As we welcome in a New Year, the Greenstone team reflects on 2021 and its significance in areas of sustainability, ESG and responsible supply chains. This blog focuses on the top five trends to watch out for in 2022.
1. ESG (Environmental, Social and Governance) and responsible investing
There is no doubt that the developments in ESG over the past couple of years have set the stage for a significant ramp-up in ESG initiatives, investments and financing in 2022. Today’s investors understand ESG investing benefits and expect ESG reporting. The quality and quantity of ESG data will continue to improve as reporting requirements and expectations grow.
The continuing growth of responsible investing is leading companies to address material ESG issues they may have overlooked or not considered relevant previously. Responsible investors are spurring companies to address issues that impact workers, customers, communities, and the climate. This has become particularly important to investors over the course of the COVID-19 pandemic, as companies with strong ESG performance showed lower instability overall.
2. Focusing on the 'S' in ESG
Social issues, such as diversity and inclusion, or labour rights, will continue to come to the forefront of discussion in 2022. The COVID-19 pandemic exposed systemic social problems across the corporate world, particularly around how companies treat their workforces. In the past these social issues tended to lag behind environmental aspects, as they are harder to define and measure.
We are likely to see an increase in investors seeking to minimise the risk that societal factors pose to long-term investments. As with ESG investing as a whole, showing a preference for companies that pay attention to these social issues can be a way for investors to reflect their values in investing, while also leading to higher and more reliable returns over the long term.
3. Net-zero commitments and the role of offsets
Net-zero has rapidly moved into the mainstream over the past year. According to the Science-based Target Initiative (SBTi) in 2019, net-zero pledges covered just 16% of the global economy; by 2021, nearly 70% had committed to net-zero by 2050.
More than 600 companies worldwide have already committed to reaching science-based net-zero before 2050 through the SBTi’s Business Ambition for 1.5°C campaign. The SBTi will begin validating net-zero targets from January 2022.
Carbon offsetting – the compensation for carbon emissions through projects that are reducing carbon emissions elsewhere - will also continue to come into the forefront in 2022. Although the primary focus for companies should remain on rapid reductions in actual carbon emissions, offsetting is increasingly seen as a key part of the overall net-zero agenda. With the majority of corporate climate targets now stretching up to 30 years in the future, many companies are not waiting for the end point and instead are neutralising residual emissions as they progress through the purchasing of credible offsets.
4. The importance of Scope 3 emissions
As more and more organisations set ambitious reduction targets, it is becoming increasingly essential that they are able to measure and reduce greenhouse gas (GHG) emissions associated with their value chain.
Scope 3 emissions, also known as value chain emissions, are indirect GHG emissions both upstream and downstream of an organisation’s main operations. This usually means all of the emissions a company is responsible for outside of its own operations—from the goods it purchases to the disposal of the products it sells. As we have in 2021, we will see a surge in companies assessing their scope 3 emissions in 2022.
It is often the case that scope 3 emissions are by far the largest proportion of an organisations’ carbon footprint. However, they are also the area over which businesses have the least control and have the most difficulty quantifying. As best practice, knowledge and processes continue to develop, we will see a huge increase in the coverage and accuracy of scope 3 data.
5. Supplier Diversity, Equity & Inclusion (DE&I)
Over the last few years, COVID-19 and the social justice movement have been stark reminders about the importance of diversity, equity and inclusion (DE&I) in all aspects of our society. The business world is no exception. Expectations placed on companies, and investor and consumer interest in DE&I, have notably increased and will continue to do so in 2022.
DE&I commonly falls under the ‘Social’ pillar of ESG. Investors, business partners and consumers are now demanding transparency into organisations’ diversity programmes, metrics and key performance indicators.
Diversity goes beyond an organisation’s operational impact. Diversity within supply chains can make supply chains more resilient and adaptable which is particularly critical now as businesses and industries have been forced to pivot during the pandemic. As more companies look to engage with diverse suppliers, understanding who they are and the key data points for reporting on supplier DE&I has become more important.
In conclusion, what does this all mean for ESG-focused investors and companies? For both groups, requirements to understand, assess and measure the ESG aspects of operations, investments and portfolios will grow, as will the need to expand their data collection, management and reporting functions. As the investor and business sustainability landscape grows in complexity, companies begin to deliver on net zero pledges and ESG transparency improves, 2022 could be the strongest year yet in terms of the acceleration of ESG into the mainstream.