Whether it’s a company’s impact on nature, its supply chain and labor practices, or regulatory compliance; environmental, social, governance (ESG) has become one of the most important sets of standards an organization must measure against.
Increasingly, a company’s ESG performance can attract investors and customers alike. But while investors are a big driver of a company's ESG compliance, its employees also play a role. “We have new generations of employees who are increasingly sensitive to climate change and social issues,” said Pablo Gonzalez Alonso, FrontierView’s Head of Market Intelligence and strategic advisory for Latin America. With these younger employees starting to take on more responsibility and a greater voice in their companies, “it’s just a matter of time until you see more ESG policies taking shape,” he said.
What are the biggest ESG topics that organizations should seek to address in 2022? Read on for the five most important trends you should be paying attention to.
Decarbonization will be a massive priority for many this year, with aggressive net-zero targets organizations are aiming to reach. It can be expensive to achieve these goals, and previously companies would buy carbon credits to hit carbon neutral targets, but “that kind of greenwashing approach is not going to fly in the next couple of years,” predicts Frank Meehan, CEO of Equilibrium. The price of carbon credits is also going to continue to rise over the next several years.
“Companies will instead start focusing on making improvements such as switching to renewable energy or looking into better refrigeration for buildings when it comes to decarbonization,” adds Meehan.
Europe is expected to continue to be a leader in climate legislation. The EU has a busy legislative agenda in 2022, which will be dominated by the Fit-for-55 package that was launched in July 2021.
Although the exact details of the package remain subject to clarification and amendment, it requires a much broader decarbonization effort beyond the power sector, as well as public-sector financial commitments to higher-risk energy transition technologies such as hydrogen and carbon capture and storage.
2. Diversity, Equity & Inclusion (DEI)
More organizations will move past making DEI commitments and statements to actual execution. Organizations have realized that achieving DEI goals means implementing strong strategies throughout an employee's lifecycle — from attraction and recruitment to career advancement, all the way through the exit interview.
Meaningful metrics around DEI in 2022 include tracking how many training hours your organization has spent on DEI, the percentage of employees trained, how many training hours your supplier spends on DEI, and measuring inclusivity efforts in your organization, according to Meehan.
Having a process in place for adequate oversight into diversity and inclusion is key, said Stina Warnstam Drolet, Head of Sustainability at Oxford Analytica. There are many initiatives, especially in the U.S., to introduce diversity mandates on boards, which organizations should keep an eye on in 2022.
As a larger trend, political behavior will also be in the spotlight in 2022, as it becomes “much less acceptable to say one thing and spend money on another,” Warnstam Drolet said. There will be a continued focus on the political activities and money companies spend, especially when it comes to the “ideologically-sensitive issues in the U.S.,” she adds. Overall, companies can expect increased scrutiny around their political spending and diversity actions.
3. Supply Chain ESG Management
Supply chains are another area of scrutiny that companies should be aware of in 2022. Large corporations such as Apple and Microsoft, for example, are placing a larger focus on this area.
“Companies are so nervous now about supply chain issues tripping them up,” Meehan said. “They are trying to get a good depth of ESG data out of their suppliers and vendors in order to identify and address any risks and vulnerabilities.”
With large companies setting lofty decarbonization goals (for example, Microsoft’s goal of being carbon negative in 2030), ESG practices along the supply chain are critical. “Companies are pressuring their vendors and partners to have decarbonization strategies or they’ll drop them,” Meehan adds.
4. Nature & Biodiversity
Tracking environmental issues related to nature loss will be a big trend this year. Companies like IKEA and Chipotle, as well as many agricultural organizations, have become very conscious of their impact on nature loss and will soon start reporting their impact.
IKEA is one company leading the way in this area by committing to responsible land and water use, securing biodiversity, helping reduce pollution, and supporting policymakers who drive change.
As witnessed at COP26 in 2021, biodiversity and nature were big topics of discussion. COP15, the Convention on Biological Diversity, is slated to meet in China this spring to discuss these matters as the conversation “continues to move up the international agenda,” Warnstam Drolet said. More work will be done this year, as the Taskforce on Nature-related Financial Disclosures will come out with standards to help companies assess their related risk and opportunities.
5. ESG Reporting Trends
A continued harmonization of ESG standards will be a big trend in the year ahead, spurred by the formation of the International Sustainability Standards Board (ISSB) in 2021. The ISSB will come out with its proposed sustainability standards in 2022.
The year will also bring a shift from voluntary to mandatory reporting, Warnstam Drolet predicted. Europe and the U.K. are leading the way, while in the U.S. this push is creating an ideological discussion, “that brings in the wider debate about the purpose of a company,” Warnstam Drolet said.
It will also be interesting to monitor to what extent private companies will be scrutinized in their ESG reporting since they don’t face the same requirements as public companies. As mandatory reporting grows for public companies, more investments may move from public to private companies to avoid ESG scrutiny, according to Warnstam Drolet.
Currently, most companies’ ESG rankings are global rather than regional, but experts predict a movement to expand the granularity of rankings to include regions. A company may be doing well complying in one country but not in another region, “which would make sense because the level of scrutiny is lower in emerging countries,” Gonzalez Alonso said. So ESG scoring based on region, rather than company-wide, may become more of a trend in the coming years.
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