Every business is deeply intertwined with ESG concerns. It makes sense, therefore, that a strong ESG proposition can create value. ESG stands for Environmental, Social, and Governance. ESG refers to the aspects of investing that are sustainable, responsible, or ethical. It’s a system for assessing a company’s or investment’s long-term viability in three areas: environmental, social, and governance. Every year certain ESG themes are defined. For the year 2022, 10 themes have been defined that lays the framework for ESG reporting.
The transformation has taken centre stage, and beginning in 2022, businesses, governments, and investors will begin their journeys toward net zero. ESG investing ought to penetrate more and more segments of the market as it advances into macro investing and policymaking. The top 10 ESG themes that have ruled the market and will do so in 2022 are listed below.
Global ESG Regulation is accelerating despite difficulties. In 2022, regulators are anticipated to intensify and improve their ESG initiatives. Greater disclosures are being driven by the Sustainable Finance Disclosure Regulation (SFDR) of the European Union, which is now applicable to financial firms, advisers, and products. The US administration has asked firms to report on climate change. China and the EU have collaborated on taxonomy classifications, while Hong Kong regulators have increased their attention to standards for climate reporting.
By promoting sustainable business strategies, there is a growing desire for actual change in the world. Asset managers have invested heavily in businesses with “best-in-class” ESG rating, which has contributed to high valuations. Too frequently, investments in ESG-challenged sectors are sold off, yet engaging in constructive change-making could produce more tangible results.
Investors put net zero commitments into practice. Investors are expecting companies to make clear and transparent disclosures explaining their goals. They want companies to demonstrate clear climate strategies to achieve net zero targets. Additionally, companies are expected to exhibit strong leadership and accountability through executive remuneration and financing tied to targets. Companies are also engaging suppliers on transitioning top lower carbon processes and practices.
Investors demand data that is looking ahead. To better understand the future ESG trajectory of organisations, investors and data providers have increased their attention on generating forward-looking data.
Impact of investor involvement is highlighted. We anticipate an increase in the number of asset managers working on reports that quantify engagement outcomes. Credit investors may help the shift alongside equity investors. The market for sustainability-linked bonds (SLBs) provides an ideal setting for improved communication between investors and issuers.
Greenwashing accusations to also hit investors. It is clear that there is opportunity for interpretation due to complex legislation and difficulty implementing ESG practises. This may lead to greenwashing allegations in 2022 that target institutional investors as well as issuers. Regulations’ monitoring of investment funds will be facilitated by mandatory disclosure requirements and new regulations governing ESG labelling.
ESG enters the mainstream in macro. ESG in macro is one of the most popular subjects right now, which brings up a number of issues for discussion. Events and policies related to climate change will unavoidably have an impact on pricing and valuations, posing new macroeconomic and financial concerns. Potential policy changes by central banks include managing these risks as well as easing the transition to a low-carbon society.
A step forward in carbon pricing. The EU, US, UK, Canada, and others support pricing carbon emissions, however there were no firm decisions made at COP26 regarding a uniform carbon price scheme. Additionally, almost 2,000 businesses with a market capitalization of $27 trillion are already utilising or intend to employ internal carbon pricing in the next two years. This comprises 57% of the biggest companies on the planet.
The value of carbon offsets is increasing, but so is scrutiny. Carbon emissions will rise as a result of net zero commitments. The voluntary carbon credit market is still uncontrolled, and not all carbon credits are created equal. Genuine greenhouse gas reductions must be given top priority by society, governments, and corporations.
Targeting deforestation and measuring biodiversity. Investors closely monitor the EU’s efforts to reduce the risks of deforestation associated with items sold on EU markets. Satellite technology and third-party certification will increasingly be used to provide independent verification of sustainable production methods. Governments, businesses, and financial institutions will be pushed harder to quantify their dependence on biodiversity and the effects it has on them.
Investment managers will undoubtedly experience more conflict as ESG momentum grows between the demands of their customers, a slew of forthcoming regulations, and what they believe is the proper thing to do to help the shift – all while attempting to maximise profits. It’s critical to keep track of the recognisable major themes in this area of environment. Investors and issuers both don’t want to fall behind.