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Environmental, Social and Governance (ESG) Program Trends in 2022
What can you expect for environmental, social and governance (ESG) in 2022? More change and progress. Below you will find our perspective as it relates to the hot topics and areas of focus for investors and regulators as well as opportunities to start exploring today. Bottom line:
- Expect more net zero commitments and specific strategies to achieve the goals
- Scrutiny of the data supporting for ESG commitments and metrics will increase
- Regulatory guidance will be released to chart a path forward for non-financial reporting
The evolution of ESGIn 2020 we saw the concept of ESG go mainstream — specifically it was the year where the value of having a strong ESG-centric strategy became clear in the minds of leadership teams, investors and the public at large. In response, companies of all shapes and sizes strengthened their existing sustainability and corporate responsibility programs to consider more aspects of the value chain. In January 2021, when the United States rejoined the Paris climate agreement, the number of companies and local governments committing to net zero emission targets by 2050 began to skyrocket. Further, regulatory bodies in the United States began to signal that non-financial disclosure requirements would be coming — likely starting with public issuers and focused on greenhouse gas emissions, diversity, equity and inclusion, and cybersecurity. So as we enter 2022, what’s in store?
Continued focus on ESG reportingMost of the world’s largest companies now set ESG-related targets and issue a report with ESG metrics, targets and disclosures. The expectation among consumers and investors is that small and medium-sized companies will continue to build out their ESG strategies and reporting capabilities to meet stakeholder demands. ESG reporting also continues to evolve. Companies use two primary approaches: standalone reporting (i.e., creating a standalone ESG or impact report) and integrated reporting (i.e., leveraging existing mechanisms, such as a 10K, to disclose non-financial information). Regardless of which reporting option you choose, one thing is clear: the qualitative and quantitative data needs to be complete, accurate and timely. Companies and governments need to begin upgrading their reporting. They must update existing policies, build out a robust process and control framework and begin to engage internal and external audit functions to assure the integrity of the non-financial information disclosed.
Net zero commitments influence strategiesWhen the United States rejoined the Paris climate agreement, it signaled a shift in the country’s approach to climate change (as detailed in the November 2021 release of The Long-Term Strategy of the United States, Pathways to Net-Zero Greenhouse Gas Emissions by 2050). The strategy is ambitious and concrete, and it will drive many companies to change how they do business. It will also require state and local governments to implement new approaches and incentives to get communities onboard. To meet these net zero commitments, we expect the purchase of alternative energy options (i.e., solar) to increase. Further, there will be an increase in carbon offset investments — driven by companies and governments entering the market to buy and sell carbon credits.
Scrutiny moving to regulationCurrently businesses aren’t required to report metrics on greenhouse gas emissions, workforce diversity or governance - but stakeholders continue to seek this type of non-financial information. In response, the SEC has signaled that regulation is coming in 2022 (WSJ: SEC Under Pressure to Implement Agenda in 2022). Specifically, public issuers can expect clear guidance to enhance their non-financial disclosures related to:
- Climate risks (e.g., consideration of physical and transition risks as well as greenhouse gas emissions and targets)
- Human capital (e.g., board and executive committee diversity)
- Cybersecurity risks