Welcome to a new year — and a new decade! At Moral Money we are very excited about what this will bring. When we launched this newsletter six months ago we were unsure whether Financial Times readers had an appetite for environmental, social and governance investing. Now we know the answer is a resounding "yes!". Our readership has soared and our "open rate" for the newsletter has been through the roof.
So . . . thank you to all our readers. Do let us know what you do — or don't — like, since we learn a lot from your feedback. In fact, when we asked you what we should be following in the coming year we received so many brilliant tips that they inspired us to compile this list of "20 things to watch in 2020". If they play out, 2020 will be the biggest year yet for ESG.
We have also encountered some criticism, not least about our name, which some readers find too pious. As we said when we launched, we chose "Moral Money" because it is catchy and free of the acronyms which haunt the worlds of sustainable business and investment. But we are not here to preach: we are journalists, not activists, and our aim is to illuminate, not advocate. We will celebrate progress and innovation in ESG, but we will also expose controversies and hypocrisy.
So Happy New Year — wherever you stand on the ESG curve. Please keep reading. And get ready for a busy year. Like many lists being drawn up at this time of year, this one is full of good intentions. We will be keeping track of which of these resolutions turn into real change — and which are quietly forgotten before the new year gets old.
1. Can anybody create unified ESG standards?
Green finance cannot work without consistent accounting and auditing. But, as outgoing Bank of England governor Mark Carney (pictured below) has warned, companies have not been reporting "in any consistent way" on how they are managing their transition to the more volatile climate future.
Carney and his pal Michael Bloomberg co-founded the Task Force on Climate-related Financial Disclosures, or TCFD, to address this, but adoption of the voluntary disclosure project remains patchy. Europe made history in December by agreeing to a labelling system for sustainable finance, but its taxonomy will not jump the Atlantic in 2020: although the US Securities and Exchange Commission started scrutinising funds' ESG policies in 2019, it seems reluctant to embrace standardisation.
So all eyes will be on America's private sector. The SEC decided in December to permit a shareholder proposal in 2020 that calls for Sustainability Accounting Standards Board disclosure, which shows how investor demands for ESG uniformity are swelling. Expect some interesting action soon from big accounting firms and banks.
2. The 'decade of delivery' has dawned
The year 2020 is the start of the UN's self-styled "decade of delivery", when the world is supposed to hit its sustainable development goals. Sadly, progress is patchy, but the zeitgeist is shifting. In 2019 CEOs who once shunned the UN were beating a path to its door, signing up for responsible finance, sustainable business and SDG-based pledges. One question in 2020 is how much tangible action this delivers. Another is whether the UN finds ways to mobilise private capital to plug the $3tn-a-year funding gap, by enlisting private investors or through better use of blended or "catalytic" capital. This is the concept of using public money or philanthropic funds to guarantee (or "wrap") risky projects in a manner that attracts more private funding. This concept has been used in a modest way for a long time but 2020 might be the year it really takes off.
3. The US election
America's Business Roundtable made a headline-grabbing attempt to champion reform — and fend off critics — in 2019 by issuing its new declaration of purpose. But who gets the US Democratic party's nomination in 2020 will determine the extent to which America's current model of corporate capitalism dominates the election campaign.
The Roundtable's statement did not placate leftwing Democrats such as Elizabeth Warren and Bernie Sanders, who called for more radical changes such as big pay rises for workers. This criticism of the C-suite could swell if a left-of-centre candidate gains more traction — and that will place pressure on Roundtable members such as BlackRock to back up their words with real change.
4. The year of 'going olive'
Bankers like to say that 2020 will be the "year of green" (finance). But it might be the year of "olive": one big recent shift is that financiers are no longer working just with crude distinctions between "green" and "brown" bonds and loans, but looking at the direction of travel from brown to green.
More specifically, there is a new fad for creating instruments which reward companies that improve their sustainability metrics — even if they are not truly "green" yet. Enel helped to launch the trend in 2019; in 2020 numerous other companies will follow.
