Trends to watch in 2021 –
ESG: from optional to essential

Environmental, Social and Corporate Governance (ESG) has progressed from optional to essential in determining a company’s success. ESG—which includes supply chain management, climate change leadership and workplace culture—will increasingly shape a company’s performance and long-term value. The next decade will be marked by:

ESG investing

Asset managers and investors continue to integrate ESG risk assessments into investment decisions and look to the Principles of Responsible Investing to shape a more sustainable global financial system.

The business case for ESG sharpened in 2020 with BlackRock’s prioritization of sustainability in its investment decision-making process and Mark Carney’s appointment as Brookfield Asset Management’s Vice Chair and Head of ESG and Impact Fund Investing.

Looking forward, a 2020 McKinsey global survey noted that 83 per cent of C-suite leaders and investment professionals predict that ESG programs will have more shareholder value in five years than today, and would pay a premium for a company with a positive ESG record.

Corporate governance

While traditional corporate governance will remain an area of focus—particularly around board quality, diversity, shareholder rights and management incentive structures—investors and boards will also prioritize environmental and social issues. Disclosure of ESG will evolve, particularly as it relates to traditional corporate governance requirements, with the potential for further regulatory initiatives on executive compensation and mandates to ensure greater gender diversity on boards.

Climate change impacts and risk

Businesses should be aware of the relationship between investor engagement and strong climate change leadership. Investors will exert more influence as climate change and its associated risks will be integrated into investor voting policies, with some taking the additional step of voting against boards of companies that don’t have substantive climate change policies.