It seems like yesterday that we published What’s Next for Sustainable Business?, the SustainAbility Institute by ERM’s 2021 Trends Report. The publication set out the evolutions we expect to see during 2021 in business’ response to 10 enduring trends around climate change, supply chains, technology, and more.
As I think back to that time in February, I vividly remember working on my laptop at home in the UK, juggling two children’s home schooling, in the midst of the second wave of the pandemic.
Sitting down at my same spot in the kitchen to write this blog nearly six months later, it strikes me how different life is. I’ve received my vaccination, and the UK, along with other parts of the world, is opening up again. At the same time, others around the world, most visibly in India and Latin America, are still experiencing the brunt of the pandemic, while parts of Africa and Asia are entering what appear to be dangerous new phases. COVID-19 still dominates much of everyday life, and our hearts go out to friends, colleagues, and others in those regions struggling the most.
The pandemic continues to show just how fast things can change, how quickly situations can deteriorate, and how quickly those of us lucky enough to be escaping its grasp can get used to a ‘new normal’s’ emergence.
The pace of change and getting used to a ‘new normal’ is also a theme that resonates when revisiting how some trends we forecast in at the start of the year are evolving. It’s clear that, for some topics, the advances we celebrated back then are already old news – in a good way. The rapid pace of change in the field of net zero – where an ever-expanding number of companies and other institutions have declared net zero ambitions – is one example.
The rest of this blog explores how businesses are creating and re-creating additional new normals in response to new information and shifting expectations related to each of our 10 trends. While trends forever evolve, and there will be more change in the second half of 2021, this exploration gives at least some hint of what to expect in the transition to 2022 as well as illuminating what’s happening in the moment.
1. Integrating ESG: Linking ESG performance to executive pay
Companies have been setting ambitious climate goals and making additional commitments on topics like DE&I. Now they need to ensure follow through. Some organizations are tackling this by linking performance on ESG to executive pay. Following the likes of Apple, who announced in January that executive pay would be connected to delivery of ESG KPIs, February and March saw McDonalds, Nike, and Chipotle report similar set-ups for their new diversity goals. Boohoo has been advised to do the same as a way of responding to the worker rights controversy that embroiled it last year. But we also see healthy level of scrutiny surrounding this practice. Several recent reports suggest that linking ESG performance to executive compensation is not always the right answer, warning of pitfalls and unintended consequences if the wrong ESG metrics are selected, and highlighting considerations for companies to bear in mind if they do go down this path.
2. Valuing human capital: Gig economy worker rights
Legal battles around worker rights in the gig economy endure. In late February, the UK Supreme Court ruled that Uber drivers are workers rather than self-employed, setting a precedent that may have wide implications for the gig economy as a whole. The subject of worker rights in the gig economy is not, however, constrained to courtrooms. Deliveroo has recently been judged by six large investors as un-investable until it improves its record on worker rights.
3. Responding to climate change: Net zero momentum meets scrutiny
One evolution that is impossible to ignore is the growing number of net zero commitments being made. When we released What’s Next for Sustainable Business?, we reported that 50 companies had signed the Climate Pledge; less than six months later, it’s over 100. We also see investors collaborating to reach net zero aspirations through their portfolio management. Accompanying this positive momentum, we note growing debate about the risks of rhetoric versus reality. Commentators increasingly point out that net zero commitments might be used as a form of greenwash to allow business as usual in the short term while kicking critical changes down the road. No longer lauded for simply making net zero pledges, it’s common for countries to be challenged to account for the detail of how they will implement their promises, as this article scrutinizing the UK Government on its net zero plans shows. Companies are facing similar pressure and should expect more.
4. Safeguarding natural systems: Practical steps to create a ‘nature positive’ society
The term ‘nature positive’ is increasing in use as companies ramp up biodiversity-related commitments. March 2021 saw the launch of the UN’s System of Environmental-Economic Accounting, also known as SEEA Ecosystem Accounting or SEEA EA, a framework now being piloted by 34 countries. The official launch on June 10 of the Taskforce on Nature-related Financial Disclosures represents another major step towards aligning global financial flows with nature-positive outcomes. Companies will need to keep up with developments in these areas, as biodiversity-focused frameworks become more refined.
