Climate, COVID and the other top ESG issues of 2021

Asset managers and other experts predict the ESG topics that will make headlines next year.

The issues that drive sustainable investing played before the world’s eyes this year — from wildfires in Australia and the western U.S. to global protests against racial inequality. Nothing grabbed more attention, though, than COVID-19. What will be the environmental or social topic on everyone’s mind next year? Bloomberg News asked an array of experts. 

Andy Howard
Global head of sustainable investment, Schroders Plc

One thing that seems unavoidable, and yet which also gets less attention than it should, is the delayed effects of the COVID crisis. Furlough schemes and government support have cushioned the impact of the crisis on many people, but that support will expire before many industries recover, creating dislocations that will burden many people with new pressures even if the economy starts to improve. The social impacts of that burden could prove a catalyst for more dramatic reforms of political and economic systems than have been contemplated to date and an increased focus on social justice in many economies. Beyond the impact on incomes, the compounded effects of the crisis on mental and physical health for many people could become more acute. The impacts of the changes in policies and social expectations on the corporate world could prove more concerted, more pronounced, and more long lasting, even if we see the economic recovery pick up pace.

Katie Koch
Partner and co-head of Fundamental Equity, Goldman Sachs Asset Management

Next year, ESG investors will have a heightened focus on the S, specifically [on] company cultures as a result of the pandemic and the awakening of racism on the back of Mr. [George] Floyd’s murder. COVID-19 was an extraordinary window into the cultures of companies: How did they treat their customers (forbearance by banks, returning insurance premiums, waiving delivery fees for essential goods), their employees (bonus pay, safety, flexible hours, maintaining health benefits), and their communities (refocusing production on PPE)? We believe investors will awaken to the reality that some of the most financially material issues, regardless of industry or geography, more or less comes down to the treatment of people. Some datasets show a strong correlation between employee satisfaction and performance, and on our team we spend a lot of time thinking about that for our portfolio companies, especially in a world where 60% of the book value of the S&P is intangible assets.

Rob Furdak
Chief investment officer for ESG, Man Group

Social issues have often been neglected in favor of environmental and governance concerns, but 2020 changed that. The pandemic and racial injustice have moved S to the fore, and investors will be forced to take these issues more seriously next year. The problem is that social metrics are the most difficult to measure because these factors are often specialized, subjective, and not widely reported by companies. Examples include employee/employer ratings data, employee benefit data, demographic disclosures beyond just gender, and data that measures the impact of community outreach. To overcome these challenges, investors will need to move beyond traditional, broad-based data providers to look at alternative sources for more specialized information on these very important topics and evaluate it using sophisticated data science techniques within a highly developed data evaluation framework.

Steve Liberatore
Lead portfolio manager of fixed-income ESG and impact investing strategies, Nuveen

Within the public ESG fixed-income market, we’re paying attention to asset-backed securities. The opportunity that these securities present highlights the potential positive economic benefits of transitioning to a more sustainable economy. ABS, which represents approximately only 10% of the outstanding labeled green bond market, has the ability to make the most direct impact on investor perception of climate change adaptation and mitigation efforts. A robust ABS market that focuses on security types that can help transition the global economy away from fossil fuel utilization in an economically beneficial way should be of great interest to ESG/impact investors going forward.

Matt Breidert
Senior portfolio manager, Ecofin

The intersection between a ‘country-level’ ESG consideration and how that transmits into corporate ESG, particularly where domiciled. More specifically: How do we apply ESG factors to government systems and actual regimes, as related to specific policy positions? If as ESG investors we engage in a public activism on an issue relating to controversial environmental activities or human labor issues which relate to a state-owned enterprise, might we find ourselves in a troubling situation that negatively impacts our investment? What if by raising these issues we get negative interference from authorities, potentially even restricting movement and access to management, and the ESG activism actually has a negative impact to our investment position? What if an administration has stated goals and objectives inconsistent with corporate and shareholder aligned values, such as dismissing climate change or promoting coal? How does this transmit and interact with corporates and their own ESG?

Steve Waygood
Chief responsible investment officer, Aviva Investors

The Convention on Biodiversity in China and the G-7 in the U.K., as well as new requirements from the European Commission, are all opportunities to move the ESG agenda forward. But the most important thing to focus on will be helping the policymakers behind COP26 [the next round of global climate change talks] redirect capital within the global financial system at the pace and scale required to deliver the objectives of the Paris Agreement. This is the most material issue by far. COP26 will only be judged a success if it takes us toward a Paris Agreement investment plan and establishes more efficient and effective mechanisms for collaboration between financial institutions, policymakers, and climate finance practitioners. And we have a duty to help them do this.

Nikita Singhal
Co-head of sustainable investment and ESG, Lazard Asset Management

The increased loss of biodiversity needs to be better understood and managed. There is published academic research on the linkages between land use change, such as deforestation, and the emergence of new zoonoses like COVID-19. It is incumbent on investors to pay close attention to the emerging materiality of this issue as it may shape consumer perception toward certain products and services, as we have seen with plastic packaging; enable certain technological disruptions, as we have seen with the falling levelized costs of renewable energy; and/or drive regulatory change, as we have seen with carbon-related regulation in many parts of the world.

Doug Grim
Senior investment strategist, Vanguard Group

For investors interested in active ESG funds (with an objective to generate returns in excess of a benchmark), an underappreciated consideration is the assessment of the structure of the fund manager’s compensation through a governance lens. A fee paid to the manager is typically based on net assets under management. Relative and long-term performance-linked compensation is a particularly effective way to align interest and ensure the active manager stands in the shoes of the long-term fund shareholders. When shareholders do well, so should the active fund manager. If the fund underperforms its benchmark, however, the active manager’s pay should move in the same direction. Interestingly, only a minority of active ESG funds have a long-term, investor aligned type of incentive-penalty arrangement in their prospectus.

Meg Starr
Global head of impact, Carlyle Group

Environmental issues aren’t fading into the backdrop — rather, social issues are surging to the fore. Beyond a focus on health and safety, as we witnessed as companies navigated COVID-19, we see investors increasingly turning their focus toward employee engagement. Efforts to provide better benefits and training, demonstrate values alignment between a firm and its worker, and increase employee well-being and satisfaction can have positive ROI [return on investment] through marked increases on productivity and decreases in turnover rates. Investors taking a sophisticated approach to ESG recognize that social issues are a lens for finding untapped value in a rapidly changing world.

Nikhil Mirchandani
Portfolio manager, Inherent Group

While incorporating ESG into public and private equity investing has gained considerable momentum, we expect to see it adopted more broadly in public credit investing next year. We believe otherwise diligent and thoughtful credit investors often omit or give cursory consideration to ESG factors. In so doing, they miss leveraging one of the most insightful analytical tools available. Indeed, a considerable and rapidly growing body of studies by both academic and Wall Street sources supports the view that companies that outperform on ESG issues tend to outperform as credit investments over time. The recent growth of the sustainability, or green, bond market has begun to buttress the findings of these backward-looking studies with real-time evidence. In two highly visible cases, large issuers such as Google and Visa broke records for low all-in issuance yields in August this year by linking debt issuance to environmentally friendly projects.