How ESG megatrends and opportunities are shaping our future

The onset of the COVID-19 pandemic has not only altered the way markets function but has also forced enterprises to re-evaluate their approach towards business sustainability. It has changed the definition of success and vastly rewritten the rules of the market. The crisis has forced business enterprises to re-examine their role in society and consider mitigating the impacts their operations might have caused on the environment and society at large. While the after-effects of the pandemic continue to affect many sectors, sustainability remains no different. With the ESG agenda steadily gaining momentum over the past few years, the pandemic has accelerated the pace at which companies need to pay higher emphasis on it. This has been reiterated by the World Economic Forum Survey 2020 conducted for corporates across the globe.

According to the recent findings, 23% of the respondents believe that the importance attached to social considerations has increased by 20% ever since the onset of COVID-19.1

This has also brought the FinTech industry into limelight with corporates shifting majority of their operations towards a virtual platform to minimize human interaction. Clearly, the time is ripe for the financial sector to place an increased focus on building an economy that is in tandem with the philosophy of the ESG principles. There has been an increased understanding of the fact that an economy, built upon protecting the environment and social rights of the public at large, will be able to sustain itself in the longer run. It will be vital for policy makers, especially in the developing economies, to ensure that rapid growth does not happen at the cost of hampering the environment and social rights of citizens.

This is where the role of sustainable finance becomes significant in the coming decade. Policy makers have become significantly cautious in the post pandemic world, and this has led to a wide variety of ESG regulations being passed and implemented across various nations. Studies have also shown that some ESG funds outperformed the S&P indices, reiterating that sustainable and strong mechanisms of governance will pave the way forward. Results from a renowned research firm, Morningstar, showed investors pouring in a whopping US$45.6 billion into ESG funds in the first quarter of the year, compared to a total outflow of US$384.7 billion.²

It is interesting to note how a decade back, financial performance of the company was the only criteria prioritized by the investors while determining a company's worth. However, with the renewed legislative and market focus on ESG, it has become imperative for the stakeholders to focus on the environmental and social performance of the company as well. Forward thinking enterprises have already initiated the process of integrating responsible business practices into their operations. While some enterprises have given more importance to mental health issues, few others have been observed to be focusing on climate-friendly initiatives. While the paths adopted by various organizations might be different, the end goal remained the same — to become sustainable and resilient.

With countries like the United Kingdom (UK), the United States (US) and the European Union (EU) leading the ESG agenda across the globe, it will not be surprising to see foreign investors looking to invest in developing countries to demand for the ESG performance of the companies. Factoring in ESG risks in business operations would not only be important from the lens of human rights but also shield the businesses from regulatory, litigation and reputational risks in the coming times.

Based on the current market analysis, we have identified broad trends that are important in the current times. Each trend shall be a steppingstone towards the roles that private sectors will play in the coming years to not only recover from the pandemic but also to achieve the United Nations Sustainable Development Goals (SDGs) of 2030.

The past few years have seen a rapid acceleration in the ESG agenda being taken up by leading organizations across the globe. The key trends which have been observed spanning across multiple sectors include:

Embedding ESG in business operations

Notwithstanding the worldwide disruptions, including the global pandemic, which led to major economic and societal shocks, investments in ESG funds have continued to increase massively and are predicted to soar more in the coming decade.

Responding to climate change

COP26 has provided the impetus for policymakers and businesses to address climate change issues on a priority basis. While environmental concerns have not been traditionally the top priorities for the market, the renewed focus on environmental initiatives by leading countries like the EU, the US, and the UK has changed the dynamics of how stakeholders will respond to climate change issues in the years to come.

Increased regulations

It is crucial for businesses and investors to embed responsible business practices in their operations. This has gained greater significance with many jurisdictions across the world coming up with ESG reporting and disclosure regulations to make the corporates more accountable.

Shifting consumer preferences

The millennial population is becoming increasingly aware of the environmental and social issues that exist in society. It will not be surprising if the next generation goes so far as to boycott products and companies that are not founded on ESG principles.

Protecting human rights

Instances of discrimination, inequality, and racism have increased manifold in the past few years. Businesses have come under major scrutiny, not only from legislators but also from the civil society. Businesses have started adopting and placing greater focus on diversity and inclusion programs in order to remain socially relevant.