ESG investments experienced a booming 2021, with assets in sustainable funds growing by nearly $70 billion to end the year at $357 billion. In addition, new sustainable debt issues totaled $1.6 trillion—40% of all sustainable debt ever issued.
With so much capital funneling into all areas of ESG, investors may find the sheer volume of options and access points overwhelming. S&P Global’s January 2022 report, Key Trends That Will Drive the ESG Agenda in 2022, may offer some help. It idenifies four ESG trends that combine all three facets of ESG, giving investors the opportunity to impact environmental, social, and corporate governance in a single swing.
1. ESG Skill Sets Are a Must for Company Directors
The bright spotlight on ESG factors translates to heightened awareness. Investors, regulators, competitors, and community members may all take notice of a company’s ability (or lack of one) to deliver on sustainable pledges. As the S&P report explains, this means corporate boards “will face rising pressure to demonstrate that they are adequately equipped to understand and oversee ESG issues—from climate change to human rights to social unrest.”
Those that appear ineffective or uncommitted could see rises in shareholder activism focused on various elements of ESG: environmental sustainability; diversity, equity, and inclusion (DEI) initiatives; and transparency and accountability on all fronts. For example, in its own report, 2022 Sustainable & Impact Investing Outlook: Reimagining the Future, Glenmede emphasized that shareholder pressure to mitigate climate change could fall heavily on the shoulders of carbon-emitting companies’ directors and executives, who require up-to-date expertise. The same goes for other issues that speak to investors, including DEI policies and programs, health and safety programming, and how wages rank relative to livability and disparity. Boards will require greater diversity among their members and skill sets to provide that expertise.
2. Divestment-Engagement Debate Reaches a Boiling Point
Already a hot topic among impact investors, the debate between divestment and engagement heated up further in 2021. The first strategy advocates for sidelining corporations, industries, and funds that exacerbate ESG issues, while the second pushes for progress through direct shareholder activism and engagement.
So far, the push for divestment remains strong. The Global Divestment Commitment Database reported that by the start of 2022, nearly 1,500 institutions with more than $39.2 trillion worth of assets under management had pledged to divest assets from fossil fuel investments. Meanwhile, shareholder engagement advocates cheered the election of three directors from responsible investing firm Engine No. 1 to the board of fossil fuel giant ExxonMobil.
Throughout 2022, S&P Global anticipates increased use of negative screens—which liquidate or avoid companies with poor ESG profiles—among asset managers and other financial services providers. Such maneuvers can help firms demonstrate support for the Paris Agreement, according to the report.
Yet while divestment shrinks the investment company’s carbon exposure, S&P Global added, it boosts the risk of concentrated ownership among poor ESG performers. That could lead to conditions that underscore the findings of a European Corporate Governance Institute-published paper, Exit vs. Voice, which concluded that engagement is more likely to help a critical mass of socially responsible investors achieve their desired outcomes. Conversely, the research found that divestment or boycotts often fail to achieve the social objectives.
3. Disclosure Frameworks Ramp Up
Inconsistencies in data collection and reporting continue to lead to mixed accountability, limiting confidence in corporate ESG strategies. The World Economic Forum highlights this point with data from Diligent, which notes that 58% of business professionals around the world have little to no confidence that companies can convert ESG strategies into operational success.
However, the US Securities and Exchange Commission (SEC) took a bold step on the environmental front in March, when it proposed a new disclosure rule on climate-related risks. Combined with the establishment of the International Sustainability Standards Board by the International Accounting Standards Board and the issuance of ESG disclosure guidelines on financial products by the CFA Institute, these advancements in disclosure may give investors better insight into risks related to climate and other sustainability matters.
With sharper definitions and more stringent requirements, stricter accountability on companies and investment firms could help reduce greenwashing, Glenmede concluded in its report. The heightened rigor, it points out, may also support the materiality of ESG considerations in fiduciary practices—a point stressed by a working group of the Intentional Endowments Network in its feedback to the SEC:
“We believe it is clear that enhanced disclosure of material climate change and ESG considerations is required in order for investor and corporate fiduciaries to fulfill the full range of their legal duties to fund participants, companies and the shareholders that provide long-term capital to companies.”
Separately, given advances in climate reporting, S&P Global’s report suggests that attention could start turning toward social factor measurements, including the impacts of responsible and sustainable initiatives.
4. Sustainable Debt Sees Ascendancy
Among the numerous ESG investing trends set to continue surging in 2022, perhaps the largest was the issuance of sustainable debt. The asset class consists largely of project-based green bonds, corporate loans and bonds tied to reductions in greenhouse gas emissions and other ESG targets, and social and sustainability bonds financing social and community-based projects.
The rise of sustainable debt had already generated concerns about the potential for greenwashing, and the European Union responded in late 2021 with a proposed green bond standard to be voluntarily applied by lenders and borrowers.
The S&P Global report anticipates sustainable debt issuance to keep expanding throughout 2022, especially as corporations and governments aim to achieve net-zero emissions targets. Yet to ensure the integrity of the investments and the broader sustainable debt marketplace, it expects further standards around disclosure and transparency to surface.
Navigating a Transitional Time
ESG trends are poised to remake the corporate landscape. Alongside traditional requirements for forthright financial reporting, investors, analysts, employees, and other stakeholders are calling for clarity and accountability across the entire environmental, social, and governance spectrum.
As companies and other organizations respond to such demands, Glenmede’s report predicts that impact investors will see two critical developments surface:
- Richer data and insight into climate change, DEI matters, and worker welfare could lead to new thematic investment strategies that allow investors to more directly stand alongside resilient, innovative, and inclusive companies.
- ESG may move deeper into the investment mainstream as the prevalence of greenwashing retreats in the face of rising regulatory guidance and sustainable investing standards, and fiduciary duties will increasingly tap sustainable inputs.
More broadly, the 2022 proxy season may feature a “race to the top” among large institutional investors pushing publicly held companies to sharpen their climate-related policies and disclosures. With ESG’s stakes poised to grow, organizations that fail to heed broader ESG trends increasingly risk backlash.