2020 will be remembered for several important milestones that cut across the three environmental, social, and governance (ESG) pillars. We continue to struggle with an unprecedented public health crisis, which has killed over 360,000 Americans and 1.9 million more worldwide and disproportionally affected middle to low-income individuals. Many companies are taking action on the diversity, equity, and inclusion (DEI) front after social unrest brought racial inequality and discrimination to the forefront. Hurricanes and wildfires continue to make headlines. And, governance has been topical with the presidential election, the politicization of the COVID response and stimulus plans, and the recent Senate runoffs in Georgia.
While the markets are often seemingly unrelated to the current economic environment, discounting expectations 6-12 months out, in Q2 there was an immediate and direct connection between the market breakdown and the uncertainty from the economic shutdown. The government’s swift, extraordinary monetary and fiscal intervention provided support, and ultimately recovery, for the markets. However, on Main Street, it remains to be seen what the longer-term effects will be on lower-income wage earners, and whether restaurant workers, agricultural workers, or members of the informal (gig) economy will see the same recovery. Some large companies have solidified their workforce with minimum wage increases and modest bonuses, while many small businesses and supply chain logistics have been compromised. Remote schooling and working from home have been difficult for many underserved communities with limited broadband or technology resources.
DEI has become an integral part of the corporate vernacular in recent months. Social justice and racial equity are prevalent conversations in boardrooms and on human resources teams; many firms have established an Office of DEI or appointed a Director of Diversity and Inclusion. Asset management firms are developing programs and recruitment strategies to improve diversity, with an emphasis on purposeful hiring, unconscious bias training, and reviewing business relationships from a values point of view. In addition, there is a renewed focus on the income gap and discussions as to equity in education, housing, and access to health care. We have seen the results of the latter in the demographics of those who have suffered the most from the pandemic. Although the attention was on racism and prejudice in 2020, there are ongoing efforts to address the issues faced by indigenous peoples and the LGBTQ community.
Within the ESG ecosystem, climate change has been a major focus for many years, and the effects are quite evident with the intense storms, wildfires, and more extreme temperature swings we’ve experienced. CNN or the Weather Channel seemingly has an endless supply of current weather videos to keep this issue front and center. The warmest years globally have all occurred since 1998, with the top ten being 2016, 2019, 2015, 2017, 2018, 2014, 2010, 2013, and 2005 (tied), and 1998, respectively. Many companies have pledged net zero emissions by 2050 (2040 in some cases), while many asset owners have unequivocally adopted ESG and voted proxies, engaged management, or divested from some of the major offenders. Thirty asset managers with a collective $9 trillion under management have signed on to the Net Zero Asset Manager Initiative to partner with clients on their de-carbonization efforts. The industry has drawn a distinction between physical climate risk (e.g., actual loss of facilities from flooding) and transition climate risk (e.g., regulatory or technological risk that may cause stranded assets), though both could affect the sustainability of a business going forward.
Politics aside, if one looks at the incoming administration’s proposed Cabinet appointments through both a diversity and a climate lens, there are several “firsts” as well as a distinct nod to climate. Of course, Vice President-elect Kamala Harris is the first woman, first Black person, and first South Asian person to be elected to that office, and she brings a passion for climate justice and polluter accountability to the table. Michael Regan, if confirmed, would be the first African American to lead the EPA; he is currently Secretary of the North Carolina Department of Environmental Quality. New Mexico Rep. Deb Haaland would be the first Native American Cabinet Secretary of the Interior. If the Senate confirms Pete Buttigieg as Secretary of the Department of Transportation, he would be the first openly gay man to be appointed and confirmed to a Cabinet post. He also would be responsible for President Biden’s infrastructure plan, with an eye towards offsetting the impacts of climate change. Former Michigan Governor Jennifer Granholm, who helped rescue the auto industry and promotes green energy, would head the Department of Energy. Regardless of whether it’s Washington DC, California, or Texas (22% of their electricity is generated from renewables), ESG and sustainability are here to stay and grow in importance. Fund flows, net-zero emission commitments, regulation, and a desire to make a difference are driving many asset owners to take the lessons learned in 2020 and look forward to a more sustainable and inclusive 2021 and beyond.
The above examples are for illustrative purposes only. The views contained in this report are those of IR+M and are based on information obtained by IR+M from sources that are believed to be reliable. This report is for informational purposes only and is not intended to provide specific advice, recommendations for, or projected returns of any particular IR+M product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Income Research & Management.