Global concerns over climate change and inequality highlighted by the COVID-19 pandemic contributed to the growing demand for, and prominence of, societal expectations around responsible business practices. As governments, investors, interested communities and other stakeholders pushed environmental, social and governance (ESG) concerns into the spotlight, companies across sectors sought to balance efforts to measure, report on and address these challenges while maximizing long-term stability and growth. 

We advised clients, including companies, sovereigns and investors, on issues that ranged from evolving ESG reporting and regulatory requirements to sustainability-linked financing. Below we discuss some of the concerns that were top-of-mind for our clients in 2021. 

Social factors carry more weight

Climate change, and the regulations and policies designed to mitigate industrial activity’s effects on the climate, have underscored the importance of environmental protection, often overshadowing the importance of the “S” in ESG. But there is a growing recognition that a company’s failure to address social factors, including human rights, labor practices, community relations, and diversity and inclusion, carries serious risks. For example, supply chains can expose companies to risks that can have a negative impact on ESG goals, creating potential for reputational damage, which can impact share price.     

Lawmakers are also increasingly stepping in to encourage action, particularly in Europe. As the regulatory landscape continues to evolve, so do the considerations for companies that want to meet their social obligations.

Mining and infrastructure investors take note

In a range of sectors, investors are seeking projects that make sense from both a financial and sustainability perspective. For example, ensuring that borrowers weigh ESG considerations has become a priority for many mining investors and financiers. As a result, mining companies routinely identify ESG issues, including environmental risks, community relations and their social license to operate, as among their most important challenges. 

Infrastructure investors surveyed in 2021 told a similar story. In both the US and the Asia-Pacific region, a clear majority of investors said ESG considerations are important when selecting among infrastructure projects. 

In the US, where the infrastructure bill paved the way for large-scale spending, investors planned to back more social infrastructure projects, including schools and healthcare facilities, in addition to the more traditional road, bridge and tunnel projects. Helped along by the lessons of COVID-19, ESG concerns also influenced investors surveyed in the Asia-Pacific region, who, likewise, described plans to invest in social infrastructure at an increased rate. 

Trade and competition challenges await

The agreements that regulate international trade largely presume that companies operate solely to make a profit. Companies focused on broader benefits, including ESG goals, will need to weigh how current trade laws may help or hinder them, both in trade disputes and in their ability to remain competitive while pursuing ESG objectives. 

Some countries have trade policies that support ESG principles by offering incentives that could run afoul of US trade laws, including anti-dumping laws, which seek to prevent products from being sold in the US at less than fair value. On the other hand, many companies in the US and elsewhere may be disadvantaged because they do not receive ESG-related inducements from their governments and, instead, must assume added costs to meet international ESG standards.

On the US antitrust front, amid heightened merger scrutiny and policy calls to use antitrust laws to spur social change, companies should weigh social factors—such as a deal’s impact on the environment and jobs—when seeking merger clearance. While it is unlikely that social factors alone will determine merger clearance outcomes, they could play a role in US enforcement agencies’ decisions on which transactions to investigate.

Sustainable financing accelerates

In 2021, ESG features became increasingly prominent in deals and investments across all asset classes. The growing focus on ESG filtered into debt markets, as borrowers recognized that presenting a clear ESG strategy to investors opened up access to new pools of capital and opportunities to lock in favorable pricing. Deals included the largest-ever sustainability-linked financing. Although European and North American issuers accounted for the bulk of ESG-linked issuance, sustainability and ESG debt are rapidly gaining traction across all regions, including Latin America and Asia-Pacific. 

A range of ESG-linked debt products made strides. Green bonds, which raise capital specifically for climate-linked and environmental projects, and sustainability-linked bonds and loans, which are not linked to specific green projects but are issued to incentivize sustainability performance objectives, all saw growing investor interest throughout 2021. As sustainability-linked financing products proliferate, the next challenge for borrowers and issuers will be standardization, to make it possible to compare the value of deals that cover different environmental and social impacts. 

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A highway overpass in Beijing