Some of the major trends

SOURCE: Top 10 ESG Trends for the New Decade

Posted by Kosmas Papadopoulos and Rodolfo Araujo, FTI Consulting, on Monday, March 2, 2020

Since we started with the Paris 2015 agreement, there have been many trends and changes that have not always been clear, but we are beginning to see that there is no turning back from the effects of this pandemic and predictions of other potential risks that will see us witness widespread implementation of ESG-related practices across industries and governments in the next 10 years. Companies, investors and governments that fail to act on ESG are likely to expose themselves to greater risks and miss significant opportunities compared to leaders who promote these ESG principles and practices in many key areas.

“Demonstrating ESG leadership will ultimately become a differentiator and competitive advantage for public and private sector entities.”

According to Kosmas Papadopoulos and Rodolfo Araujo, of FTI Consulting. Here is a summary of some of the 10 ESG trends of the new decade.

Some of them are already being implemented in many large companies that want to lead this new way of understanding business, growth and the contribution of value to their employees and society.

  1. Climate Change: The Road to Zero Emissions

Many companies will seek to take advantage of new business opportunities and position themselves as climate leaders. At the same time, investors will increase their commitments around climate change and are likely to start incorporating climate risk into their valuation policies, even voting against the boards of laggard companies. There are numerous examples of sustainable finance such as those discussed by Blackrock CEO Larry Fink.

  1. Good governance: Environmental and social issues

Governance of environmental and social (E&S) issues will take center stage for investors and boards. E&S risk management will emerge as the new standard for comprehensive corporate governance practices. Corporate social responsibility efforts are expected to go beyond simply “giving back to society” to also incorporate sustainability as a tool for systematically managing risk and creating long-term shareholder value. It will be important to understand the impacts and repercussions on the environment and society caused by companies in the development of their business. These will be essential topics to be discussed at the boards of directors, and will require expert environmental and sustainability professionals.

  1. ESG Disclosure/Reporting: The New Normal

Many of the corporate governance codes are already being disclosed by companies, reporting on board executive compensation, board composition, gender diversity, etc. Given the relevance of issues related to sustainability, social and environmental aspects, it is being recommended that specific functions in this area be identified and attributed to a specialized committee within the organizations.

All these trends have spread rapidly around the world over the past decade and many international companies and governments have been regulating them. Disclosure of ESG factors will be standardized and generalized in the coming years.

Already today there are reporting standards aimed at the investment community (such as the Sustainability Accounting Standards Board and the Task Force on Climate-Related Financial Disclosures). And there are reporting frameworks aimed at a wider audience of stakeholders (such as GRI, CDP) that also provide a clear roadmap. Verification and assurance will play an increasingly important role in confirming the accuracy of these disclosures.

  1. ESG Investors

It remains unclear when or to what extent the inclusion of ESG risk assessments will have an impact on capital flows.

Investors will have to face the many criticisms from the greenwashing society as major asset managers introduce new ESG products to the market. Start exploring some certifications such as “ Cradle to Cradle “, “ Fair Trade “, “ Company B “, “ Leed ” are the best path to legitimate sustainability for your company.

Regulatory initiatives (such as the EU Action Plan) and market-driven solutions are likely to play an important role in creating standards for sustainable finance.

The inclusion of environmental and social objectives in financial decision-making aims to limit the financial impact of environmental and social risks. For example, a 2°C increase in global temperature could have destabilizing effects on the economy and the international financial system.

  1. Data and Technology: Smarter analytics drives ESG practices and protocols.

Data and technology will drive significant changes in our ability to measure, calculate and monitor ESG factors, and assess their materiality and impact on long-term value creation. Better visibility of more difficult metrics, such as resource consumption and biodiversity, will likely enable the creation or improvement of international frameworks and targets on several key issues, reflected in the Paris Climate Agreement.

Improved and standardized reporting will enable investors to assess the effects of ESG factors on valuations. Artificial intelligence can be expected to play an important role in identifying patterns that link economic performance to ESG factors. In addition, companies that can better measure their ESG impacts and risks will be better positioned to make better capital allocation decisions.

  1. Diversity and inclusion: Beyond board quotas.

In addition to board diversity, the focus for companies and investors will shift to diversity throughout the organization, from the C-suite to the general workforce. Policies on equal pay, equal opportunity and corporate culture will also come under increased scrutiny. In the case of the United States, boards are expected to cross the 30 percent female participation threshold early in the decade, approaching gender parity around 2030, and especially in the largest companies.

The number of female senior executives will more than double by the end of the decade, despite starting from an inconsistent base. (Currently, women make up only about 6 percent and 5 percent of CEOs and board chairs of U.S. companies, respectively.)

  1. Executive compensation: Increased focus on metrics and objectives (including ESG).

The trends observed in the 2010s will continue, as a greater proportion of incentive awards will be performance-based rather than time-based, and the use of restricted stock will continue to outpace the use of stock options. Large investors are expected to refine their executive compensation assessment methodologies with even greater emphasis on transparency and appropriateness of performance measurement and robustness of targets.

As ESG considerations gain prominence, more companies will link executive incentives to ESG-related metrics.As we can see, the digitization of key processes linked to the achievement of ESG objectives is becoming a priority in companies’ investment policies. Having the key market-leading tools that are currently used by leading companies that are pioneers in the best practices of these objectives should be an option to be evaluated by companies that do not want to be left behind.

From Laragon Sustainability Solutions we have been a benchmark in the digitization of many of these initiatives for more than 15 years, providing companies of all sizes with our experience in optimizing all company processes towards sustainability, transparency, risk management and good governance.