The Megatrends driving ESG
We operate at the intersection of consumer, retail and emerging technology, because we think it’s exciting. And it’s what drives our thinking from both an investment perspective as well as the work we do to support our partners.
We’ve recently been talking a lot about Environmental, Social & Governance (ESG) considerations across our community, in part because it’s being driven by consumer behaviour change. But it’s not the only reason. More broadly, regulatory pressure (e.g. the Plastics Packaging Tax) and more stringent disclosure requirements such as the Sustainable Finance Disclosure Regulation (SFDR) are forcing organisations to re-evaluate how ESG drives their business. Additionally access to capital – both equity and debt – is increasingly being tied to ESG criteria. As an example, the John Lewis Partnership recently agreed a new £420m credit facility linked to environmental targets.
Overall, there has been a significant and sustained increase in awareness of the ESG agenda from corporates and consumers alike over the last 12-24 months, and it’s a theme that’s as topical today as it ever has been. It’s at the forefront of our minds both from an investment and innovation perspective, and is one of the hottest technology investment themes for 2022.
On that basis, we recently hosted a session for our partners and private equity portfolio on ESG and why they should be hyper-focused on this topic – not just because they have to but because of the commercial value it can generate to the businesses. In the first of our ESG blog series we summarise the megatrends moving ESG to the top of the corporate agenda.
Environmental factors
Long-term global warming trends pose a physical threat through geophysical changes, such as rising sea levels. Extreme weather is an immediate consequence of climate change, which threatens infrastructure (and life in certain cases) and always has the potential to disrupt economic life. These large-scale and tangible consequences are affecting people globally and so with more people directly feeling impacted by climate change it holds true that more change is being demanded. Outside of climate change environmental concerns such as water scarcity, waste, pollution and biodiversity protection continue to be communicated more clearly and general awareness of these issues is increasing. For example, Earth Day which launched in 1970 is now marked each year in 95% of US schools and the movement has pushed global organisations like the UN to make environmental literacy part of the curriculum. The ever-increasing number of awareness days such as this mean many consumers are demanding more from the brands they engage with. This is translating into more pressure onto executives and policy makers to focus on action to prevent and counteract such harmful environmental effects.
Social
The recent COVID lockdowns have caused some people to reconsider ways of working, shifting public focus onto the importance of good physical and mental wellbeing. This has been felt very acutely. In 2021 record numbers of the workforce left their jobs – almost double the number of people versus the lowest recorded number in 2009. The Great Resignation is evidence of real consequences to businesses that don’t act or support their workforce. On the other hand the rise of AI and automation is threatening more jobs, reshaping the labour market and causing changes to the way people work – all of which create job insecurity. One notable and positive response from companies large and small has been a renewed focus on the people and social agenda, a trend that is sure to continue as management teams look to minimise any disruption to the workforce.
Meanwhile broader macrotrends such as increased urbanisation and aging western societies are putting pressures on economic systems such as tightening job markets and added strain on public finance. Simultaneously the combined purchasing power of younger generations is increasing, meaning these groups have more influence on buying patterns and consumer spending.
With new channels and social media providing greater access to information, (although sometimes mis-information) opinions, and vivid, powerful imagery with strong messages can reach wider audiences than ever before.
Governance
Increasing polarisation in political views is causing more prevalent population divisions, regional division and economic uncertainty. The COVID pandemic put political polarisation under the microscope as voters analysed their government responses. Similarly, we’ve seen an increase in highly publicised activism on several issues over the past couple of years which has filtered into the business agenda too.
In an increasingly digital world, populations are becoming more aware of data privacy and cyber security. These issues are at the forefront of government and business agendas, with significant economic and security implications that all need to be considered and incorporated at the individual business level.
The next blog in the series will look in more depth at some of the key ESG themes being prioritised by corporates as they look to embed more robust ESG strategies, and the role that emerging technology might play in tackling these.