If 2020 was the year that saw ESG go mainstream, then 2021 could arguably be classified as the year in which investors and businesses began to earnestly explore the implications of the transition towards sustainability, to consider how to achieve sustainable outcomes and impact, and to communicate their plans and progress to stakeholders.
Looking forward, we believe that the developments of the past few years have set the stage for a significant ramp in ESG initiatives, investments and financing. The biggest ESG roadblocks are fading, massive amounts of capital committed by investors and finance providers are poised for deployment, and consumer, government, company and financial sector sustainability sophistication is growing.
Below, we highlight some of the key stories and themes from the past year that will foster even greater acceleration in ESG.
Sustainability initiatives evolve beyond target setting and low-hanging fruit
While companies and investors continued to announce increasingly ambitious ESG goals this year, the focus of initiatives appeared to shift to areas of greatest impact, and on improving transparency and accountability. For many companies, this took the form of extending their sustainability efforts deeper into the value chain, addressing the environmental and social impacts of their activities from sourcing materials to product use and disposal, and linking executive compensation to ESG performance. On the climate front, attention is shifting to the problem of greening the hardest to decarbonize sectors, and the development of new forms of clean energy.
Meanwhile, investors and financiers ramped stewardship and engagement efforts, setting clearer and more stringent sustainability-focused expectations for companies, voting more actively at AGMs, and demanding increased accountability on ESG issues from senior executives and board directors.
Financing sustainability – ESG-dedicated capital builds, ready for deployment
As corporate and government efforts to tackle global sustainability challenges scale up, capital markets participants appear to be increasingly aware of the role they can play in the transformation, and the massive opportunities that are emerging. The past year has seen a major acceleration in sustainable finance pledges and flows, along with rapid growth in the use of instruments and tools to fund and incentivize sustainability-focused initiatives. Asset owners, financiers and investors have committed to align trillions of dollars of capital with global climate goals, while increasing participation in sustainable finance at the government level promises to further accelerate the flow of capital into ESG-related initiatives.
Disclosure – will transparency shift from barrier to enabler of ESG capital flows?
One of the most significant developments of the past year is the accelerating momentum towards improved assessment, measurement and communication of ESG plans, actions and progress, addressing one of the key barriers to ESG-oriented capital flows and investments. From the launch of the International Sustainability Standards Board to the evolution of mandatory disclosure requirements, initiatives targeting the creation of clear, comparable and materiality-focused sustainability reporting kicked into high gear, setting the stage for the development of globally consistent – and in many cases mandated – sustainability disclosure standards in the coming years.
The setup for ESG in 2022
Looking forward, what does this all mean for ESG-focused investors and companies? For both groups, requirements to understand, assess and measure the ESG aspects of operations, investments and portfolios will grow, as will the need to prepare to expand their compliance and reporting functions for an emerging regime of sustainability disclosure standards. Meanwhile, as investor and business sustainability sophistication grows, sustainable finance commitments and channels increase, governments begin to deliver on net zero pledges, and the major barriers to ESG investment and finance fall, the setup for 2022 to continue the acceleration in ESG-focused capital flows and investment opportunities appears very solid.
To all our readers, thanks for joining the ESG Today community, and all the best for a healthy, happy and prosperous 2022!