This is our last blog for 2021 as our offices will be closed until January 3. To end the year, PracticalESG Advisory Board member Tamara Close offered us her 2021 Top 10 list of ESG developments and predictions for 2022. I happen to agree with this list as well. I only used excerpts from the complete text of each item to keep our blog short, but the full original document is available on her company’s website. Our thanks to Tamara for wrapping up this year of unprecedented change.
1. ESG ratings will remain uncorrelated and that’s ok! ESG ratings are the resulting opinion born from an analysis based on proprietary methodologies and should be taken as one of many inputs into the process it is being plugged into. We will never have perfect ESG data, and ESG ratings will never be as correlated as credit ratings.
2. Who should be driving the ESG car? Strategy. We now see sustainability not only being managed as a risk mitigation strategy, but also as a value driver essential to both maintaining and increasing competitive differentiation.
3. Hunting down greenwashing. With the potential for SEC ESG audits now looming on the horizon and increasing litigation risks around greenwashing, it couldn’t be a more opportune time for ESG verification.
4. Zero-washing or how to address a portfolio’s carbon intention. There are many ways to get to a net zero portfolio, but not all actually reduce carbon emissions in the real economy. To avoid being accused of being a “zero-washer,” asset managers need to be absolutely clear on the “carbon intention” of their portfolio or fund.
5. ESG throughout the financing lifecycle of a firm (from VC to IPO): an implication. The connection of ESG across the full financing lifecycle [seen in 2021] is a clear indication that the integration of ESG into the business model and strategy of a firm, no matter the stage, will become a core component of any valuation process in 2022.
6. Who’s winning the race to advance ESG maturity? Private markets. Asset managers, or general partners, who invest in the private markets have long been accustomed to conducting in-depth analysis without the benefit of complete data or standardized reporting. When it comes to ESG, this comfort with overcoming imperfect data is leading to what we view as private asset managers overtaking public managers when it comes to ESG integration maturity.
7. Fund metrics: Return, Risk and now ESG. Similar to reporting on sector and industry exposures, we expect to see more funds disclose the top ESG exposures of their funds. Sophisticated ESG managers will have performed internal assessments of these issues and will be able to provide a detailed narrative to their investor clients. Funds can then become more comparable on risk adjusted returns and their exposures to ESG issues.
8. ESG investing just becomes “investing”. As investment leaders in ESG emerge, we predict this development will lead to a streamlining of investing terminology in 2022. The distinctions between “responsible” and “sustainable” investing will fall by the wayside as “investing” and “ESG investing” become synonymous.
9. Circular technology in the 4th Industrial Revolution. A more widespread circular system is the ultimate sustainability goal and, make no mistake, we’ll need unprecedented tri-party cooperation across industries and geographies to be successful. And if we need even more of an incentive: a circular economy might even be an antidote to the global supply chain issues we are all currently experiencing.
10. Asset owners as a catalyst for change. With more asset owners fully integrating ESG into their investment processes and asset allocation decisions, and reallocating capital to sustainable solutions and sophisticated ESG managers, in 2022 we expect them to be a critical driver for sustainability outcomes both for their beneficiaries and for the global economy.
We wish you a safe, healthy and prosperous New Year.
