General ESG News
In 2022 and the coming years, the consequences of being (and being identified as) a “greenwasher” can begin to affect companies’ bottom lines and business continuity in new and meaningful ways. The media and other organizations have also been increasingly covering the connections between climate change, enterprise, and social and economic phenomena.
Companies have realized that the ESG competence of their board members has been found lacking and they have taken steps to develop their boards and bring sustainability issues to the forefront.
Sustainable investing has seen a massive inflow of capital, but the share of oil and gas companies have overtaken ESG-focused companies. Additionally, regulators, NGOs, and customers are applying new levels of scrutiny to ESG-labeled funds to help ultimately foster an enduring path for ESG products.
The “people issue,” broadly defined, will become a top investor focus.
Transparent governance can boost confidence in a business.
Sustainability remains critical for consumers, not only investors.
Businesses need to articulate which ESG issues are most relevant to them, and why.
Effective ESG actions must be part of a holistic strategy.
Getting started: securing leadership buy-in and analyzing stakeholder needs; it is critical to understand what is actually important to stakeholders and impactful to business rather than just reporting arbitrary metrics.
Early-stage ESG: establishing quick wins and new data governance; restructuring the company’s data architecture to enable ESG performance tracking.
Mid-stage ESG: achieving strategic gains and benchmarking against peers, as ESG is a moving target.
Advanced ESG: driving business innovation and supply chain sustainability; when a company has a well-developed ESG strategy, ESG concerns will permeate all aspects of the decision-making process and differentiate it within its industry.
Forbes: Climate Change And Infections
Mosquitoes are sensitive to small changes in temperatures, and because of this, it is expected that malaria will shift eastward and to higher elevations and dengue will spread across sub-Saharan Africa by 2050. Deforestation and small-scale gold mining also play a role in increasing forest-edge areas that are conducive to the spread of malaria.
For each degree of temperature rise the world sees a significant increase in disease and death, as well as extended seasons of infectivity for some organisms. Because of this, climate change is a “threat multiplier.”
Additionally, the struggle to develop vaccines and treatments for emerging pathogens is compared to a game of whack-a-mole, where the root cause is not addressed. Many disastrous epidemics and pandemics, including Ebola, Zika, HIV, and possibly even COVID-19, have originated from humans disrupting the environment and encroaching on wildlife.
Currently, the National Physical Laboratory (NPL) in London is using tools to analyze data about methane in the atmosphere. In the future, NPL hopes to build similar devices and deploy them globally. The researchers working in the lab are meteorologists, not climate change scientists, but they act as the gatekeepers to “absolute truth.”
The move toward more climate measuring stems from the growing realization that current predictions about the rate of climate change were being made purely based on statistical modeling.
Many experts are still predicting a mega-flu outbreak, and pandemics can occur more than once in a century. If the world learns from the challenges of the COVID-19 pandemic, it will be less likely to take health security for granted and will be more proactive in taking the steps necessary to stop disease transmission.
The way we live is increasing the risks of another major pandemic – international trade and travel allow diseases to spread more quickly, and overuse of antibiotics can lead to a wave of antimicrobial resistance that could cause many to die from currently treatable diseases.
Zoonotic diseases jumping from animals to humans now represent about 75% of newly emerging diseases, and this is made worse by crises like climate change, deforestation, and species extinctions and migrations.
A global expert panel has called for a doubling of international financing to help tackle the weaknesses in pandemic preparedness. The challenge is daunting, but so is the alternative.
Financial Times: Climate change and the battle for Canada’s forests
Scientists and activists are putting pressure on the Canadian government to preserve the country’s forests, particularly its older woodlands. However, escalating climate concerns have encouraged the growth of British Columbia’s biomass industry, which produces wood pellets that are considered a “carbon neutral” fuel.
Some scientists are concerned about the environmental implications of burning wood for energy. Experts also note that British Columbia should not be issuing permits to log old forests.
The government published a report in 2020 that concluded the economy was “heavily dependent on trees harvested from primary forests of old trees,” and it put forth recommendations like deferring development in sensitive areas.