5. Endowments in the crosshairs
Fossil fuel divestment campaigns heated up in 2019 — and will get hotter in 2020, especially at university endowments. Last summer's youth-led climate protests have moved on to campuses, where activists are adopting new tactics to push university endowments to go fossil-free.
Harvard is a case in point. Student and alumni divestment campaigners made headlines when they stormed the field during the school's football game against Yale in November. In 2020 their efforts will go far beyond civil disobedience: divestment activists are running for seats on the university's board of overseers and roping in some big-name alumni in their fight, including a former senator and SEC commissioner, as reported by FundFire. Harvard's faculty will soon vote on a divestment motion similar to one passed by the University of California. If the activists' efforts work, expect copycat measures at other colleges across the US.
6. How far will banks' fossil fuel aversion go?
Goldman Sachs won applause from environmental advocacy groups in December for announcing that it had stopped financing new coal power plants unless they have carbon emissions reduction technology.
The same month, Standard Chartered pledged to reduce its exposure to coal clients by 2030 and Credit Suisse said it would stop financing new coal power plants. But concerns about global warming did not stop Credit Suisse, Goldman Sachs and two dozen other banks from underwriting Saudi Aramco's massive initial public offering. In 2020, will banks' commitments to fight global warming go only as far as their shareholders will allow?
7. The year the PRI gets serious?
The UN-backed Principles for Responsible Investing has faced criticism for being too lax. This could change in 2020. This June the PRI is set to start kicking out signatories which do not meet certain sustainable investment standards. This is unlikely to silence critics, since the minimum requirements are — by the PRI's own admission — easy to achieve. But it is a step in the right direction, and only the beginning, according to chief executive Fiona Reynolds.
By making the PRI requirements easy to achieve in the beginning, the group has signed up more than 2,000 investors and become a sort of de facto standard in the investment management industry. Now, if asset managers back out of their pledges, they run the risk of losing business from sustainability-minded clients. That should let the PRI ratchet up the standards without fear of losing signatories; it will be interesting to see how quickly it moves to do so.
8. Banks battle on ESG to attract rich millennials
In its investor day presentation in December, Credit Suisse announced an impact investing workshop series focusing on maximising impact and building sustainable portfolios. The primary target is next-generation private clients, aka trust fund kids. It is not alone: there is now a battle among banks to win and retain wealthy millennials. This demographic is not only overtaking baby boomers as the largest population segment but cares more than older groups about sustainable investing. Banks are scrambling to serve their needs — mindful that if they fail to do so, millennials will take their savings to a greener competitor.
In December Liesel Pritzker Simmons, an heir to the wealthy Pritzker family (pictured below), said family offices are banding together to pressure banks to stop banking coal deals.
Sustainable investing is not just for the young or mega-rich, though. In 2020 we should see some big, celebrity-backed campaigns that aim to push the wider public's savings and pensions into sustainable financial products. London, the cradle of Live-Aid, looks set to take the lead.
9. Will the UK lead the world in green initiatives?
Brexit dominated UK headlines in 2019, unleashing poisonous gridlock and polarisation. However, there is one point on which almost all the UK's political parties now agree: the need to endorse green initiatives and more sustainable business. This will be on display when the UK hosts the next round of climate negotiations in Glasgow later this year.
But in late 2019 UK regulators announced new rules that will force banks to comply with green disclosures, and the government is supposed to accelerate efforts to reach net zero targets in 2020. Public-private entities such as the Green Finance Institute in the City of London are accelerating this drive. All eyes are now on whether Britain continue to engage with EU climate initiatives after Brexit — and whether Boris Johnson's green pledges live up to the hype.
10. Tokyo Olympics: a green festival or PR disaster?
Japan will also be vying for green plaudits in 2020, especially when Tokyo hosts the Olympic Games from late July to early August. The country has enthusiastically embraced the UN's SDG symbols — and goals — and the Abe administration hopes to use the Games to showcase its sustainability leadership.
