This year has been “without a doubt a pivotal year for sustainability in finance and in broader society”, according to Fidelity International, and is something the asset manager expects to play a role in markets next year.
The Covid-19 crisis brought ESG – environmental, social and governance – issues to light “with unexpected urgency”, according to Fidelity.
With that in mind, the asset manager highlighted three key themes that investors and companies should consider next year and will be the focus of its ‘sustainable investing engagement agenda’.
Build back greener: Valuing our natural ecosystems
Issues around climate change and biodiversity have been major themes within sustainable investing for some time. But these concerns were increased by the Covid-19 pandemic, which Fidelity said had its roots in humans’ continuing expansion into natural habitats.
Ultimately Covid-19 “brought the consequences of nature loss into sharp relief”, the asset manager’s analysts noted said.
“It is increasingly clear that these are not just one-off acute events and that the loss of natural capital – and biodiversity of that capital – is a systemic risk for investors and society alike,” Fidelity noted.
For investors and businesses the issues of biodiversity loss and climate change are important because not only do they present “critical financial and economic risks to society and to the long-term investment returns we are able to generate for our clients,” according to Jenn-Hui Tan, global head of stewardship and sustainable investing at Fidelity.
Tan said: “Investors have a key role to play in protecting biodiversity and creating positive biodiversity outcomes.
“While good progress has been made in our understanding around the pricing and integration of climate change risk, it is now incumbent on us to learn to price natural capital correctly – not simply as an input in a manufacturing process, but in a way which recognises and preserves its value for future generations.
“That is the challenge for the financial industry over the next few years.”
There have been some recent examples of supporting environmental solutions by building them into economic agendas, seen in EU’s ‘Coronavirus Recovery fund’ where the funds will be channelled through its pre-existing European Green Deal.
This deal – along with the US president-elect Joe Biden’s climate change commitments, high expectations for the UN climate change summit next year, and announcements by Asian governments – have reassured Fidelity that “climate change will return to the top of the political agenda in 2021”.
The asset manager noted that businesses have also become aware of the “measurable financial risks posed by climate change”.
The asset manager said that initiatives like the Taskforce for Climate-related Financial Disclosures (TCFD) – which formed the regulations around the UK’s new green gilts – will provide the framework for companies to quantify, report and asses the climate-related risks in the business.
Build back stronger: Narrowing the social divide
A second ESG theme for next year is increased pressure on companies to not only support its direct employees, but the community at large and the individuals working along its supply chain.
Fidelity said this increased expectation on companies is consequential to the pandemic and the negative impact it’s had on people’s lives.
According to the International Trade Union Confederation (ITUC) more than 80 per cent of the global workforce – 3.3bn people – were affected by full or partial closures because of the pandemic.
Due to the reduced working hours the International Labour Organization (ILO) estimated global labour income losses of 10.7 per cent during the first three quarters of 2020, amounting to $3.5trn.
“Social issues will be a key component of sustainable post-pandemic recovery plans,” said Tan. “As governments run out of fiscal stimulus in 2021, the onus to support workers during these challenging times will fall on businesses.
“Women in particular have been disproportionately affected by the pandemic in terms of loss of income. We will be looking to companies to make genuine efforts in supporting their female workforce.”
Going forward Tan said that “good governance”, will be fundamental in this theme.
“As part of their broader governance responsibilities, companies will have to consider how best to enable society – economies, communities and the vulnerable – to recover from the coronavirus in more sustainably oriented ways,” Fidelity added.
Build back inclusively: A focus on digital ethics
The final theme is centred around technology, an asset which has allowed people and businesses to remain connected during the pandemic while physically separated. But it has also exacerbated some social divided, according to Fidelity.
Technology has become an integral part of day-to-day life for the majority of people, a trend Fidelity expects to continue next year.
“In 2021, the use of digital channels will likely increase, bringing into focus issues of digital ethics and inclusion,” the Fidelity analysts noted. “Digital ethics refers to the ethical digital transformation of society, including topics such as data privacy, cybersecurity, online welfare, propagation of misinformation and ethical AI [artificial intelligence] design.
“It also refers to an emerging topic: digital inclusion. This is not restricted to tech companies and specifically refers to the access, skills, use and benefits related to digital technologies.”
Tan added: “Current digital disparities are extremely worrying. Digital tools have been vital in helping millions of people weather the pandemic and their accessibility is likely to become a leading indicator of educational, health and societal outcomes in the future.
“Governments will need to make digital accessibility an absolute priority in 2021 and beyond to ensure no one is left behind on the path of digital evolution.”
Data from the International Telecommunications Union (ITU) found that 50 per cent of the global population doesn’t have internet access, especially those in rural and remote areas.
But looking at the UK as an example, the government estimates the 82 per cent of all job vacancies require digital skills, making connectivity extremely important.
“Technology companies must be encouraged to adopt self-regulation in recognition of their often cross-border responsibilities and to show willingness to adapt business practices to minimise societal harm and create positive outcomes for their user or customer base,” said Tan.
“Investors have to play their part in highlighting these issues of digital ethics and inclusion, to ensure long-term sustainability for everyone.”