Transition to “circular economy” a key ESG issue in 2021

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While the appeal of investing in renewable energy assets will continue irrespective of regulatory developments as technological learning curves improve, an abrupt switch away from fossil fuels should be limited as a result of continued low natural gas prices, infrastructural obstacles and potential pushback from Republicans in a highly divided Senate.

Biden has voiced support for a gradual energy transition in which natural gas (and by extension the controversial practice of fracking) will likely remain categorized as a “transitional fuel.” From an ESG investing standpoint, we believe the focus on environmental protection and operational health and safety will continue to be material issues at the forefront of the fracking debate.

The Covid-19 pandemic and its material human, economic and financial costs will also likely continue supporting the notion that the environment, public health and global economy intertwine. Therefore, another key ESG issue in 2021 will be the implications of transitioning toward a circular economy, which goes beyond increased use of renewable energy or recycling. To be successful, it must represent a systemic shift in value chains. Companies must rethink resource consumption, energy usage and manufacturing processes with an aim toward eliminating waste and generating renewable output. We see upside potential in several areas, including water and waste management, sustainable agriculture, bioenergy and renewable biochemicals, smart grid technologies and power storage.

Like with any form of systemic change, moving effectively toward a circular economy, fostering a clean tech innovation “revolution,” and implementing concrete policies to contain climate change shouldn’t be about speed per se. Tactical changes are seldom sustainable, but strategic ones tend to be. Before articulating an argument on how sustainable development is achievable, it’s necessary to focus on why it isn’t.

 If sustainable development isn’t yet compatible with our current, fossil fuel-dependent and open-loop system, change must come from within the system. We believe the Biden administration’s key challenge will be maximizing the incentives to scale advanced and knowledge-intensive renewable energy/closed-loop solutions while balancing social and economic considerations to which the U.S. is currently exposed. Sustainability is not a binary concept—it is also about establishing an equilibrium between shared priority issues for all stakeholders. This exercise goes beyond defining “materiality” * and can only be achieved through a sustained effort on the part of business leaders, policymakers and their constituents to gradually evolve traditional measures of productivity, wealth and well-being.

 By Guillaume Mascotto, vice president, head of ESG and Investment Stewardship

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