But the Olympics could inadvertently offer fresh reminders of why urgent action is needed on climate change: Tokyo was plagued by such horrifying displays of unusually extreme summer heat in recent years that the International Olympic Committee decided to move the marathon to Sapporo. That was a major blow to the capital city. Worse still, a US Olympics team coach told the Associated Press in December that back-up plans are needed for the outdoor swimming competitions if Tokyo's Odaiba Marine Park gets too hot.
11. China the ESG leader?
China is another country to watch in 2020. The country used to be an ESG laggard but in December, the Hong Kong Stock Exchange announced new ESG disclosure requirements for its listed companies beginning in 2020 and the Shanghai and Shenzhen stock exchanges are expected to follow Hong Kong's lead this year.
China is already a world leader in green bond issuance. Many western banks say its bond disclosures fail to explain how proceeds will be used for eco-friendly purposes. But pressure is rising for better disclosure since in 2020, China will simultaneously be looking to increase foreign investments and cut pollution — and deep-pocketed European pension funds will demand action before they invest.
12. Will we ever see a global carbon market?
The international climate negotiators who failed to hammer out an international carbon pricing regime in Madrid in December will get another chance at COP 26 in Glasgow this year. But there are still major stumbling blocks that could threaten the efforts to implement an international pricing scheme as outlined in the Paris accord.
One issue is what will happen to countries' old credits earned under the Kyoto protocol's "Clean Development Mechanism"? Environmentalists hope these become redundant, as the CDM system has been criticised for "not providing real, measurable and additional emission reductions". But the countries in possession of those credits are loath to give them up for free.
It is true that even while the UN spins its wheels, individual governments are not sitting idle. Many jurisdictions, including the entire EU and several US states, have implemented their own carbon pricing systems, and China is set to launch a carbon market this year. But there is a lot riding on the UN's plans — as the FT's Martin Wolf has warned: "Climate change will not be solved by one country. To succeed, policy must be effective, legitimate and global."
13. A spotlight on biodiversity
This year, expect to hear a lot more about the importance of biodiversity and what the financial community can do to stop humans from wiping other species off the map. The UN has highlighted the issue in two of its SDGs (#14 — life below water and #15 — life on land) and has scheduled a biodiversity summit in China in late 2020.
The issue is closely linked to climate change and could have similarly deleterious effects on humanity, but as of yet it has not often been highlighted as a material threat to companies and investors. That could soon change as investors start to factor in the risk posed to companies that depend on biodiversity — in areas such as food, materials or medicines — and the possible threat of regulation that could penalise companies that contribute to extinction.
14. What about workers? The message from France's 'gilets jaunes'
France's gilets jaunes protests exploded in 2019, eventually forcing President Emmanuel Macron to jettison fuel taxes which had been designed to drive down emissions. In 2020, however, Mr Macron will not be the only leader worrying about how to square climate change policies with political concerns about inequality and workers' pain.
In America, for example, the Democrats face a nasty dilemma about how to advance their Green New Deal plans without alienating voters who work in industries which might collapse under these plans. Similar concerns stalk much of continental Europe.
Thankfully, some policy ideas are being advanced: former Unilever chief executive Paul Polman is calling for a "just transition" that promotes inclusive growth for workers alongside environmental protection; Judge Leo Strine told Moral Money that Democrats should focus on adding an extra "E" to ESG that stands for "employees". The problem for politicians in 2020 is how to turn this rhetoric into reality.
15. Adaptation advantage
The main mantra of climate reform in the financial sector in 2019 was how to slow global warming. Expect to see a new emphasis in 2020 on "adaptation", or a recognition that the effects of global warming are already here, and the finance sector must now help borrowers or companies adjust.
Credit rating agencies have been leading this charge and downgrading borrowers whose ability to repay their debts is likely to be affected by ESG issues, but it is still early days. When investors start looking closely at how certain properties or companies are (or are not) prepared for the climate-related risks that are already visible, it could mean a massive shift in how these assets are valued. Brace yourself to see some scary projected losses soon.
