As one year closes and another starts, financial services firms memorialize their economic and market expectations for the upcoming year. Over the last few weeks, we’ve reviewed several papers and news items, and talked to experts in order to summarize some key ESG themes for 2021.

2020 saw record flows into ESG mutual funds, and ETFs continue at a record pace. As 2021 unfolds, MSCI sees market maturation with “both hype and skepticism giving way to a more nuanced understanding of when and how ESG has shown pecuniary benefits — and when it hasn’t.”¹

They go on to say that “investors no longer need to “believe” in ESG, or not.  A sharper understanding is emerging as to which ESG approaches are financially relevant and which are more focused on social objectives, allowing investors to more precisely build their own strategies based on a track record.”¹ All of this should further support overall growth in sustainable investing.

MSCI also highlights the following trends:

Climate: Several companies have made ambitious targets, but a broader failure to adequately decarbonize could leave investors “with a dwindling investment universe of companies that meet the 2°C or 1.5°C targets.”¹ This could mean increasingly concentrated portfolios over time.

Biodiversity: With many plants and animals at risk of extinction, biodiversity is seeing greater focus from regulators and investors. As with climate change, the impacts both on companies and those effected by companies vary based on sector and region, with the food industry especially vulnerable from both angles.

“ESG Data Deluge”: In unwelcome news for many companies, pressure to enhance ESG disclosure will only grow as new regulations are implemented and stakeholders become more educated. MSCI notes TCFD becoming mandatory in certain countries, potentially including the U.S., in the not-too-distant future.

Social Inequalities: Income inequality and racial justice concerns became more prominent in 2020, along with “S” topics in general. Noting that, “action is important, but there are limits to what individual firms can do to address the underlying root causes,” in 2021, MSCI sees “investors venture into new approaches, including financing vehicles like social bonds, to address a challenge that extends beyond the neat boundaries of individual companies.” ¹

With respect to climate change, which is core to our investment philosophy, we’re already seeing new data initiatives from firms such as BlackRock as well as from companies driving innovations to support their net zero targets. And, as expected, the Biden administration has already moved to rejoin the Paris Agreement as well as moving to cancel the Keystone XL pipeline, among other measures.

Climate-related subthemes such as water and sustainable infrastructure will be in focus, alongside continued pushes towards electrification in energy and transportation. These are themes and topics that are covered by the managers with whom we partner for our SMART Climate Unified Managed Account (UMA).

In addition, given the political climate in the U.S., two particular ESG topics are already front-and-center for 2021:

• Political Spending: Company reactions to the insurrection and riots at the Capitol were swift. Numerous companies halted political donations to Republicans who supported overturning the election results, and some companies stopped all donations while they undertake reviews. The long-term impact may be “more symbolic than consequential”² given that corporate political giving is relatively small compared to other channels. However, this may catalyze a broader conversation about money in politics.
• Social Media Responsibility: Already under criticism for their roles in fomenting political polarization, several social media companies moved to de-platform President Trump this month. In their recent brief, Democracy Disrupted & ESG Risk, Truvalue Labs restated their earlier observation that “it is hard to imagine a business with more significant tail risks than social media.”³