Key ESG themes for a positive future, according to Fidelity International

Without a doubt, 2020 turned out to be a pivotal year for sustainability in finance and in broader society. The Coronavirus brought environmental, social and governance (ESG) issues to the fore with unexpected urgency. As we consider what the postpandemic future will look like, Fidelity International highlights three key ESG themes for 2021:

1. Build back greener

‘Nature loss is a fat tail risk, like the 2008 asset price bubble or the 2020 Covid-19 pandemic: it cannot be seen with a linear world view, but once triggered can have far greater-than average implications”, according to a 2020 World Economic Forum (WEF) report.

The origins of this pandemic, rooted in continuing expansion of human activity into natural habitats, have brought the consequences of nature loss into sharp relief. However, it is increasingly clear that these are not just one-off acute events and
that the loss of natural capital and biodiversity of that capital̜ is a systemic risk for investors and society alike.

In this respect, biodiversity loss is becoming recognised as critical to the environmental agenda as climate change, and indeed, the interrelationships and negative feedback loops generated between the two forces are accelerating the scale of the planetary crisis we face.

Key figures

  • If no action is taken to cut greenhouse gas emissions, climate change-related damage costs will climb to €31trn £26.7trn) per year, according to the latest report by Carbon Disclosure Project and ­Diversity College London.
  • The destruction of natural capital is an ecological and financial disaster, with half of the world’s GDP (£1.5trn̜) “moderately or highly linked” to its availability, says the WEF.
  • Human activity has already severely altered 75% of terrestrial and 66% of marine environments, threatening the survival of about 25% of animal and plant species, according to the Intergovernmental Sciences Policy Platform on Biodiversity and Ecosystem Services.

Climate change will return to the top of the political agenda in 2021, fortified by the European Green Deal and U­S president Joe Biden’s climate priorities. Expectations are high about speeding up decarbonisation at the UN climate change summit in late 2021 (COP). Announcements from China, Japan and South Korea on net-zero emission targets speak to the growing role Asia will play in setting the climate change agenda.

Businesses are very aware of the financial risks posed by these environmental issues. Initiatives like the Taskforce for Climate Related Financial Disclosures framework are vital in providing a platform for companies to quantify, disclose and assess climate-related risks. Firms must now do the same to systematically integrate nature-based risks.

Biodiversity loss and climate change present critical financial and economic risks to society and to the long-term investment returns we are able to generate for our clients,” says Jenn-Hui Tan, global head of Stewardship and Sustainable Investing at Fidelity International.

“Investors have a key role to play in protecting biodiversity and creating positive biodiversity outcomes. While good progress has been made in our understanding around the pricing and integration of climate change risk, it is now incumbent on us to learn to price natural capital correctly – not simply as an input in a manufacturing process, but in a way that recognises and preserves its value for future generations. That is the challenge for the financial industry over the next few years.̧”

2. Build back stronger

This year, there will be increased pressure on companies to take greater accountability, not only for the welfare of their workforce but for the community at large, and for the individuals in their supply chains. This in large part is due to the severe effect the pandemic has had on people’s livelihoods all round the world and the disproportionate impact it has had on the most vulnerable yet essential workers and members of our society, be they women, children or ethnic minorities.

Key figures

More than 80% of the global workforce of 3.3 billion has been affected by workplace closures as a result of Covid-19, according to the International Trade U­nion Confederation.

Globally, there was an estimated 17.3% loss of total working-hours in Q2 2020, compared with Q2 2019, according to the International Labour Organisation (ILO).

Based on significantly reduced working hours, the ILO estimates global labour income losses of 10.7% during the first three quarters of 2020, which amounts to $3.5trn ̛͎(£2.5trn).

UN Women predicts that due to the pandemic in 2020 for every 100 men aged 25 to 34 living in extreme poverty, there will be 118 women, a gap expected to increase to 121 women per 100 men by 2030.

“Social issues will be a key component of a sustainable post-pandemic recovery,” says Tan. “As governments run out of fiscal
stimulus, the onus to support workers will fall on businesses.

“Women have been disproportionately affected by the pandemic in terms of loss of income. We will be looking to companies to make genuine efforts in supporting their female workforce.̧”

All this comes back to the fundamentals of good governance. Companies will have to consider how best to enable society to recover from Covid-19 in more sustainably oriented ways.

3. Build back inclusively

The pandemic has turned digital tools into a lifeline for people across the world, allowing many to study and work from home. But just as digital tools become a lifeline for some, they can also further exacerbate social divides.

Key figures

  • Approximately 50% of the global population is estimated to be without access to the internet, according to the International Telecommunications U­nion, while a greater proportion, often in rural and remote areas, don’t have broadband coverage or online government services.
  • Seventy-five per cent of people using digital channels for the first time indicate they will continue to use them when things return to ‘normal’, according to a study by McKinsey.
  • According to research by the UK government, 82% of job vacancies in the  already require digital skills.

In 2021, the use of digital channels will likely increase, bringing digital ethics into focus – including data privacy, cybersecurity, online welfare, propagation of misinformation and ethical artificial intelligence design – and digital inclusion. This is not restricted to tech companies and refers to the access, skills, use and benefits related to digital technologies.

“Current digital disparities are extremely worrying,̧ says Tan. “Digital tools have helped millions of people weather the pandemic and their accessibility is likely to become a leading indicator of educational, health and societal outcomes in the future. Governments will need to make digital accessibility an absolute priority in 2021 and beyond to ensure no one is left behind.

“Tech companies must adopt self-regulation in recognition of their often cross-border responsibilities and adapt business practices to minimise societal harm and create positive outcomes for their customer base.

“Investors have to play their part in highlighting these issues to ensure long-term sustainability for everyone.”

Lawrence Gosling is the editor-in-chief of What Investment

Further reading: What is the thematic approach to ESG investment?

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