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1. Climate change
Climate change looks set to remain the top theme for most responsible investors in 2021, not least because of COP26 – the global climate negotiations now scheduled to take place in November in Scotland. Slated to be the biggest since the Paris Agreement was achieved in 2015 at COP21, the summit is expected to see the world’s governments submit new and improved climate commitments (although nearly two-thirds of them missed the December deadline), and finance will feature more heavily than ever. Former Bank of England Governor Mark Carney has launched a Private Finance Strategy as part of his new role as Climate Envoy for the UN, helping to coordinate COP26. Last year he described it as seeking to “ensure that every financial decision takes climate change into account”. Expect big commitments from companies and financial institutions, and potentially the introduction of stricter rules from governments as they pursue the next stage of their climate strategies. In the meantime, companies will continue to come under pressure from investors to turn their big, headline-grabbing climate pledges into credible transition plans, and to stop lobbying against climate change efforts – two of the top priorities of shareholder network Climate Action 100+.
2. EU regulation
The EU was supposed to unveil the next phase of its sustainable finance agenda in December, but it is now scheduled for March. It’s expected to be even more ambitious than the Action Plan on Sustainable Finance from which the current green taxonomy, disclosure rules and climate benchmarks grew, and will probably cover new topics such as due diligence rules for board directors, supply chain transparency and the possibility of regulating ESG ratings providers. The first phase of the taxonomy is also supposed to come into play this year, as well as new rules on sustainability disclosures – including transparency around the adverse impacts of investment decisions for environmental and social objectives. The EU’s Ecolabel is scheduled to be extended to financial projects in 2021, too, although there is speculation that the project will be shelved because it is proving too difficult to balance the integrity of the wider Ecolabel brand with the compromises required to make it useable in the context of investment. Following Brexit, there will also be plenty of discussions on how the UK will adopt (or not) all these initiatives to ensure minimal fragmentation for investors and companies operating in both jurisdictions. The other major move from the EU is the overhaul of the Non Financial Reporting Directive (NFRD), which will offer a stricter set of rules around ESG disclosure for big companies (and maybe even smaller ones) in Europe. The plans for that are currently slated to be released in March.
3. Data and disclosure
The NFRD isn’t the only area where reporting is developing. 2020 was huge for data and disclosure. As RI discussed last month, it was the year when players including BlackRock, Microsoft, State Street, Allianz and S&P waded in to try and steer ESG data developments in the market. Regulators and supervisors across Europe voiced support for stricter rules and governance of such data, and – with Biden coming into office in the US this month – 2021 may see more enthusiasm from regulators in the US, based on the recommendations of Bob Litterman and his colleagues on the Climate-related Market Risk Subcommittee, who last year described corporate climate disclosure as “an essential building block” to sustainable financial markets. Canada’s government namechecked the Taskforce on Climate-related Financial Disclosures (TCFD) in its Covid recovery budget, while New Zealand became the first country in the world to introduce mandatory reporting requirements in line with the TCFD. And, for better or worse, taxonomies are being developed as disclosure frameworks all over the globe, with Canada, Japan, Australia, Mexico, South Africa, Russia, Malaysia and the UK among the countries creating ‘nationally appropriate’ definitions of green as we enter 2021. On reporting standards, the European Financial Reporting Advisory Group is helping to develop the EU’s thinking, and a club has formed between the five biggest international standard setters to ensure that ESG reporting expectations become more harmonised and less fragmented. Those moves could prove very significant in the year ahead.
4. The US
2021 is already proving to be a make or break year for ESG (among other things) in the US: as the Trump Administration continues to try and rush through rules to limit the spread of sustainable investment, incoming President Biden has promised that, in less than a fortnight – on his first day in office – the largest economy in the world will rejoin the Paris Accord. That will reboot the federal-level conversation about climate change, and could see certain investments become riskier as the US Government puts its plans into play to get to Net Zero by 2050. Springtime looks set to usher in the last AGM season before new SEC rules will make it harder to resubmit shareholder resolutions, so expect lots of ESG proposals. If investors do find their wings clipped by the rulemakers when it comes to filing and voting on proposals, they are likely to start expressing their frustrations over ESG performance by voting against directors and remuneration packages – a trend we began to see in 2020.
While the lack of women in corporate top spots has been gaining attention for a few years now, 2020 brought the lack of meaningful progress on racial and ethnic diversity into much sharper focus on the back of the Black Lives Matter movement – with institutions throughout North America and Europe making loud commitments to address inequality and underrepresentation. Nasdaq is currently asking for permission from the US regulator to obligate the companies listed on its marketplace to have two “diverse” directors, and to disclose more on race and ethnicity. We’re already seeing some institutions being asked to back up their big statements on racial equality with actions in 2021 and, for many companies and jurisdictions, this year will be the first chance shareholders will have to file resolutions on the topic.
It’s a topic that burst onto the investor agenda in 2020, with big results. In January, AXA, BNP Paribas, Mirova and Sycomore kicked off a search for a firm that could help them develop nature-based investment data. They awarded that mandate in September – not long after a slew of banks, investors and governments came together to form the Taskforce on Nature-related Financial Disclosures. That same month, 26 financial institutions signed up to a new Finance for Biodiversity Pledge. And things haven’t slowed down: the PRI has published a paper on investors’ role on preserving nature, the Partnership for Biodiversity Accounting Financials issued its debut report, and EU insurance supervisors said they would look into the financial risk associated with biodiversity loss. A handful of dedicated investment managers and consultants were also launched last year to cater to this boom in interest. All of these initiatives will continue to play out in 2021, no doubt spurred on by the major global summit on biodiversity (COP15), currently scheduled to be held in May.