While the 2010s have laid the groundwork for ESG corporate practices, the 2020s will put ESG in action. Companies will actively incorporate ESG-related practices in the upcoming decade as environmental and social issues have gained significant momentum in the past decade.
Following are some of the trends in the ESG space that will drive the decisions and actions of companies, investors, and regulators in 2020 and beyond.
The primary focus will be on climate change
Though an issue of importance since 2010, climate change will be an even more dominant theme in 2020. Even the world’s leading companies have valued the climate risks to their business at nearly $1 trillion (Unfccc).
Governments round-the-world are currently concentrating more on climate-rated problems and are creating regulations to urge companies and investors to commit to net-zero emissions. In fact, governments are unanimously planning to make this a standard practice by the end of this decade.
As companies have started recognizing the risks and opportunities associated with climate change, all sectors, particularly the ones that are emissions intense and have shown resistance in the past, will have to shift to the low-carbon economy without any inhibitions.
While firms will watch out for new business opportunities and present themselves as climate leaders, investors will focus on engagements around climate change.
Environmental & Social (E&S) issues will top the list of governance activities
While traditional corporate governance will continue to play a significant role in improving management incentive structures, shareholder rights, and board quality, the governance of environmental and social (E&S) issues will gain special attention from boards and investors, as management of E&S risks has emerged as a new standard of corporate governance practices.
Today companies’ corporate social responsibility efforts are not just an act of “giving back to society”. It is also a ‘sustainability investment’ to improve risk management and create long-term shareholder value methodically. Also, with sustainability experts becoming essential additions to many boards, understanding and assessing a company’s impact on the environment and society has become a matter of paramount importance.
ESG disclosures will be the new normal
By the end of this decade, disclosures on ESG factors will become institutionalized and widely disseminated. Owing to the reforms in corporate governance, there will be increased pressure from the investors’ side. This will stimulate the change largely. Regulations along with comply-or-explain codes will also play a significant role in addressing E&S issues.
Even in the past decade, corporate governance codes, disclosures, say-on-pay, executive compensation, and broad-gender diversity mandates were imposed at various geographies of the globe as jurisdictions became aware of the governance standards.
Verifications and assurance will play a significant role in assuring the accuracy of the ESG disclosures. Reporting frameworks like the Global Reporting Initiative will be the blueprint for building reporting standards for the investment community.
