- Climate is eclipsing governance and social issues at the top of the ESG agenda, reflecting both the existential threat of global temperature rise and the race against time to rein it in.
- ESG investing has become a prevailing part of investing. And that has brought more attention from regulators, as well as investors demanding standards. The year ahead will reflect these trends.
- History suggests that the looming issues of today might become the systemic risks of tomorrow.
In 2022, climate change has come to surpass corporate governance as the most pressing ESG issue commanding investors’ attention, and ESG investing truly has gone mainstream (and is attracting the regulatory attention to prove it). Yet there are new risks emerging for companies, investors and the planet in the coming decade that will test how well we have learned the lessons of the past.
Climate as first among equals
Everyone buys from Amazon, but from whom does Amazon buy? In corporate board rooms the world over, the push to set a net-zero target is eliciting a common refrain: What do we do about our suppliers? As the world’s biggest companies work toward net-zero, downward pressure on greenhouse-gas (GHG) emissions may become as familiar to suppliers as downward pressure on pricing.
Net-zero initiatives of top upstream providers to the big four cloud-services companies
SBTI status: The Science Based Targets Initiative (SBTi) is an organization supported by CDP, the UN Global Compact, WRI and WWF. “Approved” status refers to companies that have had their decarbonization targets reviewed and validated by the SBTi.
MSCI’s Implied Temperature Rise (ITR) model estimates what 2100 temperature rise would occur if the whole economy had the same over/undershoot level of greenhouse-gas (GHG) emissions versus budget as the company analyzed, based on the most recent Scope 1-3 projected emissions.
Self-declared Net-Zero: The company has published a Net-Zero GHG emissions commitment.
Companies in the table are selected as the largest industry constituents of the MSCI ACWI Index by revenues.
Source: MSCI ESG Research LLC, as of Nov. 18, 2021.
Critics argue that privately held companies are becoming an opaque refuge for carbon-intensive fossil-fuel assets. But are those charges true? The jury is out, because the private-equity funds that own these companies aren’t saying much. The demand for increased transparency will only go up.
If the goal is a net-zero portfolio, divesting might seem the path of least resistance, especially when it comes to coal. But it may hardly move the needle on achieving a net-zero economy. To do that, investors may look to expand their toolbox: engage where they can exert leverage, divest where they can’t, plus insert themselves collectively into policy discussions to change the context.
Extreme natural disasters loom even if we succeed in limiting global warming to 1.5°C to 2°C above pre-industrial levels. There will be no escaping the need for projects that help us adapt to a changing climate. As governments and supranationals issue bonds to pay for them, they could drive a large-scale expansion of the market for green bonds.
The mainstreaming of ESG
As ESG’s star has risen, so too have questions about its credibility. Skeptics and idealists alike tout examples of greenwashing or social-responsibility spin. The good news is that we see an emerging common vocabulary that should aid transparency and, more importantly, clarify choice.
Implied temperature rise and carbon intensity of self-described ‘climate’ equity funds
Climate funds defined as mutual funds and ETFs that have “climate” in the product name and include climate-specific considerations in the investment strategy. Uncategorized Climate Funds = 106, Article 8 Climate Funds = 45, Article 9 Climate Funds = 72. Data as of Nov. 11, 2021. MSCI ESG Research LLC
With at least 34 regulatory bodies and standard setters in 12 markets undertaking official consultations on ESG in 2021 alone, it’s no wonder that companies’ and investors’ heads are spinning. We see convergence in some core areas, yet there are signs of further fragmentation, driven by differing regional priorities.
Today, investors, companies, news media and the public all expect ESG ratings to help answer a multitude of questions. Soon, both regulations and market forces could encourage codes of conduct for constructing ESG ratings, making clear what they capture and what they don’t.
Emerging risks and opportunities
The COP26 Sustainable Agriculture Agenda and the targets of the Kunming Conference scheduled for spring 2022 reflect a dire reality: If we don’t drastically change food production and eating habits, climate change and biodiversity loss will change them for us. Either way, the food and agriculture industries are in for a radical reshaping.
Climate change and biodiversity loss threaten staples and luxuries alike
Source: Pollinator extinction; Ritchie, Hannah. “How much of the world’s food production is dependent on pollinators?” Our World in Data, Aug. 2, 2021; "The global assessment report on Biodiversity and Ecosystem Services." IPBES, 2016. Water Scarcity: World Resources Institute Aqueduct Food tool, wri.org. Soil Erosion: “Let’s #StopSoilErosion to ensure a food secure future.” Food and Agriculture Organization of the United Nations, May 15, 2019; Cat, Linh Anh, “Soil Erosion Washes Away $8 Billion Annually.” Forbes.com, May 21, 2019.
Even as we continue to battle COVID-19, the next global health crisis already threatens: By 2050, 10 million people a year could die from previously treatable bacterial infections. To meet this challenge, we need major investment in new antibiotics and a drastic reduction in their quotidian use over the next few years, especially in agriculture.
As the captains of private finance begin to steer global capital toward achieving net-zero, many are realizing that efforts to stem climate risk are unlikely to succeed on the systemic level if we leave behind the most vulnerable populations, communities and countries.
Separating trends from fads
Some ESG trends, such as climate change and the value of human and natural capital, which appeared in the first edition of our decade-old ESG Trends to Watch, have endured. Others have come and gone, and still others, such as tax fairness and data privacy, seemed niche 10 years ago, but are now firmly recognized as material issues being addressed by companies the world over. Time will tell how our 10 trends for 2022 will look 10 years from today.