ComplianceFinanceESGMarch 08, 2022

ESG: What Investors Hope Will Happen in 2022

Consider this sample of headlines: 

India Unveils Policy Targeting 5 Million Tonnes of Green Hydrogen Production by 2030

Visa to Invest up to $100 Million to Reduce Economic Disparities, Support Minority-Led Banks

Chipotle Ties 2022 Executive Pay to Emissions, Diversity, Sustainable Food Goals

They are all over the Internet. These are from ESG Today, but there are hundreds more like these from all over the world, appearing in numerous publications covering business and sustainability.

Environmental, Social, and Governance (ESG) accountability are hot topics, and everyone is trying to make their claim to fame when it comes to their company’s commitments.

However, there is still ambiguity on how to report, compare, and contrast global company efforts. Investors and companies alike are looking for the Holy Grail of reporting and hope the International Sustainability Standards Board (ISSB) can clear the ambiguity soon.

“There’s also an expectation that the ISSB will issue its first standards by the end of 2022,” writes Grant Harrison in the GreenBiz article newsletter “Whither ESG standards? Fewer abbreviations, bigger budgets and more clarity”.

“The ISSB is one of the most important changes to business reporting since the Depression,” Harrison said in a recent GreenBiz State of Green Business 2022 webcast.

The ISSB, founded to deliver a comprehensive global baseline sustainability-related disclosure standard, hopes to encourage the voluntary uptake of standards globally.

The buzzword around ESG reporting is “harmonization” rather than standardization.

Europe Paving the Way

Whatever you call the trend, companies need to be aware of the following ESG reporting changes, especially in Europe:

  1. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) regime requires asset managers and owners to disclose to investors areas of ESG risks in their fund portfolios. If sustainability isn’t taken into consideration, they have to explain why.
  2. In order to prevent greenwashing, the EU’s Taxonomy Regulation imposes additional mandatory ESG disclosure. The EU defines greenwashing when a company “gives a false impression of their environmental impact or benefits.”

The United States is expected to follow suit. Interestingly, the requirements of the U.S. Securities and Exchange Commission (SEC) have not changed since 2010.

Rob Peters, from Intelligize, examined the history of ESG disclosure requirements from 2010 when the SEC released interpretive guidance with the stated purpose of clarifying “existing disclosure obligations as they apply to climate change,” until December 2021. Peters published his findings in the “Climate Change Disclosure Report: From Omission to Commission.”

In conclusion, he found: “This history will certainly inform widely anticipated new climate disclosure rules, if and when they come. Until then, the words that the SEC wrote in 2010 will remain operative.”

Lack of Trust

Stricter regulations that offer conformity and prevent greenwashing is significant, as investors do not have much faith in current company disclosures. And for good reason.

In his newsletter, Harrison quotes Larry Fink, founder and CEO of BlackRock as saying that the “‘biggest arbitrage in our lifetime’s (may be) the transferring of dirty assets to privately held firms, thereby giving the impression of decarbonizing but actually transferring dirty assets to firms with less disclosure.”

This lack of trust is also found in Edelman’s fifth annual Trust Barometer Special Report: Institutional Investors published in November 2021. The report found that institutional investors subject ESG to the same scrutiny as operational and financial considerations. However, they are immensely skeptical of ESG disclosures and commitments. According to the report, out of the 700 institutional investors surveyed, 86% said companies frequently exaggerate their ESG progress in disclosures, and 72% said they don’t believe companies will meet their ESG commitments. Nearly all – 94% – said they expect a rise in litigation due to companies not delivering on ESG pledges.

A Bandwagon to Join

No matter how you look at it, ESG is increasingly critical.

Rich Mattison, president of S&P Global Sustainable1, said in a recent GreenBiz State of Green Business 2022 webcast, “If I were a company, I would want to report my sustainability numbers. Federal Regulations are coming. So businesses need to get their ducks in the row.” Honest reporting is essential as it is used in investment transactions. Not only are investors scrutinizing the metrics, but so are banks.

For years it was safe for companies to sit out the climate policy politics discussion. But no longer. Companies need to take a stand and get involved in organizations and align their policies with their voice, says GreenBiz Chairman Joel Makower.

CDP founder Paul Dickinson said in a standing-room-only panel discussion at the GreenBiz State of GreenBiz 2022 conference in Arizona in February, “The job of ESG is to represent the next iteration of the relationship between investors, corporations and government.”

So what does it mean for ESG in the coming year?

According to Harrison and the panelists:

  1. More big budget holders in the room, who are more animated about what’s already in motion;
  2. A more accountant-heavy audience, as well as more financial types to complement the sustainability leads; and
  3. Fewer abbreviations and more clarity.
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