The Great Reset refers to the shift toward non-economic priorities (especially ESG aspirations), with an emphasis on decarbonization, equality, inclusivity, and resilience. However, these aspirations must be grounded in the realities of economics. Without this, there can be disillusionment and a breakdown of trust: the Great Regret.
Things like a clean environment, public services, inclusion, and fairness are all things we want and need as a society, but ESG considerations must account for the economic aspect of these things. Consumers and other stakeholders are concerned about income, energy costs, investment returns, taxes, wealth inequality, and more.
A “broadened” ESG framework embeds economics and a full range of stakeholder interests.
Members of the Fast Company Impact Council predict that 2022 will be the year that innovators propel ESG forward with new transparency tools, reuse solutions, climate tech, the Internet of Things, and more.
Universities are expected to teach students how to build technology products that tackle humanity’s biggest challenges, and companies are expected to grow their circular business models to increase customer loyalty and reduce environmental impacts.
McKinsey: The role of ESG and purpose
The biggest questions around sustainability are around purpose and sustainability.
Rupert Younger from Centre for Corporate Reputation at Oxford University and Robin Nuttall is a leader in McKinsey’s ESG and regulatory strategy work discuss the intersection of ESG and corporate purpose.
Rupert believes that that purposeful work demand is not only coming from external stakeholders such as investors and customers but also from employees as 70 percent now demand purposeful work. He believes based on the research over the past two years with the Enacting Purpose Initiative, we are returning to a more balanced capitalism.
Purpose and ESG should be thought of as grid with two axes. On one axis is whether you have strong or poor ESG performance and on the other is your purpose that sets your “North Star.”
Business Chief: SAP: Sustainability metrics for businesses after COP26
Many leaders are still struggling to align sustainability commitments with their business strategies, which means increased scrutiny will be a major challenge. A root cause of confusion can be found in current reporting practices, which lack standardization and comparability.
Achieving widespread ESG implementation will rely on the establishment of a set of unified standards and financial targets to incentivize progress.
Changing America: Five big climate change stories from 2021
Worsening drought in the Western United States.
Texas power crisis sparked by unusual frigid temperatures.
Warming temperatures linked to climate change cause more extreme hurricane conditions.
United States reenters the Paris Agreement.
Diplomats come to agreement at Glasgow conference.
Is ESG undermining your company’s competitiveness? If a company does not focus enough on ESG, it risks falling behind in the market
Does driving the ESG agenda mean sacrificing company returns?
How are you navigating ESG trade-offs?
How does ESG change due diligence?
Should you become a public benefit corporation?
How should corporations address societal concerns such as racial equity?
How do you develop a global approach to ESG?
How do you build an ESG framework that is future-proofed for tomorrow’s economic realities?
How do you vet company performance of ESG?
How should corporations navigate the ever-changing landscape of ESG?
Some of the key stories and themes from the past year that signal ESG acceleration include:
Sustainability initiatives evolve beyond target setting and low-hanging fruit.
Financing sustainability – ESG-dedicated capital builds and is ready for deployment.
Disclosure – will transparency shift from barrier to enabler of ESG capital flows?
The setup for ESG in 2022 – requirements to understand, assess, and measure the ESG aspects of operations and investments will grow.
ESG Disclosures, Standards, Rankings, and Reporting
Consumers are looking for quantifiable, impactful action, and they are growing skeptical of purpose washing. Stakeholders wants brands to stay rooted in their values, and survey responses indicate they would rather see brands making long-term investments in one issue rather than switching causes often.
A robust ESG strategy has become essential for company success, and research has been showing a positive link between ESG scores and financial growth.
When beginning the ESG reporting journey, business leaders should choose up to five relevant ESG criteria to measure and report. They should create a process to collecting data and assessing risks to make reports complete and accurate, which also helps simplify this process to apply it to other issues within the organization.
Companies that take a proactive approach to ESG can see improvements to their bottom line and sustainable growth. It can also reveal where there is room for operational efficiencies and cut back on waste, mitigate risk, and improve overall performance. However, this can be difficult in companies where ESG data is managed in silos.
A clear ESG strategy can also help attract and retain shareholders and draw in the best talent. Companies that selectively report on ESG data leave themselves open to accusations of greenwashing.
