The Top 10 ESG Investing Trends To Watch in 2022
No longer a niche investment trend, Environmental, Social, and Governance (ESG) investing has gone mainstream. Here are some of the top ESG investing trends investors see in 2022.
SustainFi Updated May 3rd, 2022
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What is ESG investing?
ESG investing adds environmental, social, and governance factors to the investment process. Instead of just looking at financial metrics like revenues and profits, ESG investors consider factors like carbon emissions, labor relations, and shareholder rights.
Over 100 ESG rating agencies now rate stocks and funds on relevant metrics, providing guidance to investors and fund managers. However, the field continues to be in flux, with new regulations and trends constantly emerging. Here are some predictions for 2022.
1. ESG will become mainstream
No longer a niche investment approach, ESG investing is quickly gathering assets and momentum. According to Morningstar Direct, global ESG fund assets increased to $2.74 trillion in December 2021, up from $1.65 trillion at the end of 2020 and $1.28 trillion at the end of 2019. And Bloomberg Intelligence expects ESG assets to hit $53 trillion in 2025, representing a third of global assets under management.
Although initially ESG investing has been limited to institutions and family offices, retail investors are also becoming increasingly familiar with the concept. CNBC and other media outlets are talking more about ESG, and extreme weather, climate change, and inequality motivate regular investors to make a difference.
The investment choices available to retail investors are also expanding dramatically. Robo-advisors like Acorns, Wealthfront, and Betterment have launched ESG and Impact portfolios. There are over 500 ESG and mutual funds in the U.S. alone. Some of them are even getting into 401(k)s, a tough barrier for sustainable funds to penetrate so far.
🔔 Learn how fast ESG assets under management are growing.
2. Regulations will require companies to disclose more on climate
The Securities and Exchange Commission (SEC) proposed rule changes requiring companies to disclose more on climate-related risks that are material to their businesses. Relevant risks include greenhouse gas emissions.
The goal of the proposed rule is to give investors comparable information. So far, many S&P500 companies have started publishing sustainability reports, but with selective disclosure and limited comparability.
The proposed rule requires companies to disclose how they govern climate risks, how material those risks are, and the potential impact of severe weather events, among other factors.
3. Green bond issuance will continue to grow
The issuance of green bonds – bonds that fund green projects – is booming. According to Climate Bonds Market Intelligence, 2021 issuance hit a record $517 billion, and 2022 may be even higher. Investment banks are clearly incentivized to grow issuance.
Bloomberg estimates that banks earned $3.4 billion in fees from green bond deals in 2021, up from $1.9 billion in 2020. Fees earned from green bonds are now comparable to those earned from financing fossil fuel companies, so investment banks’ drive to issue more green debt is not just about what’s good for the planet.
🔔 Learn how to pick a green bond fund.
4. Shareholder activism will become more common
2021 already saw an increase in shareholder activism, including proposals to set net-zero goals, reduce emissions and disclose employee diversity. Engine No 1’s success in getting three seats on the board of oil giant Exxon was widely covered in the media in 2021. According to Morningstar, the support for ESG petitions increased to 34% during the 2021 proxy season.
What about in 2022? In late 2021, the SEC canceled the 2017 guidance that helped companies limit what shareholder proposals were up for debate. This should ease the way for more environmental and social shareholder proposals in 2022.
According to a recent Conference Board study, corporates should prepare themselves for more environmental and social proposals this year. They should expect a rise in “S” proposals, focusing on diversity and corporate purpose. Additional proposals will likely cover ESG reporting, lobbying, pay gaps, and human rights.
The study expects diversity issues to dominate human capital management proposals. And climate proposals may include a broader range of issues, such as water use, plastic pollution, and deforestation.
5. The use of carbon offsets will grow
Under pressure from climate activists, more companies are committing to net-zero targets. For example, Microsoft plans to be carbon-negative by 2030. But reducing current (and past) energy consumption to zero is not currently possible without carbon offsets.
