Trends in the Environmental, Social & Governance World

What are some key trends you’re observing in the ESG World?

Last week, I had the pleasure of speaking on ESG in Private Equity as a Council Member on GLG’s expert speaker platform. I highlighted three key trends that I’ve seen in the ESG World over the last few years.

#1) Broader Appeal & Popularity Growth

Despite the COVID-19 pandemic’s devastating impact on the world, it has accelerated ESG’s popularity by clearly demonstrating the negative impact the world’s unfettered economic growth has had on the environment and society. And it has brightly highlighted just how interdependent we are to each other. According to the U.S. SIF Foundation’s 2020 Report on US Sustainable and Impact Investing Trends, as of year-end 2019, one out of every three dollars under professional management in the United States – $17.1 trillion- was managed according to sustainable investing strategies. And a recent Morningstar Report showed ¾ of Americans have moderate to high interest in sustainable investing – exhibiting that ESG is no longer just appealing to women and millennials.

Governments are promoting efforts to “build back better” by tying stimulus money to green projects and impact measurement. While Europe has traditionally been farther advanced in its “green thinking,” the United States is quickly gaining speed under the Biden Administration. Moreover, private sector businesses that first saw ESG as “nice to do” and/or risk avoidance have evolved their thinking into a more complicated assessment of positive performance and see ESG has an enormous economic opportunity and competitive advantage. Companies are increasingly coming out with their own net carbon neutral statements and movement in the financial markets are growing, such as green bonds tied to sustainability targets. Moreover, companies are hiring Chief Diversity Officers and are implementing new HR policies on diversity, equity and inclusion which evaluate and compensate executive teams on clear diversity objectives.

I anticipate interest in ESG to continue to grow — what was once reserved for “do-gooder” organizations by design has now grown into widespread adoption and is increasingly important for all stakeholders.  

#2) Proliferation in ESG Measurement/Metrics & Accountability

I’m a big believer in the saying, “what gets measured, gets managed.” Over the last 10 years, there has been a significant proliferation in ESG measurement and metrics with the growth in ESG’s popularity. While there is still much to be done to harmonize impact measurement, there are several efforts worth noting:

• Global Impact Investing Network (GIIN) – IRIS +
• Global Impact Investment Rating System (GIIRS)
• Sustainability Accounting Standards Boards
• UN’s SDGs – 17 SDGs
• ESG “Calorie”
• B Corps, Benefit Corporations and their equivalent around the world

I’ve seen two key challenges to the adoption of ESG policies at a company or fund: 1) time and 2) accountability. It takes time to properly implement ESG policies and I recommend starting by focusing on the key metrics most relevant/important for you – break down ESG into smaller, more manageable goals. Moreover, given that transparency and traceability are enablers of real change, I recommend hiring a dedicated professional(s) to oversee your ESG policies. This demonstrates a high level of commitment to ESG principles and he/she can implement a structure to trace and report on progress. While ESG metrics are not commonly part of traditional financial reporting, companies and funds are increasingly making disclosures in their annual reports or making available separate ESG or impact reports.

A final challenge to appreciate when adopting ESG thinking into your organization is balance. As the concept of shareholder primacy fades, stakeholder capitalism has emerged with sometimes conflicting priorities. Failure to implement ESG can risk your ‘license to trade’ while adjusting too much can hamper competitiveness. That’s another good reason for starting small and building on success over time.

#3) Increased Focus (finally!) on the “S” of ESG:

For many years, my experience has been that ESG has overwhelming focused on the “E” – the environment – of ESG. However, this has shifted significantly to include the “S” over the last year due to the COVID-19 pandemic and the Black Lives Matter movement. A wide range of social issues are now front and center – ranging from gender, diversity, equity and inclusion to voting rights and LGBTQ+ to name just a few. While I anticipate the “E” to remain a large share of the ESG discussion, I fully anticipate the “S” to receive similar attention and treatment.

What trends do you see in the ESG World? Please share your ideas with me. If you’d like me to speak to your organization about ESG and Sustainability, please send me a note. I look forward to discussing and sharing my experience.