We have been asked by a number of people for our views on the trends in ESG that senior executives should take note of during 2021. We have summarised four drivers of change to consider:

• The increasing impact on mid and small cap companies: As more asset managers, banks and insurance companies adopt ESG principles into their decision-making and insight capabilities, the importance of ESG will continue its expansion to cover all listed companies. The significant inflows of ESG-linked capital seen during 2020 will continue throughout 2021, as will ESG’s relevance to value and pricing discussions – be that in equity, credit or risk coverage – as first witnessed by large cap companies.
• The role of business and climate change: The economic and social impact of climate change will intensify with growing demands for a net-zero strategy and the implementation of TCFD as a factor of risk and competitive advantage. The Bank of England’s stress test of the financial system to assess individual and collective resilience to climate change will require disclosure and governance on risk and emissions reduction with an expected impact on capital and asset pricing. New FCA rules for all premium-listed companies to implement and disclose TCFD came into effect on 1 January 2021. The FRC has also made clear it is encouraging all listed companies to immediately follow the TCFD and SASB frameworks on a comply or explain basis. COP26 in November 2021 will mean increasing visibility of the climate debate, with the likelihood of more regulations as the UK Government looks to take a global lead in green finance and emissions reduction. We are already seeing influential investor groups calling for mandatory climate votes at AGMs.
• The stakeholder contract: COVID-19 will continue the acceleration of business and societal change, magnifying issues including tax, employee security, supply chain resilience and diversity. The treatment and engagement of stakeholders will become a key focus area with increased demand for insight. The FRC has already made clear it expects companies to improve disclosure on purpose, culture, diversity and stakeholder engagement, moving away from a description of management process to a clear narrative of how and why decisions and action are being taken by senior-management and Boards.
• Link to remuneration: There will be a growing demand for clear evidence of how ESG is being embedded within organisations. This will require companies to identify, measure and manage the different elements of ESG that are material to the business and strategy. The final expectation and test will be how these material factors are being linked to senior executive remuneration. Several large companies are already taking the lead on this, and we expect many to follow.

It is clear that ESG will continue its journey from being traditionally treated as a box-ticking and reporting exercise to becoming part of the strategic programme. This will require more details on materiality, measurement and targets set over the longer-term and integration into the corporate positioning and narrative, as stakeholders place greater value on intangible reputational items.

Please do not hesitate to contact us should you wish to discuss any of these points in more detail.