The Environmental, Social, and Governance (ESG) criteria continue to be a hot topic for investors, issuers, and companies alike. As we talked about in our previous post on ESG investment for beginners, this form of investment has existed for many decades. And it’s only becoming more popular with each passing day. So, whether you are directly involved with ESG funds or not, it pays to know the latest ESG trends and updates, nonetheless.
The ESG trends have traced a rather interesting curve over the years. From the initial efforts on ‘say on pay,’ board diversity and independence to environmental protection, social impact, and more, the ESG landscape is continuously evolving.
How did the ESG movement take root, and where is it headed? The following article answers the question in detail.
A Quick-Primer on the Past Trends
Though it was first introduced in the ‘60s, ESG only became a mantra for corporate entities during the early 2010s. This was mostly an after-effect of the financial crisis that hit many developed economies in 2008 [1].
Back then, companies mostly focused on implementing best practice codes. They introduced laws for investment stewardship along with taking investor-led initiatives on improving board diversity and responsiveness to shareholders. Environmental and social efforts didn’t gain significant momentum until around 2015. At this time, more than 190 nations gathered at UNFCC’s 21st Conference of Parties (COP21) agreed to take global measures to reduce greenhouse gas emissions at the industrial level [2].
The international negotiations led to the formation of the Paris Climate Agreement. Since the last few years, this Agreement has played an important role in bolstering the ESG movement. However, as we plunge into a new year with the pandemic still raging on, there is mounting urgency in the corporate sectors all around the world. Companies are looking for ways to sustain business operations while still staying mindful of their environmental and social impact.
Analysts predict three key ESG trends will influence business goals and activities in 2021 and beyond. Let’s explore each of them in turn.
3 Key ESG Trends to Watch Out For
The three main ESG trends that can present new challenges – or opportunities – for companies as well as investors include:
1. Climate Change Driving Excessive Business Exposure
Climate change is a continuously growing problem. A Risk Barometer Report published by AGCS, a leading global corporate insurance carrier, identifies climate change as the top business risk for companies in 2021 [3].
The effects of climate change are already noticeable. From unexpected floods to droughts, hurricanes, and so on, weather-related problems have increased almost threefold for business since 1980. Did you know that weather events cost companies a total of over $140 billion in loss annually?
Floods, storms, and similar events not only damage corporate assets but also disrupt supply chains. It increases transportation costs and creates a market gap, resulting in even more losses.
Companies that wish to stay ahead of the negative effect of climate change must look beyond the typical two to five-year plan. They must account for weather-related issues and prepare to deal with them accordingly.
2. Water Management Policies
It doesn’t matter where your business activities take place or where your customer base is located; water shortage is looming over virtually every country worldwide. It is said that the global water demand will increase to almost six trillion cubic meters by 2050 [4]. Most of this increase is likely to result from the growing demand in the industrial sector, which predominantly includes energy generation.
This is why many countries have imposed strict restrictions on the use and management of water in various industries. Farmers and agribusinesses are usually the most severely affected by water management policies. However, public scrutiny is increasing on virtually every business operating in the water-intensive sector. For example, beverage giants such as Nestle and Coca-Cola have faced multiple accusations for abusing local water supplies. A Coca-Cola bottling plant near Kaladera, Rajasthan, faced widespread criticism for destroying local agriculture [5]. According to reports, the facility’s use of water resources prevented the farmers from irrigating their lands, resulting in poor yields and loss of livelihood for several families.
In addition to the expected water shortage, the water supply quality is another major concern for businesses. While several big companies are shamed for polluting nearby rivers and lakes, others are questioned for the purity of the water used in product manufacturing.
3. Biodiversity Presenting Big Issues
It might surprise you to know the land degradation due to waste disposal, drought, and storms have led to a nearly 25% reduction in the global land surface. As if that isn’t alarming enough, the marine environment is also being destroyed at a similar rate.
Scientists estimate that nearly one million natural marine species are on the brink of extinction due to rising sea temperatures combined with excessive water pollution. When key ecosystems are disturbed or destroyed, the effects ripple out not only to coastal communities but to inland areas as well. Take the reduction in South Asia’s mangrove cover, for instance. Vast patches of mangrove forests in Nepal, Myanmar, and Pakistan have been cleared out over the years in a bid to facilitate more commercial shrimp farming. However, the deforestation hotspots have made the areas more prone to natural calamities, including tsunami and cyclones.
On a positive note, though, the rising awareness among the masses with respect to the environmental impact of business activities is forcing companies to stay more cautious of their environmental footprint. Many corporate entities, both big and small, are adopting what is known as the ‘circular economy’ plan. These strategies focus on creating products that can be easily reused or recycled, thereby helping reduce waste generation. An amazing example of such sustainability initiatives is Nike’s Reuse-A-Shoe program. Here, the company recycles athletic shoes at the end of their life by using them as raw materials for building athletic tracks, playground surfaces, scrap tires, etc. [6].
Endnote
The growing environmental concerns demand companies of all sizes to take action and protect their respective communities and the world at large. Businesses that wish to succeed in the coming year need to demonstrate leadership in ESG trends. It’s the key to securing sustainable funds and maintaining an influential brand image.
References:
[1] https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp
[2] https://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf
[3] https://www.agcs.allianz.com/news-and-insights/reports/allianz-risk-barometer.html
[5] https://waronwant.org/news-analysis/coca-cola-drinking-world-dry