16. Ignore the $100tn bond market at your peril
With their insatiable appetite for green bonds, debt investors are no strangers to the ESG world. However, they are often overlooked compared to the equity investors publicly pushing companies to clean up their acts. This is understandable to some degree — bond owners do not have proxy voting rights. But that does not mean they cannot still throw their considerable weight around.
There has been an incremental rise in attention to ESG by bondholders. Last summer Hiro Mizuno, chief investment officer of Japan's $1.6tn Government Pension Investment Fund, called on lenders and bondholders to do more to engage with companies on ESG. And Pimco, one of the world's biggest bond investors, launched in December its first fund dedicated to combating climate change. In addition to green bonds, the fund will seek out companies that demonstrate "innovative approaches to environmental sustainability". With the massive sums of money involved in the bond market, this kind of action might start a snowball effect in 2020.
17. Big Tech's role in the clean energy transition
If the world is going to transition to a carbon-free economy, we have to change our energy consumption habits. But that does not just mean switching off the lights: 2020 could be the year we start a debate about using artificial intelligence and smart home technology to help people optimise the deployment of renewable energy.
This is badly needed. One problem with renewable energy is that it is generated intermittently — when it's sunny or windy — and cannot be easily stored. Worse still, energy consumption takes place (and is priced) with no connection to supply. In theory, AI should be able to synch things up so that more power is used at the same time that renewable energy is being generated, and maybe even priced to match supply and demand.
Introducing these reforms might be controversial, given rising concern about privacy and monopoly power among tech giants such as Amazon, Google, Facebook and Apple. (Can tech companies be trusted with the data? How do we ensure that they are incentivised on energy management rather than advertising, addiction and product placement?) But as pressure grows to deploy renewable energy sources, this debate will become more important.
18. California tests companies' stance on workers rights and consumer privacy
Californian businesses in 2020 will get in-your-face alignment with UN SDG #8, which pledges "decent work for all". On New Year's Day a new law went into effect that makes it much harder for companies to classify workers as independent contractors versus employees who are entitled to minimum wages, overtime and other benefits. Uber and Postmates have sued the US state to stop the law, known as Assembly Bill 5.
California's tough consumer privacy law also goes into effect on January 1. The law requires companies to tell customers what personal information they have collected and allows consumers to request that this information be deleted. Big tech companies from Amazon to ZipRecruiter will continue lobbying in 2020 to weaken the law.
19. Beyond Beyond Meat
The terrifying images of the burning Amazon forests in 2019 marked another setback in the battle to slow global warming and insatiable demand for beef was blamed as a root cause of the fires. But the meat industry also offered a source of hope for sustainability. The number of retail outlets selling Beyond Meat burgers increased to 20,000 in June 2019 from 5,000 in December 2017, according to Morgan Stanley. The company's revenues more than tripled to $107m earlier this year as its stock price soared.
Competitors are racing to get alternative protein products on to diners' plates. In 2019 Nestlé debuted a yellow pea protein burger, Hormel Foods unveiled its "Happy Little Plants" brand and Tyson Foods announced pea protein isolate nuggets. As alternative proteins become ubiquitous, 2020 should be the year diners can casually pair combating climate change with tasty meals.
20. Do Republicans shift their position on climate change?
In 2019 Donald Trump's administration made most environmental groups despair: the president formally began withdrawing the US from the Paris climate accord, and moved to unwind many of the environmental protections his predecessor Barack Obama had introduced. However, one intriguing question for 2020 is whether Mr Trump might soften his stance.
There is little sign of this in Washington but the Republican party is already splitting in the flood-prone swing state of Florida and we have seen growing signs of activists encouraging companies to use their lobbying dollars to push politicians in greener directions. Don't expect Mr Trump to rush back into the Paris agreement, but some of his party's congressmen may bend if their donors encourage them.
Written by: Gillian Tett, Billy Nauman, Andrew Edgecliffe-Johnson and Patrick Temple-West
© Financial Times