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Clifford Chance

Clifford Chance

ESG Trends

Key theme for businesses worldwide

ESG Trends in 2021: Trends to watch

The new Biden Administration, COP26, a renewed push from China on climate change and a focus on how we build back better post COVID-19 means that 2021 is going to be the year of ESG – environmental, social and governance issues. Here we explore some of the key trends to watch.

1. The transformation of U.S. policy

Climate issues are now an essential element of U.S. foreign policy and national security. Rejoining the Paris Agreement was one of President Biden's first actions alongside commitments to achieve net zero emissions no later than 2050 and to decarbonise US power generation by 2035. These announcements are likely to galvanise efforts regarding climate change internationally and domestically, and create significant opportunities  for international investment in U.S. domestic climate projects.

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2. A new multilateral approach?

President Biden's commitment to the US rejoining global initiatives/bodies, including the Paris Agreement and the World Health Organization, signals a much greater focus on global co-operation. He says: "The United States will work with other countries and partners, both bilaterally and multilaterally, to put the world on a sustainable climate pathway. The United States will also move quickly to build resilience, both at home and abroad, against the impacts of climate change that are already manifest and will continue to intensify according to current trajectories." 

3. COP26 – a gamechanger?

COP26, the 2021 United Nations Climate Change Conference, which will be held in Glasgow in November, has been described by the US climate envoy John Kerry as "the last best chance" to avert environmental disaster. With the US back in the fold, having rejoined the Paris Agreement and rolled out a series of executive orders aimed at tackling climate change, COP26 may make significant progress. U.S. re-engagement in international climate action is likely to encourage greater international carbon reduction and climate finance efforts at the COP26 meeting, and could help unblock continuing impasses on the development of a carbon market mechanism. 

4. Increasing legislation

We will see increasing regulation and legislation to deal with ESG issues across jurisdictions. The EU is a first mover with legislative proposals for mandatory environmental and human rights due diligence and the Sustainable Finance Taxonomy Regulation which comes into force on 1 January 2022. The aim is market transparency and to provide businesses and investors with guidance on when a business can and cannot describe a business activity as sustainable. In the US, the legal and regulatory pace will accelerate under the  Biden Administration with the ESG Disclosure Simplification Act; and regulations around racial equality, and anti-discrimination on the basis of gender, identity or sexual orientation.

5. The rise of ESG litigation

Activist shareholders and NGOs are targeting businesses and increasingly using litigation in efforts to combat climate change and its impact on human rights. Columbia Law  School says that in 2020 the number of cases almost doubled, to 1,550 in 38 countries, and shows no signs of slowing. The big questions for the courts are: who is responsible? Who will bear the financial burden of the lasting changes caused by climate change? In the US and Continental Europe, many disputes stem from these unresolved questions. Investors are beginning to pursue large-scale group claims against companies for inaccurately representing their ESG credentials, particularly in the U.S., and it a trend that is likely to spread to Europe and Asia. 

6. Sustainable tech

From the carbon footprint of Bitcoin, to the cultural and ethical issues raised by developing products using personal data or AI, ESG considerations and challenges abound for tech. We expect to see tech firms being held to greater account on ESG issues. Take the right to privacy – users are increasingly switching to encrypted messaging and video call services as they become more concerned about who has access to their personal and sensitive data. 

7. Social risks as a stakeholder issue

Social risks – the "S" in ESG – are rapidly becoming a crucial issue for boardrooms. They include: business and human rights; corruption; supply chain management and transparency; consumer protection; investment in local communications; and labour and employment issues, such as diversity and inclusion, working conditions, and child labour laws. The focus on these areas is likely to intensify post COVID-19. We are already seeing a strategic shift from a reactive approach to dealing with issues, such as diversity and inclusion, to a proactive one.

8. Build back better

Governments and companies have said that post COVID-19 they intend to build back better and learn lessons from the pandemic. But what does that mean in practice? Many businesses demonstrated flexibility – L'Oreal, for example, paid small and medium-sized suppliers early to help them weather the crisis, fashion brand Barbour repurposed its production lines to make PPE for the NHS free of charge – but others were accused of not considering the health and safety of employees by keeping warehouses and stores open.