ESG Trends to Watch for 2022

MSCI presents its top 10 of ESG trends for 2022. This year, 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

1. The new ‘Amazon effect’: corporates pushing corporates for net-zero supply chains

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.

The chart below shows how the top upstream suppliers to the big four cloud service companies (Amazon, Microsoft, Alphabet and Alibaba) stack up when it comes to carbon emission abatement. The top bar charts are the companies’ Implied Temperature Rise1; a company has a white check connected to its name if it has declared a net-zero commitment2; and a green check if the company has a decarbonization target (different than a net-zero target) approved by the Science Based Targets Initiative (SBTi)3.

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.
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.

2. Private-company emissions under public scrutiny

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.

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Private-Company Emissions Under Public Scrutiny
Data as of Nov. 18, 2021.Company stated they have no material Scope 1 emissions. 2Categories included are “numerous” but unspecified. See page 17 of “KKR Climate Action Report,” November 2021. For Carlyle, see page 53 of “Impact Review,” June 2021. For TPG, see “ESG Performance Report,” September 2021. Source: MSCI ESG Research LLC

3. The coal conundrum: rethinking divestment

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.

4. No planet B: financing climate adaptation

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 Netherlands leads other countries in its issuance of green bonds whose proceeds are tied to climate adaption projects. An unsurprising fact as the Dutch are famous for their ability to live in harmony with their many in-land rivers. Yet the chart below may soon change, as the UN estimates that the annual amount spent globally on adapting to climate-change needs to be five to 10 times higher than current spend,2 and countries continue to contend with more aggressive weather caused by climate-change.

No Planet B: Financing Climate Adaptation
Source: Bloomberg MSCI Green Bond Index, MSCI ESG Research; Aggregate data as of Nov. 1, 2021. Note that numbers for bonds which have not released their green bond annual reports as of Nov. 1, 2021 are based on approximations.

The mainstreaming of ESG

5. Greenwashing recedes as common ESG language emerges

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.

ESG Trends to Watch for 2022

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
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

6. Regulation at a crossroads: convergence or fragmentation?

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.

Regulation at a Crossroads: Convergence or Fragmentation?
The table shows a representative selection of regulatory initiatives that meet three criteria: (1) directly affecting financing activities and/or investors’ reporting; (2) aimed at improving investors’ decision-making processes; (3) come into effect within the next five years. Only initiatives with sufficient details disclosed are included.1 Taxonomies2 and prudential regulation3 are excluded.

7. Putting ESG ratings in their rightful place

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.

ESG Trends to Watch for 2022

Emerging risks and opportunities

8. Coffee vs. burgers: biodiversity and the future of food

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

Pollinator extinction;
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

9. Bacteria rising: another health crisis looms

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.

ESG Trends to Watch for 2022

10. Just transition: finding the nexus of need and investability

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.

Below chart shows disproportionate amount of assets invested in companies operating in highly developed economies. This is true for public debt and in the private equity and debt space. For our world to facilitate a just transition, developing and frontier markets — and those not even sufficiently developed to qualify as frontier markets — need more and creative conduits if they hope for wider investor financing. And those channels arise when investors start to look further afield for their capital allocations.

Just Transition: Finding the Nexus of Need and Investability
Source: MSCI ESG Research LLC and World Bank as of Nov. 11, 2021

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.

Report can be requested here.

Source: MSCI – ESG Trends to Watch for 2022