Looking back on 2021, it would be fair to say that all ‘8 ESG trends for 2021’ that we identified did indeed play out over the course of the year, although some to a greater degree than others.

Without a doubt, 2021 was another challenging year, with the Covid pandemic continuing to impact almost every aspect of our daily lives and financial markets. It was also a year during which incorporating ESG factors across capital markets and businesses continued apace. This was particularly relevant for those based in Europe, with regulations such as the Sustainable Finance Disclosure Regulation (SFDR) coming into force and resulting in some very meaningful shifts.

We continued to witness some of the emerging physical impacts of a changing climate (unfortunately seeing emissions rise back up to pre-Covid levels) and started to see explicit signalling on the systematic risks posed by the loss of natural ecosystems. On the social side, management of human capital and wellbeing, as well as tackling social inequalities, were prevalent themes throughout 2021, as society continued to adjust to new ways of working.

ESG trends to watch in 2022

Looking into 2022, we have identified seven key themes, which fall into two broad categories: specific issues and topics, and those which relate to enabling frameworks and practices. We believe there will be a particular focus on financial products, companies and other issuing entities during 2022, as well as providers of ESG and insights. While such developments will have a global reach, we foresee continued acceleration in European jurisdictions, and potentially the start of meaningful shifts in emerging (especially Asian) markets.

Specific issues & topics

Climate change: While there will be heightened scrutiny of companies, investors and governments on setting credible targets and evidencing meaningful progress in the ‘race to net-zero’, 2022 should also see increased attention on the ‘race to resilience’. This is the recognition of the need to adapt to the changing climate. Ensuring a just transition is another aspect of safeguarding workforce and community resilience to ensure equitable distribution of the costs and benefits of climate action. All eyes will be on governments during November in expectation of stronger emissions pledges as they meet at COP27 in Egypt.

Natural capital & biodiversity: Nature-based solutions not only help tackle climate change, they can also afford other environmental and social benefits to society and the planet. Expect to see increased attention on terrestrial and marine ecosystems, as well as a greater emphasis on a more circular approach to production and consumption. Another important COP conference will occur in April/May (Part II of COP15), where the goal will be for governments to commit to ‘30x30’ – protect 30% of their lands and oceans by 2030.

Human capital: The gradual trend towards a more inclusive and adaptive economic model will be maintained in 2022, with the pandemic enabling more creative thinking on how companies access and retain talent, as well as how they keep employees engaged. The emergence of new Covid variants during 2021 showed society needs to learn to live with zoonotic threats, while highlighting that the world is not safe until everyone is safe. Labour and human rights more generally will remain relevant and receive further attention over the year. Interestingly we may also see more discussion regarding the link between human rights and the environment, which in turn could pave the way for global recognition of the right to a healthy environment. This would add greater credence to efforts to promote land and resource governance, the protection of indigenous peoples and those engaged in environmental protection activities.

Governance: 2022 will see increased demand for ESG to be integrated into incentive plans and remuneration practices, to drive greater accountability and delivering of objectives. Expect to see more investors signal their views via proxy voting activities, demanding reporting and target setting.

Enabling frameworks & practices

Regulations & litigation: European sustainable finance regulations will further make their mark on financial market participants and issuers in 2022. Alongside the ongoing rollout of the SFDR regulation, the green taxonomy and MiFID sustainability preferences will be added to the mix. Furthermore, work on the social taxonomy and focus on human rights will also progress during the year. Europe is not going to be alone in its efforts, as the UK and other jurisdictions look to provide their take on how to define ‘avoiding harm’ and ‘doing good’ in terms of economic activities and entity-level conduct. The focus on transparency attempts to stamp out ‘greenwashing’ by fund providers and issuers where they are seen not to be delivering on their ESG claims. Aside from reputational risks, this also brings increased potential litigation risks, some of which may start to emerge over the year. With increasing emphasis being placed on ESG data and ratings as the basis for firms evidencing their ESG credentials, the quality, reliability and comparability of such metrics means providers will also come under greater scrutiny.

