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ESG - Trends
Some broad trends in the US ESG (environmental, social, and governance) category are increased executive accountability, ESG metrics in incentive plan, and gender diversity.
TREND #1: INCREASED EXECUTIVE ACCOUNTABILITY
HOW IT IS HAPPENING:
- The #metoo movement has been of great significance globally, touching both the social and corporate spheres.
- In 2018 companies realized the “reputational and operational risks of failing to react or address hostile environments.”
- To protect their reputation and operate hitch-free, most companies conduct their own reviews and put in place measures to "rebalance these discrepancies, diversity and inclusion."
- In some companies, accountability is ensured by "creating a zero-tolerance culture, regular training and awareness programs, communications, strong anti-harassment policies, reliable complaint and investigation measures."
ITS EFFECT IN THE INDUSTRY:
- Regular reviews, including diversity, gender, race, ethnicity, and cultural background, help companies to add value and serve their clients better.
- According to the 2018 Reputation Dividend report, a company's reputation contributes to up to 38% of its market capitalization.
- Increased executives accountability, as seen by investors joining the call to manage workplace risks, will improve employee engagement and retention, thus boosting productivity.
- After the #metoo initiative began in 2017, 53% of businesses reported that their sexual harassment cases went up while the cases decreased in 4% of businesses.
COMPANIES AT THE FOREFRONT OF THE TREND:
- California Public Employees’ Retirement System (CalPERS) votes against any director sitting on a board for over 12 years in order “to oust those executives who have behaved problematically.”
- Engage PEO, Mercer-Mettl, and Thrive! Resumes are some other companies working to eliminate harassment from the workplace by creating a zero-tolerance culture, regular training, and awareness programs.
TREND #2: ESG METRIC IN INCENTIVE PLAN
HOW IT IS HAPPENING:
ITS EFFECT IN THE INDUSTRY:
- ESG metrics usage saw the highest prevalence among respondents in the Mining & Metals and Energy sectors.
- Employee Engagement/Culture is the most prevalent metric for 76% of respondents in all other sectors, followed by Diversity & Inclusion for 35% of respondents in all other sectors.
- From the survey, 96% of the respondents in the Mining & Metals and Energy sectors are far more likely to use an Environmental metric i.e., use ESG metrics in their incentive plans.
COMPANIES AT THE FOREFRONT OF THE TREND:
- Walmart has reported in their 2019 ESG report about their ESG commitments and progress.
- Walmart "offers 10 weeks full-time hourly or salaried paid maternity leave (stackable with parental leave) in the U.S. effective from March 2018."
- Walmart also offers "6 weeks full-time hourly or salaried paid parental leave after 12 months of service, in the U.S. effective from March 2018 and $26/pay period health insurance for all full- and part-time associates who have worked an average of 30 hours per week over the past 12 months in the U.S."
- Walmart also provides store discounts, 401(k), stock purchase options, training programs under the ESG metric.
TREND #3: GENDER DIVERSITY
HOW IT IS HAPPENING:
- During the board’s evaluation for their quality and competencies, investors consider the directors' age, tenure, and diversity, including gender, race, and ethnicity.
- Though the age, tenure, or diversity quotas are not a legal requirement in the US, investors are paying close attention to them when it comes to board composition.
ITS EFFECT IN THE INDUSTRY:
- In 2019, new policies are expected to be implemented at two of the most prominent proxy advisory services, Institutional Shareholders Services (ISS) and Glass Lewis (GL), "allowing recommendations against boards that lack diversity."
- The California legislation ruled out that public companies that have principal executive offices located in California, irrespective of their incorporated location, should include a “representative number” of women on their boards of directors.
COMPANIES AT THE FOREFRONT OF THE TREND:
- Companies like Vanguard and AXA partnered with the Thirty Percent Coalition to "promote gender diversity on corporate boards."
- According to the Wall Street Journal, 17% of S&P 500 boards were female in 2012, and in 2019, women hold 27% of all S&P 500 board seats.
- According to an ISS publication, women filled 45% of new board positions among the Russell 3000, a 34% increase from 2018.
RESEARCH STRATEGY:
To identify three to five broad trends in the US ESG (environmental, social and governance) category we scoured through industry reports and media publications such as S&P Global, Forbes, CNBC, Inc, ISS Governance, HBR, Business, among others. The idea was to check these sources for the latest trends or future-facing trends that are currently applied throughout the market. These sources were used as prima facie as these channels are most likely to highlight the trends in the industry.
We have focused on broad trends related to workplace diversity, gender pay gap, among others.
Trends have been identified as trends based on their repetition as "trends" in two or more sources.
Since mostly all trend reports and articles focused on climate change and investments, we have also used surveys/case studies in the field and corroborated them with similar studies/articles to show them as trends as they were mentioned in two or more sources highlighting its importance and/or its impact in the industry. Also, as most trends are focused on the global economy rather than only the U.S., we have used global trends which either highlight the U.S. market or can be seen implemented through U.S. based companies.