As we turn the page on 2021, we reflect on another unpredictable year in which we saw: businesses overtake governments with ambitious targets at COP26, ESG investing dominate the conversation in the financial world and more energy being produced from renewable sources than fossil fuels in the EU (Ember and Agora Energiewende).
Throughout January we have been looking forward to what topics we think will lead the sustainability agenda for 2022:
1. Sustainability focus will move beyond carbon
The last few years have been dominated by net zero carbon strategies and targets. We anticipate that the focus will broaden to encompass a wider range of sustainability issues.
Biodiversity will play a large role in this as the impacts of biodiversity loss move up the agenda. We are already seeing this reflected in the latest regulations. For example, the updated Environment Bill mandates biodiversity net gain following construction projects, and the Taskforce on Nature-related Financial Disclosures (TNFD), which launched last year, is expected to set similar reporting requirements as Taskforce on Climate-related Financial Disclosures (TCFD) from a biodiversity standpoint.
Social issues have often been seen as secondary to the environmental, however, we foresee the growing momentum behind a just transition changing this, a framework which aims to include social interventions in climate change strategies. Human rights play a key role in this and will be brought into focus for investors in Spring 2022 when the UN PRI launches a new initiative to address human rights and social issues through stewardship activities.
2.The ESG investment discussion will mature
Green investments were the buzzword for 2021. However, the next twelve months will see investment firms grappling with definitions and reporting requirements currently being put in place to clamp down on greenwashing. The speed at which this happens will be driven by when updated criteria are announced, for example the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy.
There is a high likelihood that the increased regulation will cause a reduction in the number of ESG labelled investments; in particular the last few years have seen continuous growth of the green bonds market. But in 2022 we predict that this market will reduce due to these new regulations, the EU Taxonomy, around what can be considered green.
In addition to the reporting requirements evolving, we see the fundamental ESG investment approaches changing. Investors will move away from exclusion criteria, often seen as the first step of ESG investing, and towards a thematic impact approach. This may be paired with a stronger active engagement strategy, as an increasing number of investors will use their leverage to change companies from the inside.
3. Governance practices will come under greater scrutiny
The G in ESG is often seen as something that is taken care of already in traditional due diligence and investment review processes, however, we expect this is set to change in 2022.
We are already seeing increased board-level accountability for ESG issues; in 2021 around two-thirds of FTSE100 firms now link executive pay to at least one ESG metric, up from less than one-half in 2020. This has been driven by investors asking for board-level accountability, and looking forward this will move from a point of differentiation to a requirement by investors.
Although corporate tax may not immediately appear to fit into the ESG conversation, tax justice definitely does. This movement aims to cast a light on unethical tax behaviours such as tax avoidance, tax competition, and tax havens. Whilst this is in the early stages of discussion within the ESG context, we expect some difficult questions will be asked by investors on this topic.
4. Growing field of sustainable tech
The dot com boom may feel like a long time ago, but the valuations assigned to the latest ‘green tech’ companies have an eerie feeling of deja-vu. Whether we are in a green tech bubble or not, the outcome is the same, and that is an enormous amount of innovation in tech to address sustainability issues.
Virtual reality universes have been pipped to provide a more sustainable consumption method. A number of fashion retailers have set up virtual stores in these universes and offer customers the opportunity to purchase items in the virtual world, which will be worn by their avatar. Whether this is solving the problem of overconsumption or just moving it online can be debated but expect to see growing interest in how the virtual world can address some of the sustainability burdens on the real world.
Another out of this world opportunity in sustainable technology is that in space. While last year’s billionaire escapades in space engendered strong backlash from many quarters, the reality is that through their investments the cost of space has drastically reduced, opening a market for new solutions. We anticipate seeing increasing space solutions to earth’s sustainability problems. For example, precision farming based on live feeds of soil nutrients and water content. Whether space takes off as a solution to sustainability issues will be dependent on them facing up to the assumed negative impacts of the industry.
5. Regulation starts to come into force
For a number of years now there have been increasing warning signs of future regulation around sustainability from both a corporate and investor perspective. While we have touched on this from an investor standpoint already, new regulation for corporations remains a hot topic for 2022 as we start to see requirements come into force. With a complex interlinking set of regulations, we expect 2022 to be the year of tentative claims and forays into the new reporting requirements.
Reporting aligned with TCFD will become mandatory in the UK in 2022, requiring companies to undertake and report climate scenario modelling. We expect to see a wide range of complex models as companies scramble to gather the data required.
Plastic tax will be also coming into play in the UK, the outcome of the boom in plastic outrage in 2018. Whilst the tax may not have a large financial burden, the Extended Producer Responsibility (EPR) legislation expected to follow this will have a considerable financial impact. Read more about how to prepare for this in Felix’s insight here.
The mass announcement of net zero strategies at the tail end of last year thrust scope 3 emissions into the limelight. There is currently no voluntary or compulsory methodology for selecting the scope 3 categories which are included in a company’s net zero strategy. This will result in vastly different outcomes between companies and render comparability impossible. Given this, we strongly expect a robust methodology to be announced, initially voluntary, perhaps through the GHG Protocol (who provide guidance on how to calculate the emissions), likely followed by mandatory regulation.
Each of the topics identified here offer companies opportunities to get ahead of the curve in both risk and opportunity. Get in touch with consultant Charlotte Matthews to discuss them further.
Do you agree with our predictions? Or have any of your own to add? Drop consultant Charlotte Matthews an email with your thoughts (firstname.lastname@example.org).