrace more standardized, prescriptive line-item requirements for key areas such as diversity, climate change and sustainability.
2020 has shown that boards should be examining ESG issues regularly, prioritizing these issues and considering the interplay among ESG, corporate strategy and risk. Boards should act to ensure that management, legal, IR and other internal teams have a shared understanding of a company’s strategy and long-term plans as it relates to ESG matters and are working toward the same goals.
More ESG Insights
Our 2021 memo includes pieces discussing a number of these aspects of ESG, looking at developments and lessons learned during an unprecedented year and sharing what we see as trends and key takeaways for board focus in 2021.
Please find additional ESG insights in the following pieces:
- Shareholder Engagement Trends and Considerations
- Emphasis on Diversity Initiatives Broadens in Scope and Focuses on Impact
- Corporate Sustainability: Moving Faster and Faster to the Center of Strategy and Shareholder Value
- Progress Since Paris: Sustainable Policy in Europe in 2020 and Beyond
- Fulfilling the Board’s Expanded Oversight Role in Human Capital Management
- ESG Considerations for Incentive Compensation Programs
 Morningstar Direct (2020).