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November 27, 2024
ESG Spotlight: 5 Themes To Define the ESG Landscape in 2022
- Samuel Leavitt
- Tech4Fin
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With an eye on all things ESG in 2022, we used our ESG platform to identify five ESG themes that will make an impact in the upcoming year. We outline how dynamics between governments, companies and investors will define how these themes may develop throughout the year.
2021 was set to be a momentous year in ESG. The new administration was friendly to clean infrastructure development. There was a vaccine on the horizon! The end of the pandemic was in sight.
As it turns out, forecasting is a risky business– and unfortunately this past year did not go as many imagined.
Nevertheless, 2021 set the stage for important ESG developments as a whole new set of material issues and opportunities came to the forefront. In case you missed it, we recently used our ESG platform to put out a recap of the top, material ESG topics that we identified in news and earnings in 2021.
Now, 2022 is here, and with it, a vastly changed landscape when it comes to society and the economy in the world around us.
To begin the year, our ESG team looked into our crystal ball, debated its portents, and selected the trends that we think will gain momentum over the next 12 months. This article summarizes those conversations and outlines the top five themes that you should lookout for as we get going into the New Year.
Materiality and Greenwashing
If 2021 was the year of commitments, 2022 needs to be the year of material action. We see that vague language around ESG issues with minimal intent to act no longer suffices for the modern investor. Companies have to be making real meaningful action to prepare themselves for the future. Luckily, we have two features in our ESG platform that can track these trends in real time.
Our Materiality feature helps us separate company intent (Commitments) and planning from the real actionable items the company is undertaking (Investments, Milestones, and Exposures). Together, these categories give us a unique window into company strategy and disclosure on ESG issues.
Commitments are important, but all too often in 2021 we only saw commitments. Commitments with no action leads to investor pressure like we saw in the case of Barclays as it pertains to their coal investments. In 2022 we expect to see commitments as well as more commentary on investments and the strategy they plan to use to meet those commitments. The top performers will also begin to hit milestones: completing projects, purchasing new clean power, achieving diversity targets. Finally, every year the set of exposures that companies discuss shifts. In 2022, we expect an increased focus on carbon.
In order to gauge the companies that might be best positioned to capitalize on the trend towards action, we went into our ESG platform, narrowed the filter set to only investments, and looked at the top companies by Impact Score (Our Impact Score is the Sentiment adjusted for volume of mentions).
ESG Platform: Investments Materiality Scorecard, 2021
Many of the companies receiving top Impact Scores operate in the Oil and Gas sectors. This is because they stand the most to lose in a low carbon future and are shifting resources to develop renewable energy. BP especially was early to make Commitments around low carbon development. We also see leaders in Auto Manufacturing as the race to develop electric vehicles heats up. Overall many of these companies made strides related to carbon transition.
It is important to note that some companies who score well will still have room for improvement and face criticisms that you can also see on our platform. Many O&G companies are especially at risk for Greenwashing, and the vigilant investor will need to monitor these firms through that lens.
This brings us to the second component of our top 2022 theme: Greenwashing.
Greenwashing is almost certain to play a starring role in 2022, especially in the investment space, as more investors seek transparency from funds that are labeled as “green” or “sustainable.” Our Greenwashing feature analyzes company statements and compares them to external coverage to determine who is putting an overly positive spin on their actions. This is often a good reality check when a company seems to be generating a lot of positive content for themselves.
Overall we expect the volume of ESG disclosure by companies and level of detail to increase in 2022. This is why Materiality and Greenwashing is our top theme to follow for 2022. Using these model features will feed into how we view and analyze our other themes this year.
Resource Use and Materials Sourcing
In 2021, Supply Chain was on the tip of everyone’s tongues as movement of goods slowed to a crawl during the pandemic. This was further exacerbated by events like the Suez Canal blockage and factories shutting down from localized COVID outbreaks. Companies had to learn to make do with this new reality and many companies got creative in managing resources and raw materials use.
Environmental issues in the supply chain gained further prominence toward the end of the year including water use, packaging waste, and deforestation; particularly in the wake of the COP26 Glasgow Climate meeting. Materiality statements for Event Types containing those topics on our ESG platform grew by 59.4% in 2021. Resource use issues in 2021 were so prominent that they will undoubtedly feature as a primary ESG theme to lookout for 2022. Below we highlight the top companies from 2021 when it comes to Resource and Biodiversity in our Materiality feature. We can see the companies included cover a wide range of industries and furthermore, is indicative that companies can make an impact in ways that are often overlooked.
ESG Platform: Resource and Biodiversity Materiality Scorecard, 2021
Volvo, for instance, has pledged to be leather free in new automobile interiors and plans to use recycled materials in their manufacturing process. General Mills has been advancing regenerative agriculture this year through grants and partnerships. Brazilian meat producer JBS has recently committed to ending deforestation in its supply chain by 2035. However, as the COP26 agreement has set a 2030 deadline for this goal, consumers are beginning to see these commitments as insufficient, with some retailers questioning whether they should carry products by JBS at all going forward. As JBS is one of the largest meat producers in the world, ending deforestation for cattle ranching would be a major step in fighting climate change. However, the distant deadline and relatively little previous emphasis by the company to address this issue have given many second thoughts. We will use our model to track how companies are making good on these environmental goals in 2022.
