There is one thing we know for sure. The focus that consumers and the public and private sector have on ESG issues will continue to grow in 2022.
The escalating reporting and regulatory requirements – such as the Taskforce on Climate-Related Financial Disclosures (TCFD) requirements coming into force this April – coupled with growing public and shareholder pressure will encourage businesses to ramp up their ESG efforts.
We expect this will lead to three key trends this year.
A period of transition and planning
COP26 shone a floodlight on climate issues and saw governments agree to revisit and strengthen 2030 environmental targets by the end of this year. In the UK, this comes hand-in-hand with the requirement for listed companies to set out detailed plans on how they’ll adopt a low carbon future in line with the UK’s net zero by 2050 target. Together, this stacks up to a period of transition and planning for businesses.
By now most businesses are accepting the need to better implement ESG in their operations but for some, defining and embedding purpose at the heart of the day-to-day will require work. Without a strong set of governing principles and clear ESG objectives, companies can lack the context within which to demonstrate progress on ESG.
A big point here will be moving beyond target-setting and embedding ESG strategies – be they focused on decarbonisation or greater social inclusion – in the heart of all activity. Transition plans that cover strategy, challenges, opportunities and interdependencies in meeting ESG goals will come to the fore.
For those with robust strategies and plans already in place, this year will be about enhancing these and taking them to the next level, for example considering the ecological challenge in climate disclosures.
Bigger and better reporting
While many firms will begin measuring and reporting on their ESG goals this year as part of the TCFD requirements, 2022 is also expected to see significant developments in ESG reporting frameworks too.
One area that we expect to see changes is around regulations driven by the International Sustainability Standards Board (ISSB). This is expected to address the challenges around common language and methodology for ESG reporting, although fragmentation at national levels may still occur, for example between the US and EU.
In most cases we see businesses focusing on the ‘E’ in ESG, with Scope 3 emissions, but we’ll see more attention to the S and G in the coming year. For some this will mean looking beyond their own doors to the wider supply chain which can be complex to manage and report on effectively when it comes to ESG.
Increased scrutiny over ESG reporting, and the metrics that are used, will likely gain more public interest too as consumers focus on ethical purchasing decisions. ESG disclosure will therefore come with challenges. Finding reliable data, accurate reporting and external verification will become more important across all sectors. Companies will also need to build their internal skills to verify their own ESG strategies.
In some industries, the use of artificial intelligence and machine learning could prove valuable in gathering robust data and prove critical to evaluating performance against ESG strategies.
Increased scrutiny over ESG metrics and reporting will continue to rise and firms will need to have a strong grasp on their measurement and evaluation – both of financial and non-financial disclosures – to avoid accusations of greenwashing.
Pressure on the up
Pressure is on the up this year. Take finances first. There has already been pressure from banks, investors and shareholders to act on climate change. This is only going to increase, and rapidly.
The green bond market is expected to keep expanding, with finances continuing to get ‘greener’. Lender decisions too are increasingly factoring in ESG – with Deutsche Bank and consumer finance provider Home Credit Philippines recently closing a deal that contained robust social targets, an interesting step in the development of ESG financing.
This level of financial pressure is only likely to grow, with FCA planning to require investment products to show impact, risks and opportunities with new consumer-facing sustainability labelling – helping to show genuine support for ESG.
Increased financial scrutiny will run alongside growing pressure from consumers, businesses employees and wider local and national community groups – who can turn to protest and vote with their feet against companies that are getting it wrong. We’ll likely see more organisations react to changing demands from organisations in the year ahead.
With so much changing in the ESG space, and businesses seeking to differentiate themselves, it’s going to be an eventful year.
As we saw at COP26, larger businesses are, in a sense, moving ‘ahead’ of the government when it comes to some environmental aspects of ESG, but we need to work together to ensure this happens across the full ESG landscape and that companies are well placed to put purpose first.