In a Time of Crisis, ESG Comes to the Forefront
A Year Like Never Before
In a year of unprecedented global health and economic crises, it has been both illuminating and affirming to see the heightened importance attached to environmental, social, and governance (ESG) issues, by corporations, the financial industry, and society in general. Looking back to early 2020, at the onset of the coronavirus pandemic, expectations were for a potentially very different ESG landscape—fears that progress in global ESG initiatives would be undermined by the impact of the pandemic and that companies would struggle to sustain their commitment to ESG principles and practices.
However, as 2020 progressed, the pandemic underscored just how intertwined economic outcomes are with the prosperity of the planet and the people on it. For companies, the crisis brought new health, financial, and operational headwinds, the likes of which have never been experienced before. This extreme environment only intensified the focus on issues of sustainability and served to accelerate existing ESG trends.
The severity of the impact was a wake-up call for some companies and forced them to reassess how they operate. The size of a business’s carbon footprint and its energy and water use, diversity and inclusion practices, and supply chain management all assumed greater importance over the past year. For companies and investors alike, they are no longer seen as secondary, or even a hindrance, to financial performance.
A Step-Change in Attitudes Toward ESG Disclosure
This positive trend has also been reflected in corporate attitudes toward ESG disclosure. Previously, our engagement discussions with companies revolved around why they should disclose ESG data. However, the past year has seen more and more companies actively seeking guidance on what ESG data to disclose and how best to provide this going forward. Given the fragmented and inconsistent nature of ESG disclosure currently, with varying standards globally, the step-change in corporate attitudes seen in 2020 could mark a significant turning point toward greater, and more consistent, ESG data being disclosed.
Progress Made on Climate Change Policy
On the critical subject of climate change, we saw further progress made toward closing the gap between climate science and policy. This disparity is something that we have discussed in previous ESG annual reports. If we hope to be successful in limiting the adverse impacts of climate change, then policy needs to catch up with the science. Ultimately, this would mean increased regulation globally. Encouragingly, it appears that the urgency of the situation is increasingly being understood. The 26th UN Climate Change Conference (COP 26) in November may also bring the issue sharply into focus.
From Tragedy Comes a Commitment to Change
Issues of diversity, equity, and inclusion (DEI) were also amplified in 2020, following a global wave of protests and activism against systemic racial inequality. Sparked by the tragic death of George Floyd, for many companies this was a crucial moment as DEI was thrust to the top of managements’ priority lists amid demands from employees and customers to accelerate the pace of progress.
In response to these demands, we observed a continuum of corporate responses, ranging from nominal statements of support to financial donations, to implementing structural change. Achieving true DEI in the corporate sector is clearly a long-term journey. However, it is worth noting that, in our long experience of engaging with companies on ESG issues, we have never seen the kind of unity and commitment on any single issue as companies have displayed in the last year.
We remain committed to continuously improving the quality and quantity of ESG data for our research and analysis—which ultimately helps us pursue better long-term investment decisions for our clients. ESG is a critical topic, and I look forward to sharing more on ESG-related issues and sustainable investing in the future.
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The views contained herein are those of the authors as of June 2021 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
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