Carbon offsets are CO2 emissions reductions generated from projects like planting trees. Each carbon offset represents one ton of emissions. Companies buy them to “cancel out” their emissions, resulting in a net-zero impact on the environment. Although carbon offsets have been much criticized, interest in them is only growing, and offset prices per ton are rising.
Around $1 billion went into carbon offsets in 2021, and that number may be even higher in 2022.
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6. ESG professionals will be more in demand
As the new field of ESG investing grows, ESG professionals are in demand like never before. However, both ESG talent and the ways of getting certified are lacking. According to a study by the CFA Institute, 6% of investment jobs on LinkedIn required sustainability skills, but only 1% of investment professionals had them.
The rise of ESG investing is also creating jobs that have not existed before. Funds are hiring in-house heads of ESG. Companies now need ESG disclosure and compliance specialists familiar with the “alphabet soup” of ESG reporting and standards.
7. ESG funds will reassess what is ESG
The war in Ukraine has led to some-searching among ESG investors. For example, ESG funds have traditionally excluded weapons manufacturers, but what if weapons are used for defense, not offense? Weapons manufacturers are now pitching themselves as ESG-friendly businesses.
Nuclear energy, which is also excluded from most large ESG funds, is seeing renewed interest from both investors and environmentalists. Microsoft founder, environmentalist and nuclear investor Bill Gates has long argued in favor of nuclear as a source of clean energy.
Nuclear power is going to be classified as eco-friendly by the European Union, opening the door for inclusion in sustainable funds. According to surveys, fewer ESG funds are now banning nuclear compared to one year ago.
8. Companies will focus more on supply chains
The Covid pandemic and the Ukraine war have stretched global supply chains, highlighting their importance. Under pressure to reduce carbon emissions, companies are evaluating their suppliers and the impact their procurement process has on the environment.
The electric vehicle supply chain is particularly important. There are shortages of key raw materials like lithium and nickel, whose prices spiked earlier in the year. Cobalt, another critical “green metal,” is problematic due to human rights violations in the Democratic Republic of Congo, where two-thirds of cobalt is mined.
Supply chains are a big source of risks for ESG investors. Forced labor and unsafe working environments are a big deal for sectors like apparel. Supply chain disruptions caused by these issues don’t just disrupt product shipments. Worse than that, they can be detrimental to the company’s reputation and cause a consumer backlash.
9. The use of ESG data will grow
As sustainably managed assets grow, more investment firms are including ESG data and metrics in their investment process. Metrics include carbon emissions, board member diversity, energy intensity, and the amount of waste generated. The development of technologies like machine learning and artificial intelligence could help investors access alternative sources of data, like satellite images or Twitter feeds.
The use of ESG scores, which help rate companies versus their peers on a range of metrics, is also growing. Compiled by agencies such as MSCI or Sustainalytics, scores help asset managers understand which risks their investments are most exposed to.
The agencies try to incorporate materiality into their assessment, noting that some issues are more important in certain industries. For instance, water consumption is more important in mining or agriculture than in the software sector.
Unfortunately, rating agencies often disagree, and the correlation among scores from different agencies can be low.
10. ESG accounting will become more standardized
Although ESG funds are attracting billions in assets, ESG standards remain confusing. A survey by FTSE Russell found that 59% of investors worried about the lack of ESG data standards. Sustainability-minded investors want easily comparable information on environmental, social, and governance risks to their investments.
With regular financial reporting, frameworks like GAAP and IFRS are firmly embedded and established. This is not the case with sustainable investing. There are competing ESG frameworks, including the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD), the CDP, and the Sustainable Financial Disclosure Regulation (SFDR) in Europe.
However, there are growing attempts to create common standards, such as the CFA Institute’s Global ESG Disclosure Standards. The IFRS Foundation is also forming the International Sustainability Standards Board (ISSB), which would create a single set of ESG standards. Although global adoption of ESG data standards will take time, 2022 could be the start.
NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.
🔔 Looking to learn more about ESG? Find out how rating agencies calculate ESG scores.