Everybody says ESG is the next big thing - Waterfall surrounded by green land

  • Richard Bernau, Director |
  • Georgie Fletcher, Author |

2 min read

There is huge momentum building around ESG from all angles. Political leaders are making serious changes in the world, from the Paris Agreement to proposed Green New Deals (US), Green Finance Strategies (UK) or committing to mid-century net zero carbon targets. Regulators are working with governments and think tanks to implement mandatory climate related financial disclosures.

Consumers are changing their purchases to reflect their sentiments on sustainability, and brand trust, loyalty and price expectations are shifting to reflect this. Even Mark Carney is juggling his new role as Head of ESG for Brookfield with being the UN Special Envoy for Climate Action and Finance, and COP26 Finance Advisor to the Prime Minister.

Not only this, but recent events such as COVID-19 have highlighted the importance of companies’ stewardship, environmental impact, and working practices. It would be hard to argue against the fact that 2020 has catapulted ESG thinking to the top of the CEO agenda.

In the broader economic context, this narrative matters

Markets are not always deemed to be rational – while being driven by hard economic factors (such as the impact of COVID-19), investor behaviour (and sentiment) is undeniably important. This positive narrative around ESG is now reflected in the flurry of ESG-related investment activity that has proliferated, particularly throughout 2020, where nearly four times the amount of cash has been plunged into responsible funds than the previous year. Investors are now pouring cash into funds that use ESG criteria to screen the companies they invest in. Passive investors are also jumping in on the action – sustainable index mutual funds and ETFs are popping up all over the place. It’s gaining serious momentum in Europe, which accounts for >75 percent of global assets in sustainable passive funds.

As a result, companies are starting to take stock of their ESG responsibilities and recognise the importance of sustainable decision making to investors. CEOs are making assertive statements about the importance of ESG, from BlackRock (Larry Fink’s CEO letter relates it to a ‘tectonic shift’) all the way to Imperial Brands (Alison Cooper’s CEO statement presents their 3-pillar sustainability strategy).

These messages will be heard by our society at large

Consumers, regulators and governments will no doubt be picking up these messages from the market as a confirmation that ESG is high priority. After all, if public companies are making seismic changes to incorporate ESG factors into their strategic planning, it sends a clear signal that the momentum is building. If the momentum is building, the forces driving political and regulatory actions become stronger, and consumer sentiment evolves again. And so, the waltz goes on.

So, in a way, it is a self-fulfilling prophecy – even the ESG cynics among us must recognise this. If the world at large is indicating that ESG is the next big thing, so it must be.

If you'd like to discuss any of the points raised in more detail, please don't hesitate to get in touch.