For more information, read up on our past spotlights on this theme:
Putting the Human in Human Capital
The pandemic has drastically changed the dynamics of the modern workplace across many industries. From offices to restaurants and factories, all were forced by the pandemic in 2021 to adapt and change to styles that fit the new reality. Human Capital covers a broad range of topics and issues so different industries are going to have different pressure points. With tech and gaming, Diversity, Equity and Inclusion continues to be a troublesome domain. Companies like Ubisoft and Riot Games ended the year on a negative note in this area. Thus far, it appears no material changes have yet emerged from this chaos and so we predict these problems will continue well into 2022. In the manufacturing and shipping industries, strikes and unionization featured heavily in the latter half of 2021. New SEC disclosure requirements taking effect will require companies to be more honest with their Human Capital numbers and could give investors better insight into themes like employee turnover, workplace culture, and other potential red flags for some of the negative events we have seen.
ESG Platform: Human Capital Materiality Scorecard, 2021
Furthermore, relating to our previous predictions for supply chains, efforts are being made to crack down on negative working conditions abroad as shown recently by the U.S. ban on goods produced in Xinjiang,China. President Biden cited slave labor as the reason for this ban and many companies like Nike and H&M spoke out about this earlier in 2021. Many companies will have to determine how best to navigate this perilous path between the two superpowers as the year progresses. Walmart and Sam’s Club recently have faced backlash in China as the two companies removed products from their shelves in an effort to comply with the new mandates. Tesla recently opened a new showroom in Xinjiang since the Biden ban and the company and has faced its own criticism from the US. 2022 is a year where increased emphasis will be placed on human well-being across all industries and is a major ESG focus for us at Amenity going forward.
For more information, read up on our past spotlights on this theme:
Clean Tech Investment Beyond Wind and Solar
Clean Technology is primarily focused on wind and solar energy for carbon transition. However, we also saw other energy-focused technological applications outside of the scope of wind and solar. From low carbon smelting for metals, to hydrogen expansion as a viable utility scale energy; Clean Tech made a splash in 2021 that looks to expand in 2022. Technology, at its core, continues to be the driving force behind the fight against climate change. Increased utilization of existing technologies and the exploration of new technologies will be paramount in 2022.
ESG Platform: Auto Sector, Clean Tech Materiality Scorecard, 2021
From an electrification perspective, every major car company appears to have a plan in place to manufacture EVs. As companies start to play catch-up with Tesla, they have committed massive capital outlays and formed long-term strategies in 2021, making EV’s the focus of their futures. This year starts with alignment between auto manufacturers, consumers, energy majors, and governments on a low carbon future. This gets us to our next major theme as company strategy will match government action.
For more information, read up on our past spotlights on this theme:
External Forces Dictating Company Behavior
As we’ve seen in the case of the Biden ban on products from Xinjiang China, government action is affecting company strategy more and more when it comes to a variety of issues. However governments aren’t the only ones impacting company behavior. Investors too, were busy impacting the market in 2021. These outside actors are putting increasing pressure on companies to change their behavior and strategy on ESG issues.
In the Energy space alone the effects have been quite noticeable. Exxon for example, is bracing itself for a future without oil but not entirely of their own initiative. In May 2021 activist investor Engine One was able to install their own directors on Exxon’s board who are more climate risk minded than their predecessors. Barclays earlier this year, faced pressure from larger investment groups like pension funds to divest from coal assets. Increased access to financial services and more climate conscious investors, especially those beneficiaries of the ongoing generational wealth transfer from baby boomers, will play a role in 2022 as this new generation of investors not only care more about ESG issues, but also have shown that they are willing to act.
We mentioned earlier that the Biden administration banned imports from the Xinjiang region of China after several companies like Nike and H&M spoke out on this issue over the summer. Increased scrutiny of this kind is a feedback loop where companies police an issue and government action confirms the realities of that scrutiny. This, in turn, leads more companies to act on the given issue. A great example is Cyber Risk, where a string of security breaches caused companies and the government to join forces in forming a national plan for cybersecurity. In 2022, we are predicting more collaboration between governments and companies after seeing the interplay between them in 2021 on a variety of issues. We also anticipate that investor pressure on climate change will continue.
2022 Brings Consensus on Carbon Transition
In 2021 we saw many forces at odds: companies vs workers, governments vs companies, and everyone vs COVID. It appears going into 2022 that some of these differences in opinion have been brought to the fore, and there seems to be some consensus (at least when it comes to Carbon Transition) on how to proceed. Resource use will be a driving force, underpinned by our other themes of Human Capital and increased Clean Technology Investment. Dynamics between governments, companies and investors will define how these issues play out across the globe in 2022. So while 2022 may seem much the same to 2021 at face value, there has been much development when it comes to Carbon Transition and that momentum should carry into this year.
We will continue to follow up on these themes as the year progresses and encourage readers to reach out with any comments or questions.
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