5. Building sustainable and resilient supply chains: Companies push on resiliency and sustainability
Salesforce announced in March that it will require suppliers to set a science-based target by 2024. In April, Tesco announced that it, in partnership with Santander, will be offering its suppliers preferential financing rates linked to their carbon data and sustainability goals. A recent report from WEF in collaboration with Boston Consulting Group further reinforced how companies are increasingly looking to their supply chains for some of the biggest opportunities to advance their net zero commitments.
Companies continue to recognize the sustainability impacts of their supply chains and the power they have to influence supplier behavior.
6. Enabling sustainable production and consumption: More collaboration evident
Collaboration is common where the corporate world is tackling complex issues relevant to multiple companies and sectors. One example is e-waste, the world’s fastest growing waste stream. In March of this year, six already-influential business alliances came together to create the Circular Electronics Partnership, a pre-competitive industry platform aimed at bringing diverse stakeholder groups together to reimagine the value of electrical products and materials by using a lifecycle approach in a coordinated way. Another example is the task force recently convened by the Royal Society of Chemistry in coordination with founder members Afton Chemical, Croda, Crown Paints, Scott Bader, and Unilever, which aims to promote the development of more sustainable polymers in everyday consumer products like paint and shampoo.
7. Applying technology to sustainability: Data and ESG integration
Our 2021 Trends Report showed that companies need to embrace innovative approaches to better manage and understand ESG data. Greenbiz’s annual GreenFin conference, held in April this year, highlighted new intersections between data and ESG. Greenbiz notes that companies tend to use in-house ESG analysis, and that they are increasingly using AI and machine learning to understand ESG data, recognizing that creating systems for sharing data on ESG metrics will be critical to satisfy stakeholders who expect ESG information to be readily accessible.
8. Protecting fundamental rights: Regulatory changes will make more human rights due diligence mandatory
The heterogeneous human rights regulations found across EU Member States are likely to become more coherent as a result of the European Commission’s planned directive for mandatory corporate environmental and human rights due diligence, which was voted for by an overwhelming majority of the European Parliament in March 2021. When the Directive enters into force (expected in late 2022/2023), it will affect companies registered in or having operations in the EU, requiring them to conduct more human rights risk assessments and more detailed due diligence of their operations and value chain. These companies will also need to publicly report on their due diligence strategy, and non-compliance is expected to result in a range of sanctions.
9. Shaping policy, norms and regulations: The EU’s sustainable finance focus deepens
As part of its efforts to become the first carbon neutral continent by 2050, the EU continues to implement plans under its Green Deal to channel private investment towards the transition to a climate-neutral economy. In March 2021, the Sustainable Finance Disclosure Regulation (SFDR) came into effect, imposing stronger requirements on financial-services institutions’ sustainability-related disclosures. April brought further developments, with the release of the first set of implementing rules related to the EU taxonomy. This pattern is expected to continue this year and beyond.
10. Moving towards stakeholder capitalism: The role of the CFO
Shifting our economic models towards one founded on stakeholder capitalism relies on multiple complex changes taking place in parallel throughout businesses and society. One growing focus has been the role of the CFO and company accountants in making such change happen. In this WBCSD-led discussion, participants suggested that financial leaders and accountants must develop new competencies and skillsets, educate themselves in ESG principles, rethink how P&L and balance sheets are presented, and above all embrace and react to today’s evolving opportunities and risks. This article from Workday similarly articulates how the CFO role is changing from one just based on ‘number crunching’, to one closer to business strategy – in part driven by stakeholder capitalism’s call for a more equal focus on measuring success through the lenses of people and purpose, as well as profit alone.
As we move into the second half of 2021, it’s exciting to think about what the rest of the year will bring.
We can be sure that some of the developments we have highlighted here at mid-year will shift from being newsworthy to simply being the way that companies do business.
As we reach new normals in sustainability practices, we can be equally sure new issues will emerge, and that companies will face new questions about how to act in response to evolving sustainability trends.