Disclosure & reporting: The drive for increased transparency will persist this year, with reporting providing the lens through which organisations can be held accountable for their efforts to help the world meet the 17 UN Sustainable Development Goals. The scope of what data is required will span those that capture risk exposure, policies and process, as well as performance-related data to demonstrate the resulting impact and outcomes. Specific topics beyond climate change where we will begin to see more data include nature and human rights risks. While best-practice ESG reporting standards exist, there is not necessarily alignment amongst them. In 2021, we saw several different ESG reporting initiatives come together to work towards developing global ESG reporting standards. We expect to see more debate and discussion around what scope of materiality is useful – such as whether we should assess double materiality (i.e., financially material topics that influence the enterprise value of an issuer (‘impact inwards’), as well as the issuer’s impact on the economy, environment and people (‘impact outwards’).

Stewardship, collaborations & partnerships: While avoidance and divestment may have a place as part of a considered and targeted approach, it is not desirable or practical to divest from the whole economy. As such, active stewardship will remain at the forefront for most investors. In particular, collaborations and partnerships to coordinate and align stakeholders with shared objectives will be key when it comes to tackling systematic ESG risks.

Without a doubt, the journey ahead will be bumpy and not without its pain points. The issues are becoming increasingly complex and nuanced. Clashes of cultural biases combined with political and economic agendas are not a good recipe for harmonisation and standardisation.

Furthermore, despite good intentions, some of the approaches reveal a lack of understanding of how investment works, the different asset class dynamics, as well as what ESG investing is and what it is not. Ultimately, while there is much the finance community can – and should – do to scale-up and speed-up the sustainability transition, there are also limits. Our success is incumbent on the actions of other key players like governments, policymakers and the private sector.

Nevertheless, the opportunities and prizes are there for those investors taking a robust and considered approach, who integrate ESG considerations within their investment practices and engage with others to develop solutions. It is certainly an interesting time to be in the field of ESG investing.

Incorporating ESG factors within the investment process

Promoting sustainable land management

Ensuring sustainable land use is critical to effectively address a range of ESG issues: climate change, nature and biodiversity loss, as well as human rights abuses. During the second half of 2021, we engaged in a range of activities, which focused on different aspects of land use to promote more responsible practices, including the following: Sustainable agriculture – calling on governments to explicitly address agriculture-related climate exposure in their climate commitments:

• A public investor statement directed at governments on sustainable agriculture and climate change was published towards the end of June, ahead of the July G20 Venice climate conference. The statement was coordinated by the FAIRR initiative, a collaborative investor network that works with investors to address ESG risks linked to intensive agricultural practices and to develop tools to help manage these. BlueBay has been a member of FAIRR since July 2020 and was a signatory to the statement, which was supported by over 30 investors with a total of USD5 trillion in assets under management. The statement urged G20 leaders to set clear targets for reducing agricultural emissions as part of their nationally determined contributions (NDCs) to meet the Paris Agreement and to do so in the lead up to the United Nations (UN) climate change conference (COP26) in November this year.
• BlueBay participated in the statement as we recognise the importance of addressing emissions from the agricultural sector, given its contribution to climate change, which accounts for a third of all global emissions. Thus, achieving net-zero will not be possible without tackling emissions from agriculture. According to FAIRR research, there are no updated NDCs from G20 nations with clear national emissions-reduction targets for the agricultural sector.

Addressing commodity-driven deforestation

• We joined a newly launched initiative convened by the Principles for Responsible Investment, the Sustainable Commodities Practitioners’ Group, which will be a forum for building investors’ awareness and sharing current practices in responding to deforestation linked to the soft-commodities value chain. The launch of the initiative recognises the increasing focus on the role of land use in climate change, its impact on nature and biodiversity, as well as the negative human rights issues that may arise.
• Investors can be exposed to deforestation risks through financing activities, either by investing in issuers directly connected to deforestation risks through the production or processing of soft commodities – like cattle, soy, palm, timber, pulp & paper – or extractive industries in forest ecosystems. They can also have indirect exposure through holdings in companies that procure these products or provide financing to them. Our rationale for joining the group was to build our knowledge of such risks so we can better incorporate them into our analysis of companies active in the soft-commodities space, such as food producers, in both developed and emerging markets. Such efforts complement our efforts on managing deforestation risk through sovereign engagement, which we currently do via our co-chair of the Investors Policy Dialogue on Deforestation (IPDD), which focuses on Brazil and Indonesia. We have been participating in workshops organised between investor members of this forum to advance awareness, knowledge and understanding of deforestation risks, and share insights on potential solutions.