Teradata predicts more AI adoption and software development in the financial world in 2022, as well as adoption of cloud technology. However, this can come with serious risks for some firms.
Additionally, regulators are planning to step up their data analysis and statistical capabilities in 2022, and banks and other financial institutions will work to provide emissions data that can satisfy regulators as to their ESG status.
The new UK FCA rule will be first applicable to annual reports published in early 2023. Relevant issuers will need to state in their reports whether their climate-related disclosures meet TCFD recommendations on a comply-or-explain basis.
The FCA has also provided guidance for companies headquartered or operating in a country that has made a net zero commitment.
ESG is about making portfolios “less bad,” while a sustainable portfolio is meant to intentionally include companies that are making a positive difference in the world.
For example, a portfolio that reduces its exposure to ExxonMobil is “less bad,” but a portfolio that adds First Solar to replace ExxonMobil is positive and sustainable.
Unfortunately, many of the existing U.S. funds labeled as ESG/sustainable actually offer positive, solutions-based holdings. Shifting toward a paradigm of intentionality is needed to create actual change.
One reason for BlackRock’s significant inflows into its ESG products is the fact that the firm inserted it into its popular model portfolios offered to investment advisers, meaning many investors got into an ESG investment vehicles without necessarily choosing that strategy.
By doing this, BlackRock has made its ESG success somewhat of a self-fulfilling prophecy. It has also been found that the ratings BlackRock uses to justify its popular ESG funds’ sustainable labeling – ratings from MSCI – have virtually nothing to do with the ESG impacts.
Critics, including BlackRock’s former chief sustainable investing officer Tariq Fancy, have also noted that ESG funds come with higher fees that non-sustainably labeled counterparts.
BlackRock has stated that it believes sustainability should be its new investing standard, but it is ensuring that more clients invest in its most popular ESG funds by inserting it into popular model portfolios. This creates the illusion of a demand shift and does not account for the lack of intention (or even awareness) by investors.
Four reasons why private equity firms of all sizes are taking ESG seriously:
How a company handles its ESG responsibilities reflects on its ability to protect value and manage risk
Better ESG performance enables value creation
ESG can be a critical market differentiator for Millennials and Gen-Z
ESG is about future-proofing a business
U.S. oil and gas producers have responded to growing ESG interests by cutting spending on new drilling projects and allocating more capital to decarbonization and low-carbon/clean energy ventures.
The Biden administration has made ambitious promises about tackling climate change, but there have been few concrete policies implemented to reduce the demand for petroleum products. Current actions to block pipelines and oil and gas leasing have made U.S. oil companies wary of investing in new drilling. Crude oil prices are increasing and consumer gas prices are at a seven-year high, with inflation over 7%.
The ESG movement has had more of an effect on investors’ mindsets than on consumer demand for oil and gas products. To avoid an energy crisis on top of a pandemic and an economic crisis, it is crucial to acknowledge that the clean energy transition will take decades and fossil energy will be necessary to power the economy for years to come.
Private investors are currently worth $42 trillion worldwide and are increasingly demanding greater transparency and alignment of companies’ strategies with ESG policies. This push was previously been led by large institutional investors.
Investors are encouraged to exercise their votes and engage with companies’ management to push for responsible action (rather than just divesting).
Transparency, choice, and trust are the three key pillars that will unlock the power of private investors.
Global VC funding hit USD 454 billion in the first three quarters of 2021 and the early-stage funding grew at 104% year-over-year in 2021 to peak at USD 49 billion
Newer VCs globally, welcome changes in known VC forms and VC platforms such as VentureESG, PRI’s Venture Collaboration are shaping the face for ESG
Venture capital can embrace ESG by analyzing the right product market fit, identify ESG issues, prioritize the high value, low complexity ESG issues in sectors, measure the impact, and communicate well to your customers.
Australian companies are increasingly recognizing that gaining access to global capital is dependent on their sustainable operation. Fortunately, green debt has evolved over the past year to include Indigenous and other social projects.
