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5 ESG themes for next year


Michael Jantzi is Managing Director of Morningstar Sustainalytics. In this article, adapted from his year-end report, he takes a look at the main ESG trends for 2022

We will now see a continued proliferation of climate-related social issues, such as just transition. the Just transition Declaration, signed by more than 30 countries at COP 26, reflects the guidelines of the International Labor Organization and commits them to finding strategies that support communities throughout the transition to a more sustainable economy. You’ll see more efforts, such as the EU’s € 17.5 billion Just Transition Fund, as well as investor initiatives like the World Benchmarking Alliance, which will assess how well 180 companies are managing the process.

The climate crisis also encompasses a range of other issues, including deforestation, biodiversity, pollution and human rights. Ultimately, it’s about the health and resilience of the planet, which underpins the health and well-being of those who inhabit it.

Humans are part of nature and not separate from it. While climate change and weather events will dominate the coverage, the discussions will be much broader. For example, there is evidence that air pollution worsens the severity of Covid-19. In October, the medical journal The Lancet, predicted that climate change would be the defining story of human health. All of these discussions will gain momentum.

Theme 2: Net zero stays

However, the Net-zero transition is not just about reducing carbon emissions; it is a transformation of the business model similar to the industrial revolution. There will be winners, survivors and victims. If you’re a board member, in the C-suite, or allocate capital as an investor, you’re trying to figure out what you need to do to be in the winner’s circle, or whatever. the least to avoid being a victim.

The investment community, a mainstay of capital markets, must absolutely focus on achieving meaningful results from their investments. I read a humorous article that poked fun at the net-zero movement. It was about an Australian who had set himself the ambitious goal of quitting drinking by 2050, when he turns 101. He didn’t see that he had to stop drinking in the short or medium term. It won’t work here. We need to make significant progress now.

Theme 3: Divestment And Commitment

One of the most critical questions of our time is how to decarbonize investment portfolios. Should we opt out of high carbon emitters or engage with them?

Decisions to divest are very different from the past. Take the example of the Dutch pension fund ABP, which announced in October that it would divest itself from fossil fuel producers, citing “insufficient opportunity for us as a shareholder to push for the necessary and significant acceleration of energy transition in these companies ”. that assets simply end up in the hands of people who care less about sustainability.

State-owned enterprises, for their part, will surely need political will to change. But even private equity and venture capital are paying more and more attention to sustainability issues. Increasingly, owners of capital will demand that their private assets also be engaged in ESG.

Regarding engagement, the tools must be varied and effective. Instead of writing a simple letter, those who engage with companies need to fundamentally challenge them about their underlying business models and call for significant changes, which takes commitment and resources. Engine No. 1, the activist who elected three candidates to Exxon’s board of directors this year, has a very different model of engagement.

Theme 4: ESG will become much more normal

As more investors in public and private assets insist on greater sustainability, a dire need for consistent and shared disclosure and reporting standards has arisen. Imagine a world without generally accepted accounting principles. It would be chaos. That’s basically where we are now.

Today, the infrastructure for sustainable finance is being put in place. Recently, the IFRS Foundation announced the formation of the International Sustainability Standards Board, or ISSB, which merges two major standards bodies. Meanwhile, efforts by Morningstar and others to clarify the terms used for sustainable investing may also help new investors who are concerned about greenwashing and other potential issues.

In 2022, as the influence of sustainability considerations on long-standing financial reporting, oversight, risk, and regulatory frameworks grows, I expect our habit of talking about investing. sustainable and responsible, ESG and sustainable finance will start to disappear by then. side of the road.

More and more, we will simply refer to the work we do as investment or funding – a choice prefix will no longer be necessary as sustainability will become the norm.

Theme five: Critical mass

As Morningstar CEO Kunal Kapoor noted, the number of ESG ETFs has more than six-folded, even as active ESG fund assets continue to grow. This, along with record asset flows into sustainable funds, may signal the interest of retail investors who are traditionally the last to party – and whose arrival, to cynical investors, heralds the peak of the market. .

This might be true if sustainable investing were just a fad, but investors are embracing ESG as part of the transition to a net zero world. Individuals in North America are a powerful client base for large institutional investors. In fact, increased growth could occur when individual investors start investing in sustainable funds as part of their retirement plans.

I would say retail investors have double expectations: They care about a secure retirement, financial goals, and risk, but they also care about whether air pollution is causing asthma to their children. or if the increased incidence of forest fires means home insurers are reducing their coverage. .

How ironic it can be that the latest folks to join this party can be a critical catalyst in moving the conversation forward towards the impact of portfolios in addressing these issues. In doing so, they could be the force that creates change.

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