3 key ESG issues for investors to watch over the next 5 years

By Robert Blood, managing director, SIGWATCH – the activist group tracking and issues analysis consultancy

Covid-19 may have switched many investors’ focus from sustainability to survival, but once the crisis is over and companies return to making profits, ESG should resume its role as the principal driver of long-term stock-picking. Assuming this is the case, what can recent NGO campaigning tell us about the ESG trends to watch in the years ahead?

Plastics and packaging

We’re already seeing intense pressure from activists for commitments to reduce plastic use in general and single-use plastics in particular; campaigning has rocketed six-fold since 2015 and shows little sign of abating. Who’d have thought that global brands like Coca-Cola, used to defending the nutritional value of their products, would now be struggling to justify the containers their products come in?

Investors need to assess companies on their response to the plastics issue or risk being seen as blinkered. Consumer brands switching to 100% recycled plastic will stave off some criticism, but without more supply to meet demand, new non-plastic packaging approaches will still be required. The most radical option is to abandon single-use package altogether.

Investors should be assessing retailers on how they manage packaging waste. Possible solutions include comprehensive waste collection systems in restaurants and stores being extended to other forms of packaging to increase recovery rates. Laminated cartons will be under renewed scrutiny because of the difficulty of recycling, with a possible backlash against non-packaging single use disposables, even hygiene products like wet wipes and single use gloves. That said, the Covid-19 crisis will have demonstrated the importance of disposable products for medical and healthcare use, so there is some room for a more nuanced case to be made for single-use plastics.

Green vegetarianism

Green vegetarianism, flexitarianism and veganism are all going mainstream, and this time for environmental reasons, not just ethics or health. This is another trend that has risen up the agenda as a result of campaigning from environmental groups. They see the drive to eat less meat as critical to decarbonizing agriculture and our modern lifestyles, and just as important as driving less and ceasing unnecessary flying. Campaigning against meat eating “to save the planet” more than doubled in late 2019 and remains at twice 2017 levels, and five times 2013 levels.

Investors should take note because the implications of such a major consumer lifestyle change are enormous for the food and agribusiness sectors. As meat moves from being at the centre of food choices to the fringe, brands closely associated with meat like many quick service restaurant chains are being forced to adjust their menus. McDonald’s and Burger King have already anticipated this trend by offering non-meat options, but most food firms remain wedded to meat as an essential ingredient. This puts them at risk of suffering long term decline.

Climate

With climate concern now mainstream, all companies are under pressure to respond meaningfully. EasyJet with its headline-grabbing tree planting carbon offset commitment is pointing the way. Even Shell has followed suit with its own scheme, although NGOs are far from impressed (they called these initiatives ‘treewashing’). Consumer brands are beginning to adopt climate-friendly tags. Examples include English Shaving Company’s no plastic all-metal razor and the advent of bamboo-handled razors, and Bulldog’s ‘carbon neutral’ moisturiser for men, whose advertising carries the slogan, “A smaller carbon footprint is the way to go”.

Investors have been a target on this issue for some years through the high-profile carbon divestment campaigns. Initially activists targeted coal investments by college endowments and pension funds, but now all major financial investors are coming under fire for any kind of fossil fuel related ties, including shale gas and oil and gas pipelines. In parallel, although less strongly, there is pressure to invest more in expanding renewable energy capacity. Logically, this will extend to favouring major companies that are making a serious effort to reduce their carbon footprint, such as the tech majors like Google, Facebook and Apple.