2022 will be another historic year for ESG

Over the last five years, the focus on ESG (Environmental, Social, Governance) has skyrocketed as investors, regulators, and consumers fuel demand for sustainable firms and investments. In 2021, the market saw a $120 billion influx into ESG exchange-traded funds, more than doubling the previous year's $51.1 billion.

With continuing climate-related disasters and variable weather patterns, tighter regulations surrounding greenhouse gas emissions, rising demands for renewable and sustainable energy, and increasing concern over social and governance issues, 2022 is projected to see an even greater expansion of ESG related trends and investments.

2021: A watershed year for ESG

Investors worried about climate change and social justice were successful in pushing firms and regulators to make significant adjustments related to ESG issues in 2021. The surge of ESG popularity among investors, consumers, companies, and legislators can be attributed to greater attention on the climate change crisis and spotlighting social justice issues such as the death of George Floyd.

The importance of sustainability-focused investing and the implications of a net zero economy was emphasized in BlackRock CEO Larry Fink's 2021 letter to CEOs. The US Securities and Exchange Commission (SEC) issued a risk advisory to alert investors about potentially deceptive statements identified during recent audits of investment firms that offer ESG products and services. And, yet again, ESG funds broadly outperformed their non-ESG counterparts.

The trend is clear: in 2021, 72% of U.S. adults expressed interest in sustainable investing. According to Bloomberg, global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management (AUM).

As we look ahead to 2022, a number of factors are lining up to offer global sustainable and ESG assets a boost next year.

What's driving ESG in 2022?

"We are seeing 2022 as the year when ESG not only goes mainstream, but it starts driving markets a lot more," Jefferies Global Head of ESG and Sustainability Research, Aniket Shah, said on Yahoo Finance Live.

The majority of the triggers will fall under policy and regulatory adjustments as national governments and central banks take climate change and decarbonization goals more seriously. Other issues, such as biodiversity and supply chain issues, are also becoming increasingly important to the ESG agenda.

Here are five themes that will help to move ESG forward in 2022.

#1: Regulatory changes & monetary policy

The Biden administration took a significant stride forward in 2021 when it rejoined the Paris Agreement, and Congress passed a $1.2 trillion infrastructure program. Analysts expect the stalled Build Back Better bill, which focuses on climate change in the US, will pass sometime in the first half of 2022. The bill's passing would be a big win for ESG funds.

New criteria for disclosing climate-related risks, opportunities, and metrics could be among the most significant improvements in ESG investing in 2022. Between March and June 2021, the SEC received over 5,000 public comments on climate change disclosures, with a majority in favor of more severe disclosure standards to control greenwashing.

In addition, the International Sustainability Standards Board (ISSB) may provide a draft of global sustainable disclosures for financial markets in early 2022. These guidelines could potentially serve as a catalyst for ESG convergence across countries and administrations.

#2: Biodiversity

Biodiversity loss, the loss of diversity of living organisms on the globe, is speeding up around the world. Over half of global GDP, according to the World Economic Forum, is moderately or severely reliant on nature, making mass extinction of species an increasingly pressing problem for businesses and investors.

Biodiversity loss has negative consequences for livelihood and economies that are just as devastating as climate change. As the COVID-19 epidemic revealed, trading wildlife and removing large-scale habitats for agriculture or construction can lead to the creation of novel zoonotic illnesses with terrible economic repercussions.

While voluntary disclosure of biodiversity impacts is currently uncommon, some countries are now requiring investment corporations to declare their environmental footprints. On January 1, 2022, the European Union Sustainable Finance Disclosure Regulation (SFDR) took effect and requires investment firms to declare activities that have a negative impact on biodiversity-sensitive areas.

#3: Supply chains

ESG factors are becoming increasingly important in procurement and supply chain decision-making. When it comes to reducing ESG risks, it is no longer acceptable for the world's largest organizations to focus simply on their own operations; global corporations are expected to take the lead in addressing our most important ESG challenges.

Companies are under increasing pressure to ensure their ESG principles are consistent throughout their distribution network/supply chain as they strive to meet global net zero greenhouse gas emission goals and promote diverse, safe workplaces. This, in turn, creates intense downward pressure on supply chains and suppliers.

Furthermore, the disruption produced by COVID-19 has increased global supply chain scrutiny, prompting many corporations to focus on increasing supply chain resilience. Given the complexity of the world's top corporations' supply chains, many are turning to third-party ESG risk management firms for assistance.

These third-party services will focus on analyzing the supply chain and procurement procedures in order to identify areas of concern connected to ESG risks as well as opportunities to reduce business risks.

#4: Carbon offsetting

Companies around the world are under pressure from stakeholders to not only set net zero carbon emission objectives but also demonstrate progress toward those goals. Many businesses have begun to engage in carbon offsetting initiatives such as reforestation, landfill methane capture, wastewater treatment facilities, and investments in energy efficiency technology.

While the merits of carbon offsetting are still debatable, businesses are likely to follow these trends in 2022 by introducing policies such as offsetting emissions output by planting trees, which create minimal disturbance to business operations and create a positive impact. However, calls for businesses to prioritize emissions reductions as a dedicated endeavor and achieve net zero emissions are expected to expand in the coming years.

#5: Increasing ESG commitments worldwide

Over the last two years, ESG investment has dominated the financial world. Integrating ESG elements into company valuations, according to ESG investors, improves traditional research by discovering new risks and opportunities that go beyond the balance sheet.

Until recently, ESG funds have concentrated their investment in North America and Europe, but as the ESG investing landscape becomes increasingly crowded, Oxbow Partners expects many ESG investors to shift their focus to Asia and emerging markets in a quest for higher returns.

Many companies in these areas will scramble to build their ESG credentials as they compete for investors. Other political factors will also play a role; for example, the Chinese government has vowed to 'scale down' investment in coal-fired power facilities in order to keep global warming to 1.5 degrees Celsius above pre-industrial levels.

The big ESG data driver

The development of ESG-specific data, which will begin to be embedded into processes, is a last, less discussed driver that will propel ESG forward in 2022.

Data and analytics are at the heart of every ESG approach. As ESG disclosures become increasingly necessary, the quality and amount of ESG data will also become more important.

However, investors are finding it difficult to collect and compare data on ESG progress, as well as to act on ESG risks and opportunities, due to the current mix of reporting standards. As a result, external data sources are projected to expand and improve dramatically, led by ESG rating systems and worldwide standardization, in the coming years.

ESG materiality assessments

With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.

An ESG materiality assessment empowers you to easily report on your current state and outline future initiatives while taking into consideration your business goals and risks. Download our guide to creating and extracting the maximum strategic value from an ESG materiality assessment.

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Helee Lev

Helee joined our team in 2012, overseeing strategic account management, new business, and industry alliances. In 2015, she participated in raising $5M of venture capital funding. She leads sales, business development, and Conservice ESG's strategic consulting group.

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