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ESG

Ever-Evolving Trends in ESG

Worldwide the economy was overwhelmed by the outcomes of the COVID-19 pandemic, the beginning of which prompted a lofty and fast decrease in global capital markets during the first quarter of 2020. The S&P 500 index had lost 34% by August, prior to marginally recovering by the end of the year. In the wake of this pandemic-initiated commotion, there were far and wide cases that a company’s execution of ESG acted as a safeguard with firms facing less value destruction as compared to their lesser ESG-performing peers, a total return of 20.4 % over the past 12 months compared to the S&P 500’s total return of 19.7 %. Morningstar, alluded to ESG as an “equity vaccine” against the pandemic-affected market. Following which ESG gained traction as risk security, and 2020 saw increased investor focus on sustainability investing, reflected in an increase in total assets and inflows in sustainable funds USD 550 billion at the beginning of 2018 to USD 1,258 billion at the end of September 2020 – an increase of 129%, equating to a CAGR of 35% (Source: Morningstar)

1) ESG Disclosures, the new normal: EU led the way for the adoption of ESG funds, expecting to now reach over 7.6 trillion euros in ESG funds by 2025, directing business and venture choices more than ever. Around 79% of investors in Asia-Pacific expanded ESG investments “significantly” or “moderately” in light of Covid-19, as indicated by MSCI 2021 Global Institutional Investor survey. India likewise saw an inflow of Rs 3,686 crore in 2020 as contrasted by Rs 2,094 crore in 2019-20 (Morningstar data). Following a push by worldwide financial investors with 6 new ESG funds dispatched in 2020 alone. While some  big corporations felt the brunt of ESG debates, governments have additionally been confronting increasing pressure from investors and stakeholders to disclose their ESG risks, practices, and impacts.

2) Rise of climate related disclosures: As the economic aftermath of COVID-19 unravelled, some risk-management parallels between climate change and the pandemic began getting clear, and regulators throughout the world started demanding climate disclosures. The U.K. became the first nation to make the disclosures compulsory as investors and governments demand companies curb their greenhouse gas emissions. New Zealand also declared it obligatory to report on climate-related disclosures, based on the TCFD framework, for all listed equity and debt issuers by 2023. The Securities and Exchange Commission of the USA likewise declared its commitment to improving its disclosure on climate-related exposures. In Asia-Pacific, Taiwan became the first nation to implement mandatory reporting, adhering to the G4 principles. Hong Kong puts regulations on a “comply or explain” basis for disclosures of broad climate issues that impacted organizations, and Singapore introduced sustainability reporting on a “comply or explain” basis in June 2016. As governments across the globe came forward with their commitment to report on climate-related risk, India to stay up with worldwide advancements came out with disclosure requirements under BRSR, covering ESG perspectives, which will be material to the top 1,000 listed entities by market capitalization.

3) Race to Net-Zero: The signatories of Paris Agreement committed to reach carbon neutrality by the second half of the 21st century but with environmental change getting both progressively present and direr this is a wide period.

Climate Summit in 2021 saw U.S pressuring nations to either speed up carbon-neutral pledges or commit to them in the first place, following the USA re-joining Paris agreement. Up until now, just five nations have net-zero pledges set for after 2050, including Australia and Singapore, which haven’t set a firm target yet. Even if each nation meets its present commitments, the world would still warm by more than 3*C this century, as per the Outflows Gap Report by UNEP, and yet many of these commitments aren’t backed by government actions. The pressure to bring bold targets to the table at this year’s UN climate change conference (COP26) is understandable, India may join other Asian nations in announcing a net-zero carbon emissions target.

4) Stressing on the “S” in ESG: The intolerable labour practices and racial injustice issues like ‘Black Lives Matter ‘campaign has only increased the emphasis on the ‘S’ of ESG. There is growing pressure on companies from consumer expectations and investors across global operations to consider social factors in their longer-term plans. An assessment made by World Benchmarking Alliance showed that businesses need to urgently step up their game as many of their commitments lack a practical execution plan. Due to the nature of globalization and regional differences in policies there is no consistent global consensus on what social outcomes should be prioritised and how the implementation of shared social objectives should be achieved, reflecting how difficult it is to achieve a global consensus on both objectives and implementation whilst respecting cultural preferences or norms and accommodating particular issues affecting individual countries. EU mandated human rights due diligence regulations as they pose a significant ESG risk to the economy, as the market expects to see more demand for the familiarization with human rights issues and the integration of human rights due diligence into the investment process in 2021. India too revised it’ s BRR framework based on the nine principles of the Indian government’s RBC guidelines that are driven by leading international standards and practices including the UN Guiding Principles on Business and Human Rights, UN SDGs, and the ILO Core Conventions with the aim to address business ethics, transparency, human rights, environmental safety and fair labour practices.

In the world privatization, investor’s interest is dependent on the country’s competitiveness. The traditional outlook of assessing a range of macroeconomic variables has been upgraded with an additional factor of sustainability, any Institutional weaknesses in implementing those factors can amplify macroeconomic fragilities and affect credit worthiness’s. To conclude, ESG can act as either a catalyst or impediment to a country’s economic growth, and the lack of commitment to address ESG risks can constitute a major obstacle to long-term growth.

ESG Chronicle Team