Lauren Compere of Boston Common Asset Management says companies and investors will have to urgently step up their ESG work on multiple fronts in 2020 and beyond
It’s impossible to understate the importance of 2020 in the fight against climate change. If we are to have any chance of limiting global warming to 1.5C, 2020 is the year global emissions must peak, with a decade of significant climate action to follow.
The year has begun with a stark warning of the consequences of inaction, with the Australian wildfires razing over 10 million hectares, claiming dozens of human lives, an estimated 800 million wildlife (with some species at the tipping point of extinction), and costing billions of dollars in damage.
Companies and investors must now urgently broaden their efforts to act on multiple fronts beyond energy use; from land-use challenges to refrigerants, “business as usual” simply will not do. Deforestation is removing carbon sinks in places like the Amazon, driven by irresponsible sourcing in global supply chains of agricultural products such as palm oil, soy, cattle and timber. And, as the warming planet increases demand for refrigeration and air conditioning, responsible management and disposal of refrigerants will be critical, as they are extraordinarily potent greenhouse gases.
But it is not only the climate crisis that will be at the top of the agenda for companies this year. The meteoric rise of the data economy has been accompanied by serious digital privacy concerns that must be tackled in 2020. And just as incremental progress on climate is being called out for its inadequacy, pressure is also mounting on firms to address boardroom diversity and go far beyond a “one and done” approach to a more holistic effort to achieve workplace equality. Here are five of the biggest sustainability trends in business to watch for in this critical year:
1. Climate transparency ahead of COP26
In the lead up to November’s COP26 in Glasgow, those businesses that still fail to even disclose environmental data will feel the heat more than ever. Investors will continue to lead on this, as they did last summer, when over 80 investors representing $10tn in assets targeted more than 700 companies for not reporting their environmental data through CDP’s disclosure platform. We are also seeing activist hedge fund TCI warn companies to improve environmental disclosure or face votes against their directors and auditors. There are more markets examining mandatory climate disclosure beyond France, and regulators like the Bank of England are starting climate stress testing in 2020.
Long overdue, this trend should percolate to the banking sector this year, which has been increasing financing for fossil fuels, despite an explosion of green financing initiatives. Earlier this month, a group of 11 pension and investment funds filed a resolution calling for Barclays to set clear targets to phase out services to energy companies that fail to align with the Paris Agreement. This increasing pressure should push banks to adopt a robust strategy for decarbonising balance sheets, including clear timelines for restrictions and phase-outs of financing for fossil fuels.
2. Circular economy and resource efficiency
A new American Council for an Energy-Efficient Economy report shows that by 2050 energy efficiency alone can “slash US energy use and greenhouse gas emissions by 50%, getting us halfway to US climate goals” and deliver energy savings worth more than $700bn. Companies must go back to the basics and address operational footprint efficiencies by increasing their resource productivity and cut resource use – in the areas of energy, water, emissions and waste, especially plastics. Plastics are now everywhere in our lives and of the 2.5 billion metric tons of plastics sold globally each year, 275 million tonnes are wasted.
More than 400 companies have endorsed the New Plastics Economy Global Commitment, which envisions a circular economy where plastics never become waste. Companies representing 20% of all plastic packaging produced globally commit to a set of ambitious 2025 targets. These are to: eliminate problematic plastics, innovate for safer reusable, recycled, or composted packaging, and circulate 25% of the plastic produced by reusing or recycling (the current global average is 2%).
3. The end of the ‘would if we could’ excuse
For several years investors and companies have bemoaned a lack of necessary tools to achieve the ambitious Paris Agreement goals, arguing that they would do more if they could. The good news is there has been a steady increase in the innovation and standardisation required for climate action in the market and we expect this momentum to carry on.
Climate tools and frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Transition Pathway Initiative now exist to help firms disclose their climate-related financial risk and have seen a significant uptake in use by businesses. About 800 organisations have expressed support for the TCFD recommendations, a more than 50% increase from last year.