These loans and bonds have been traditionally linked to targets like clean energy and decarbonization, but now they can be linked to targets like having a certain percentage of Indigenous workers by a set date. Experts predict that demand for sustainability linked loans will increase in 2022.
In 2021, the main catalysts for continued ESG investing momentum were the Biden Administration’s rejoining of the Paris Agreement and the passage of the $1.2 trillion infrastructure bill. However, some of this momentum has been slowed by the Build Back Better agenda being mostly halted.
From a global perspective, the trend is greater decarbonization efforts in the U.S., Europe, and China, but decreasing international cooperation. Some experts point to the fact that there is a less of a policy-driven market in the U.S., which is different from the European approach.
The biggest anticipated changes in 2022 will be new guidelines from the newly-formed ISSB for disclosing climate-related risks, opportunities, and metrics. These guidelines could also help align ESG strategies across disparate countries and jurisdictions.
The overarching theme for ESG investors in 2022 is a broader approach to companies’ environmental frameworks, beyond decarbonization. Specifically, biodiversity is expected to become the “new climate change” in 2022.
ESG Chanel: Expect ESG to Drive Markets in 2022
Aniket Shah, the global head of ESG and sustainability research as Jefferies believes that 2022 as the year when ESG not only becomes mainstream, but it starts driving markets a lot more and the reason why this will happen is because core parts of the financial system, including the central banks, are going to become even more serious about climate change as they are today.
Analysts are anticipating the stalled Build Back Better bill that focuses on climate change within the U.S. to pass sometime in the first half of 2022 and mirror a global trend of increased focus on decarbonization from regulatory bodies. Meaning huge boon for ESG funds.
He added: As more companies disclose ESG-related information based on ISSB, the standard will become the driver of materiality, just like with financial disclosures. We recommend investors become familiar with the ISSB approach in 2022.
Companies and Industries
FinTech: The Notorious E.S.G.
FinTech should expect to be subject to some of the upcoming legislative changes regarding ESG. While there is currently no uniformity in ESG reporting, standardized reporting is expected to grow substantially in the coming years.
FinTech has an important role to play in ESG issues, due to the need to collect and analyze large amounts of data. The clearest example of overlap in FinTech and ESG is in the investment space.
Climate change and the move toward a net zero economy has been the most high profile ESG element in FinTech, but socially focused projects have increased exponentially (e.g., inclusive finance). Additionally, effective governance drives sustainable financial performance and reduces reputational risk, which then generates value for shareholders.
International Banker: Sustainability in Banking: Fossil-Fuel Fuel Financing Still the Main Issue
There is evidence that banks have been responding to pressures from stakeholders on all sides, but regulators are increasing their efforts to ensure banking systems are addressing climate issues and banking sustainability is taking on a new urgency.
The Glasgow Financial Alliance for Net Zero (GFANZ) is a step in the right direction, but there is still a glaring omission of any actionable mention of fossil fuels. Many of the world’s biggest fossil fuel financers are in GFANZ, and many are still starting new investments in fossil fuel projects.
For banks to improve their sustainability credentials, they need to define a sustainable banking strategy, identify and address risks, offer sustainable products, develop a smart target operating model, and take advantage of green IT.
S&P Global has acquired The Climate Service, which will add capabilities to the firm’s portfolio ESG insights and solutions for its customers.
The New York Times: Europe Plans to Say Nuclear Power and Natural Gas Are Green Investments
The EU has proposed plans to classify some nuclear power and natural gas plants as green investments to help cut emissions, which (if approved) could spur a resurgence in nuclear energy in the coming decades.
The proposal caps one of the most heated political battles in Europe when leaders have pledged to take action on climate change but some countries are still wary of increasing nuclear power on European soil. The new proposal would deem natural gas and nuclear power as “transitional” green energy sources to help countries bridge the gap from coal and carbon to clean, renewable energy.
Critics say that neither energy source should be labeled as clean due to the emissions from burning natural gas and the environmental hazards associated with nuclear plants and radioactive waste.
Including nuclear power in the EU green taxonomy would have significant implications, including unlocking billions of euros in state aid for nuclear energy projects and including nuclear energy companies in sustainable investment funds.