Mike Scott scopes out the year ahead for sustainable investment in his monthly columns

If 2021 was a momentous year for environmental, social and governance (ESG) issues, in 2022 they will become even more important as governments, companies and investors digest the implications of their net-zero targets and start acting to make them a reality.

The three biggest risks highlighted by the World Economic Forum’s latest Global Risks Report are environmental (climate action failure, extreme weather, and biodiversity loss), and this will be many companies’ focus over the coming months.

“A key takeaway from COP26 was that while it’s essential to have targets and ambition, now we really need to see those translate into more rapid action,” says Paul Simpson, CEO of disclosure group CDP. “This is the case for countries at an NDC (nationally determined contribution) level, but also companies and investors.”

The U.S. Securities and Exchange Commission is due to release its climate disclosure rules early in 2022, while the European Union’s Corporate Sustainability Reporting Directive will work its way through the Brussels political machine over the course of the year, reinforcing the bloc’s green taxonomy in making it easier for investors to know what constitutes a green investment.

Downward pressure on GHG emissions may become as familiar to suppliers as downward pressure on pricing

This is all in addition to the UK government’s announcement at COP26 signalling that it will by 2023 require financial institutions and listed companies to publish net-zero transition plans. “We expect and hope that more nations and regions will follow suit here, as governments, investors and consumers push for more scrutiny over corporate commitments,” Simpson says.

The investors that signed up more than $130 trillion of assets to the Glasgow Financial Alliance for Net Zero (GFANZ) have made themselves accountable for the emissions in their portfolios, so they are increasing pressure on the companies they invest in to disclose and reduce their emissions.

This is likely to manifest itself in a new wave of climate-related shareholder resolutions, putting even more pressure on high-carbon companies. And companies themselves are looking deep into their value chains, whether that be their supply chains or their customers, to identify the key sources of emissions, and to begin cutting them.

Al Gore speaking at a news conference during COP26 in Glasgow last November. (Credit: Phil Noble/Reuters)

“As the world’s biggest companies work to go net zero, downward pressure on greenhouse-gas (GHG) emissions may become as familiar to suppliers as downward pressure on pricing,” says the index provider MSCI.

Businesses will need to take more account of these scope 3 emissions in 2022, particularly those where the majority of emissions lie upstream or downstream of their own operations. A new wave of tools is emerging to help them do this, such as Climate Trace, an Al Gore-backed company that promises to bring “radical transparency” to emissions through the use of satellite and AI technology.

Transparency will also be helped by moves to increase the quality and standardisation of disclosures, most notably the newly formed International Sustainability Standards Board (ISSB), which is set to publish a global climate standard this year, the first of its kind from this newly formed body, with more standards to come.

There’s a lot of new money coming into the market, and that will fund a lot of origination activity in 2022

Two ways that companies are seeking to avoid this new scrutiny are to go private or to sell their fossil fuel assets. But regulators and financiers are starting to turn their attention to private companies, with the U.S. Securities and Exchange Commission (SEC) considering requiring more disclosure from them, and many private equity groups looking for clean assets, not dirty ones.

And while divesting is a good way to clean up a company’s own balance sheet, it does nothing to improve the climate, indeed it may make it far worse. Pressure will likely grow for companies to manage their closure of “brown assets” in a way that helps workers to retrain and get new jobs rather than just sell them to companies with fewer environmental and social qualms. Or maybe we will see the emergence of special purpose vehicles dedicated to the same task.

Like 2021, when green bond issuance surpassed $1 trillion for the first time and EU carbon prices rose almost 150%, 2022 is likely to see no shortage of climate finance. One area that is likely to benefit hugely from this is voluntary carbon markets.

Companies are seeking to sell fossil fuel assets amid increasing mandatory disclosures. (Credit: Yves Herman/Reuters)

“Last year was a tipping point for the sector,” says Mike Korchinsky, CEO of Wildlife Works, a project developer. “We saw the market move from regular supply and demand in the first part of the year to FOMO (fear of missing out). We have been telling people for a long time that demand has been grossly underestimated.

“There is a realisation that this stuff is not easy and new voluntary projects are not going to come onstream quickly.”

While 2022 is unlikely to see another tripling in the price of voluntary carbon credits, as in 2021, the market will still see strong growth, he adds. “There’s a lot of new money coming into the market, and that will fund a lot of origination activity in 2022. The challenge will be to demonstrate that supply can grow to meet demand.”

At the same time, in the face of the pandemic, rising inflation and employees rethinking their career choices post-pandemic, companies will need to focus more on their human capital, in the form of better conditions and wages, as well as improved diversity.

Main picture: Houses engulfed in flames as a wildfire spreads in Colorado amid extreme dry conditions. (Credit: Sean David Van de Riet/via Reuters)
Global risks report  WEF  SEC  EU Corporate Sustainability Reporting Directive  GFANZ  ISSB 

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