Furthermore, the number of recommended disclosures per company has increased, while the percentage of firms that disclosed information with at least one of TCFD’s recommendations has also grown. What we need to see in 2020 is more robust TCFD reporting, as the key conclusion from the latest TCFD progress report is that “not enough companies are disclosing decision-useful climate-related financial information”.
Our recent Banking on a Low Carbon Future report also highlighted aids such as Science Based Targets, the Principles for Responsible Banking and explicit scenario analysis tools like PCAF (Platform for Carbon Accounting Financials). Banks must also assess and manage the wider climate risk posed by soft commodities and sectors linked to deforestation and biodiversity loss. Even in the relatively advanced markets in Australia and Europe, only about a third of the banks covered in this report have required no-deforestation policies and even fewer have expanded these policies to all soft commodities. None of the US or Canadian banks – and few in emerging markets – require clients to adopt no-deforestation policies.
Looking beyond the banking sector, despite more than 469 companies adopting zero-deforestation or “No Deforestation, No Peat, No Exploitation” (NDPE) supply chain commitments, none is on track to meet their 2020 commitments.
Clear direction from regulators is also falling into place to drive investment. More than 60 countries have said they will try to reduce their net carbon emissions to zero by 2050, including a few nations that have already codified the net-zero goal into law.
4. Strengthening digital human rights
The data industry’s unbridled growth has left cause for concern, with a myriad of issues surfacing, ranging from data privacy to targeted advertising to online extremism. In 2020 expect to see responsible investors to step up efforts to force companies to embed digital human rights into new products and risk-management processes. Tools such as the Ranking Digital Rights Corporate Accountability Index are likely to grow in prominence.
Ethical questions are emerging particularly strongly over the use of artificial intelligence (AI). In an encouraging sign, several companies including Google, Microsoft and IBM have adopted codes of artificial intelligence ethics. With the EU considering a five-year ban on facial recognition, Microsoft vocally calling for “a government initiative to regulate the proper use of facial-recognition technology” and Google’s CEO calling for a sensible approach to AI regulation, markets will hopefully move in the right direction in this space in 2020. Unless concepts like privacy, civil rights, and human rights are baked into the actual design of newer technologies from the get-go, it is a lot harder to manage the risk of adverse human rights outcomes.
5. From board diversity to workplace equality
While small steps are being taken in addressing gender equality on boards, the pace needs to accelerate. Last year, California passed a law enforcing all locally headquartered publicly traded companies to have at least one female director by 2020. But we need to go further and move beyond tokenism. Norway, Spain, France and Iceland all have laws requiring that women comprise at least 40% of boards at publicly listed companies.
This trend is driven by the evidence of its success. A meta-analysis of 140 research studies of the relationship between female board representation and performance has found a positive relationship with accounting returns. Gender diversity is also becoming a prerequisite for institutional investors, who make up 80% of the equity market cap, which will put further pressure on firms to address gender diversity on boards in 2020.
Beyond the board we believe more ambitious and innovative practices for diversity, equity, and inclusion can be a source of sustainable advantage for firms. The essential and long-overdue pivot towards gender and racial equality in the workplace has proved elusive, despite many corporate diversity, equity, and inclusion (DEI) programmes. Indeed, data suggests that over the past 30 years, the percentage of managers from diverse, ethnic and racial backgrounds has remained stagnant or reversed, despite voluntary initiatives.
Companies need to address the current pitfalls by making goals that are public and measurable – and the achievement of these goals should be integrated into performance goals and compensation at the individual and team levels.
Lauren Compere is a managing director and director of shareowner engagement at Boston Common Asset Management. The information in this article should not be considered a recommendation to buy or sell any security.
For more thought-leadership on the agenda for business during 2020 and the #deliverydecade download the January issue of Ethical Corporation here
divestment Barclays deforestation biodiversity loss COP26 CDP TCI New Plastics Economy Global Commitment TCFD Transition Pathway Initiative gender equality