2020 was a tumultuous one for investors facing a pandemic, the resulting economic fallout, and a reckoning on cultural and systemic racism and racial injustice. And no sooner had the new year begun when an anti-democratic mob, incited by outgoing President Trump, brazenly attacked the Capitol, a symbol of U.S. democracy. All of these issues remain top of mind among environmental, social, and governance investors as we head into 2021.
Looking forward, a growing number of investors will continue to use ESG to activate their capital beyond financial returns. Morningstar reports that as of July 2020, ESG funds had already attracted greater inflows than in all of 2019 — and last year’s net flows were already four times higher than any previous year. And whereas funds overall hemorrhaged $384.7 billion in the first quarter of 2020, which covered the pandemic sell-off, ESG funds had inflows of $45.6 billion during the same period.
What issues will motivate ESG investors in the coming year? Fostering a just, green recovery in the wake of the pandemic, addressing widespread racial inequity and injustice, and moving the needle on climate change are top of the list.
With vaccine distribution underway, ESG investors are eager to hear manufacturers’ plans for scaling up production and ensuring equitable distribution of vaccines and therapies domestically and in recovering economies. How are pharmaceutical companies factoring in public investment into their pricing strategies? What are the legal and reputational risks associated with accepting public money for R&D while minimizing tax payments via tax havens and other means? Investors are urging companies to adopt fair tax policies to safeguard against these risks.
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Investors will call on companies to explicitly detail how they plan to carry out their commitments to vaccine access for low-income and communities of color, particularly in the U.S. This demands collaboration, knowledge-sharing, technology transfer — and even sharing IP in the short term.
COVID-19 has laid bare pervasive, systemic inequity in the U.S., and many ESG investors are urging companies to build inclusive workforces and identify and dismantle structural racism within their operations and supply chains. Companies are disclosing more information about their approaches to diversity, equity, and inclusion and publicly disclosing diversity and compensation data, but there's much more to be done.
In 2020 the median wealth of white households is projected to be 86 times that of Black households. Redressing this inequity is not simply a moral issue, but a practical one within an economy dependent on consumer spending for two-thirds of its activity. Companies benefit from workplace diversity, which correlates with stronger business outcomes, and their performance depends on their ability to attract and retain underrepresented groups.
We also expect to see more ESG investors pushing companies in the U.S. and overseas to increase racial and gender diversity at the board level.
While there’s keen anticipation of what President-elect Biden will do to address climate change, ESG investors aren’t waiting to act. More investment managers are pressuring banks to increase financing to renewables, decarbonize their loan portfolios and adopt goals aligned with the Paris Accord.
ESG investors are pushing for more disclosure from companies on climate-related political and lobbying activities, “no deforestation” policies, trade association memberships, and risk management and oversight. They have already seen progress from companies like American Water Works, Verizon and Oracle. Now banks are coming under scrutiny: Are they disclosing their engagement with policymakers on legislative and regulatory climate issues? How involved are industry groups and trade associations in these debates—and are companies’ stated values consistent with their trade associations’?
These are just a few of the issues on the table for ESG investors in the year ahead. Others will emerge, such as holding companies accountable for lending activity, purchasing decisions, marketing decisions, etc. Meanwhile, issues related to COVID-19, climate, and racial equity aren’t going away—and neither are the increasingly influential ESG investors advocating for them.
Allyson McDonald is CEO of Boston Common Asset Management.
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