Lauren Compere, Managing Director, gives her views on the year ahead
In January last year I looked at five sustainability trends with the potential to affect investors in 2017. As a long-term investor, perhaps making short term projections is a fool’s errand, but having made them, it’s only fair to look at how they panned out.
A year ago, I predicted that low-carbon, human rights and corporate governance of sustainability would all rise up the investment agenda, despite the strident positions being taken by the Trump administration in the US. That proved to be the case and I expect these issues to continue to shape the agenda in 2018. Other forecasts, that companies would do more to empower consumers on waste, and that the Sustainable Development Goals (SDGs) would become ‘big business’ have not quite materialised to the same extent, although on both I hope it is a case of being early rather than wrong.
But what of 2018? What are five environmental, social and governance (ESG) trends that might shape capital markets in the year to come?
1. The low carbon transition will gather pace
At the end of last year we saw markets go increasingly green. The investor flight from coal continued at pace with the likes of AXA and ING accelerating their divestments from coal financing, and a $26 trillion group of over 225 investors backed the Climate Action 100+ initiative to curb the emissions of the world’s largest greenhouse gas emitters.
This year expect the pace of the low carbon transition to quicken further, thanks in large part to an increasing standardization of environmental disclosure. Earlier this month, over 200 firms, worth a combined $81 trillion pledged to regularly report on climate change risk and to implement climate-friendly initiatives in-line with the recommendations of the G20-backed Task Force on Climate-Related Financial Disclosures (TCFD). The 6,000 companies that use CDP’s environmental disclosure platform will now find that this also follows the structure of TCFD, encouraging them also to report along the same lines. This standardisation will help more investors take climate risk into accounts in their asset allocation.
For investors, Article 173 in France has made climate change reporting mandatory for institutional investors, and we could see more of this kind of legislation in 2018. Perhaps the most interesting space to watch is the EU’s ‘High-Level Expert Group on Sustainable Finance’ (HLEG), due to report around the end of January. This will present the framework for a new EU strategy on sustainable finance which could make it a legal obligation for investors to factor sustainability risks into capital allocation decisions.
2. Investors and consumers to come together
From food to fragrances to football, both shoppers and shareholders increasingly care about what is in their products, and that is a force that could radically shape 2018.
Chemicals, such as those that go into perfumes, are a good example of this. For investors there is increasing interest — with new analysis showing that toxic chemical exposure may cost the world up to 10% of GDP. Among consumers there is also increasing interest, with companies like Procter & Gamble, Unilever and Walmart all instigating more rigorous labelling of fragrance ingredients.
The coming together of consumer and investor concerns will also be reflected in the release of the new Access to Nutrition Index in Spring 2018. For the first time this Index will look not just at corporate practices to tackle obesity and undernutrition, but also the extent to which these issues are being addressed in the food products themselves, including where the products are being sold and at what price.
In the summer, we expect Russia’s hosting of the football World Cup to put the issue of human rights on both the investor and consumer agenda. Human rights organizations have already alleged abuse of thousands of workers involved in the construction of stadiums and infrastructure for hosting the World Cup. At the same time, investors are increasingly taking note of human rights issues, as demonstrated by the growing influence of benchmarks such as the Corporate Human Rights Benchmark and KnowtheChain.
3) Shareholder engagement may at last go deeper
Last year some of the largest fund managers in the world dipped their toes into the water when it comes to shareholder activism on ESG issues. For example, BlackRock, Vanguard and Fidelity all issued guidance to empower fund managers to vote in favour of climate-related shareholder proposals.
In 2018 expect to see more fund managers move beyond guidance and take up meaningful engagements with portfolio companies. A big driver of this is the toughening stance taken by the UN-supported PRI, which from 2020 has said it will delist those asset owners and investment managers who do not meet new minimum requirements for putting responsible investment into practice.
A good example of substantive, deep shareholder engagement is the banks and climate change coalition led by Boston Common. For several years we have led an investor coalition that examines how 60 of the world’s largest banks manage their climate-related risks and opportunities. Our coalition — now over 100 investors with $2 trillion in assets under management — takes a holistic view of all the risks and issues, looking at each bank’s climate strategy, its financing of the low carbon transition and its actual risk management practices such as environmental stress testing or use of carbon footprinting. Our latest report is due for release in February 2018 with a more explicit focus on alignment with the TCFD.
An emerging issue, that might require substantive shareholder engagement in 2018 may also be that of companies using prison labor. For example, there is evidence that companies such as Costco use prison labor in parts of their supply chain to supply products such as electrical wiring or fruit. There are real concerns that these workers will not get a fair wage. Boston Common has joined a shareholder resolution asking Costco to clarify this position at their AGM at the end of January.
We are all regularly bombarded with articles in the media about aggressive tax planning by multinationals and how this creates market distortions and costs billions of dollars to governments. We now need to start getting to the bottom of these stories and ensure companies, investors and governments are fair and transparent across all tax issues.
In the third quarter of last year Boston Common joined the PRI advisory committee focused on tax transparency. This initiative focuses on engaging IT and Healthcare companies to encourage best practices in corporate income tax disclosure and mitigating tax risks. In 2018 will be receiving the formal responses and taking action in these two sectors.
4. Taking diversity beyond the boardroom
As more women speak out on sexual harassment in the wake of the Harvey Weinstein scandal, shareholders are starting to pay attention. This is driving work on diversity as a whole.
For example, in 2017 Boston Common co-filed its first racial diversity shareholder resolution with Alphabet (the parent company for Google). Alphabet seeks to link CEO compensation with the achievement of sustainability metrics, including metrics on diversity within the executive ranks. Though the company has publicly disclosed demographic data for its employees since 2014, progress has been slow and Google recognizes that the lack of inclusion of women and minorities in the tech space is a problem. Eileen Naughton, Vice-President, People and Operations at Google has noted in a blog post, “Our employees, product and business depend on us getting this [a more diverse and inclusive workforce] right.”. It’s been reported that, according to the Equal Employment Opportunity Commission, one in four women have been sexually harassed in the workplace, and this could be as high as 50% according to a recent Wall Street Journal/NBC News poll. In 2018, we will raise our focus on discriminatory workplace practices and sexual harassment through our support of the Women’s Empowerment Principles and direct engagement with portfolio companies.
Other initiatives such as the 30% Coalition, have helped to improve diversity in corporate boardrooms. The portents for 2018 are positive so far. According to research from recruiters Glassdoor, diversity and inclusion is becoming top of mind as companies plan their talent strategies for next year. Let’s hope it is the year when companies start to properly value diversity at all levels of an organization.
5. Growth in SDG investing
Finally, expect to see more and more investors look to align their investments with the UN’s Sustainable Development Goals (SDGs). According to CalPERS, the US’ largest public pension plan, the SDGs are a moral imperative and an economic necessity, while the PRI has now established two SDG working groups on asset allocation and active ownership.
These are just some of the themes and trends we will be focusing on as we move into 2018. What’s clear is that ESG trends in general will continue to shape investors’ portfolios in an ever more powerful way in the year ahead, and that should be good news for all those who want to see more sustainable capital markets.
The information in this article should not be considered a recommendation to buy or sell any security.
 Journal: Environmental Health
 North Star Asset Management