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After presenting our SRI Outlook 2021 linked to ESG momentum, now we focus on the risks to monitor in 2021 for each dimension of ESG.
In 2021, the focus will remain on climate, which is clearly the top priority on the public agenda.
Let’s look at the commitment of the main regions, or at least the most GHG emitting ones – USA, Europe and China. These all commit to carbon neutrality by 2050 (Europe and USA) and 2060 (China). They are joined by South Korea, Japan, Colombia and South Africa. As a result, two thirds of the global economy, and over 50% of the GHG emissions are targeting net zero GHG emissions in the next thirty years.
There are three main options to achieve this neutrality: reducing the energy consumption, reducing emissions by selecting greener sources of production and increasing the carbon capture and storage programs. To achieve this “net zero” target, climate change should be defined as purposeful investment, and markets should shift to green investment-led growth. This might require a full paradigm shift and a reformulated concept of “growth”, which would have an important impact on the current resource-intensive market process. In concrete terms, energy, transport, construction, agricultural and food-system resource footprints must be addressed. In addition, as some GHG emissions are inevitable, the implementation of the net zero emissions theory will require interim steps and a credible offset programme. Carbon capture and storage (CCS) programs and approaches remain so limited and slow that a credible carbon price appears to some as a valid solution to move forward. The question of potential taxes and eventual cross-border adjustment taxes based on externalised costs will become more and more relevant.
Climate change mitigation and adaptation, the first two objectives of the EU taxonomy, will require a large amount of investment in R&D, innovation, low carbon infrastructure and new technologies. It is important to anticipate the coming environmental objectives of the next EU taxonomy, namely pollution, the change in land usage and biodiversity.
The arrival of vaccines, without daring to speak about the potential end of the pandemic, will challenge the world after the sanitary crisis i.e. its impact on jobs, livelihoods and ways of life.
On the social side, the COVID crisis has exacerbated global inequality. Distribution effects and a “just and fair transition” will be at the heart of people’s concerns. The virus has worsened unemployment, raised poverty levels and exacerbated inequality. This could weigh on political stability and increase geopolitical risk, which was already a major hazard in the last decade.
The EC is already trying to further regulate human rights and corporate responsibility to encourage supply chain vigilance. Since the inception of ESG research, supply chain has been one of its main concerns. The virus might have deviated the debate. On one hand, there is a paradigm shift from corporates and their sources of resourcing, with some relocation of supply. On the other hand, the crisis has accelerated the growth of incentives for rapid automation. This will be an important social challenge to assimilate: It is important to keep in mind that, if the speed of technology adoption were to surpass that of economic growth, the societal impact will be generally negative, resulting in unemployment and low economic development.
Governance: the shift from shareholder primacy to stakeholder capitalism
The sanitary crisis has reinforced the move away from shareholder primacy towards stakeholder capitalism. This will clearly be a disruptive structural trend in the coming years. From the original paradigm focusing on maximising returns, corporates are increasingly called upon to focus on all stakeholder interests. The long-time motto of cost reduction and profit maximisation is now being replaced by global ESG issues as a notable result of the sanitary crisis and lockdowns’ impact.
This pursuit of profit maximisation for shareholders is also in the crosshairs of the European Commission. It aims to fight against the short-term pressure of the markets, which is harmful to the sustainability of the companies. Through this, the EC is closely studying the option of a legally binding regulation regarding the sustainability of corporate governance. This includes the role and responsibilities of board directors. Indeed the EC could adopt regulation regarding corporate law and board duties to foster sustainable corporate governance. The link between shareholder primacy, short termism and environmental unsustainability has already been established. Similarly, the link between shareholder primacy, short termism and exacerbation of social inequalities has also been documented in several research pieces on the topic. The EC could be tempted to clarify the concept of “stakeholder interests”, not yet covered by the different corporate governance codes. In its last survey, it is considered to make board directors responsible for the identification and mitigation of factors affecting the long-term life of the company. To be continued.