To mark the beginning of Black History Month in the US, Timothy Wilkins, Freshfields’ global partner for client sustainability, shared his views on the development of corporate ESG trends and commitments, echoing Rev. Dr. Martin Luther King’s sentiment that community voice and environment are necessary for social justice and civil society to progress.
This article was originally published as a Markets Insights piece by Thomson Reuters on January 17, 2022.
“I will properly appreciate the sun, the moon, the stars, trees, apples…God writes…on trees, and in the flowers and clouds and stars.” — Rev. Dr. Martin Luther King, Jr.
Dr. King’s words encouraged human beings to care for all living things — all of Creation, including the Earth. In the last decade, Dr. King’s call has been expanded to corporations, and while the language used to reflect this care has been referred to as environmental, social and corporate governance (ESG) issues, the message is still the same.
To honor Dr. King’s message on his birthday and the corresponding holiday, the Thomson Reuters Institute (TRI) sat down with two ESG experts, Timothy A. Wilkins, Freshfields’ global partner for client sustainability; and Jared Giles, vice president for Corporate Social Responsibility at Partnership for New York City, who runs the corporate responsibility partnerships between the city government and businesses. We assess their views on ESG developments in 2021, what is emerging in 2022, and on how Dr. King might evaluate how these corporate commitments stack up to his “care-for-all-living-things” message for humans and all of Creation.
Corporate ESG efforts accelerated in 2021
Both Wilkins and Giles say that corporations made excellent progress on sustainability during 2021, with Wilkins describing their progress as “remarkable.” Advancements in the environmental space were particularly notable, and Wilkins credits two converging factors for this progress:
- The United Nation’s latest annual climate conference (referred to as COP26, the 26th meeting of the “Conference of the Parties,”) which has driven positive change in both the public and private sectors. Governments made fresh pledges to reduce greenhouse emissions, while businesses — which attended COP26 in greater numbers than previous iterations — committed to achieving their sustainability goals in 2030 rather than 2050.
- Regulators have emboldened their oversight of corporates to keep them accountable for their pledges. There is a greater convergence around the necessity for full and accurate ESG disclosures as well as for clearer guidance on state aid support for green projects. Freshfields has set up a comprehensive regulation horizon scanning tool to enable clients to keep up with the rapid speed of these changes, Wilkins notes.
Giles frames his perspective of ESG forward momentum on the social and governance parts, specifically referring to how corporations are investing in more diverse pipelines and promoting employees of color, women, and others from underrepresented backgrounds at the leadership, executive, and board levels. “Many companies that I worked with in 2021 have collaborated on establishing pilot apprenticeships and internship programs to increase hiring of students of color with some local New York City colleges and universities with plans to expand them in 2022,” Giles observes.
Pace of action & measurement will speed up in 2022
Both Giles and Wilkins say they anticipate corporations coming under greater pressure from investors to show measurable progress toward their ESG commitments in 2022. Internally the priority will be cultural change, explains Giles, with companies working to ensure that inclusion and belonging actions are embedded in the day-to-day operations of the business. Both Wilkins and Giles say they expect the current emphasis on robust corporate governance and improving diversity within the C-suite and on boards to continue to grow in 2022.
Wilkins says he is also optimistic of further progress around both the definition and measurement of ESG performance in the year ahead. He expects regulators to more clearly set forth their “taxonomy” for what will qualify as “green” projects for financing and how to measure progress against intended goals. Further, private contractual arrangements will flourish, he says.
Rev. Dr. Martin Luther King, Jr.
“We will see more sustainability-linked loans where the borrower and lender agree to specific ESG targets that directly influence the cost of capital,” Wilkins says, adding that, for example, an interest rate can be increased as a penalty or decreased as a reward depending upon whether an ESG target — such as a percentage change in the reduction of carbon footprint or an increase in board diversity — is achieved by the corporate borrower.
Also, to advance how to define and measure progress, Wilkins says he expects greater uniformity around disclosure. Specifically, the International Financial Reporting Standards foundation will help standardize the multitude of disclosure regimes, and this will help investors compare investment opportunities. This, in turn, will drive greater consistency and transparency on the anticipated returns of similar investments as well as their projected sustainability impact.
Reflections on what Dr. King would say
As Giles and Wilkins ponder Dr. King’s words and spirit, both conclude that he would be heartened by corporations’ focus on ESG issues and their pace of progress. “Dr. King would be encouraged to see that the world’s attention is now focused on the social and environmental impacts of communities across the globe,” Wilkins says. Giles agrees, adding that the “commitment [from business] is outstanding.”
At the same time, Dr. King also stated that words are not enough — action must follow, with measurement to demonstrate progress. Indeed, corporations still have a long way to go to shift their cultures, Giles notes, particularly in relation to increasing representation at senior levels.
However, both remain optimistic. “Dr. King championed that both the community voice and environment are necessary for social justice and civil society to progress,” Wilkins says. “Communities are now actively organizing to have their voices heard, and businesses have become more proactive in both hearing those voices and finding ways to support them.”