As the world adapted to the impacts of the global pandemic through 2021, the environment, climate and public health – together with the indisputable need for profound transformation – became mainstream issues. Concepts like net zero and green finance, and the COP26 climate conference, triggered early tremors that herald a seismic shift in business, finance and policy.
Environment Analyst predicts that these tremors will amplify through the forthcoming year. Here is our take on the trends that will characterise 2022.
1. Impact-focused finance
While the risk to business from climate and biodiversity disruption remains a primary driver, public and political pressure are forcing businesses to consider the external impacts of their own operations too. Finance is now increasingly following those companies that have strategies for minimising both types of risk. Environment Analyst predicts that this trend will accelerate, with global capital flows charting a noticeable about-turn as their fortunes become increasingly tied to sustainability metrics. We predict also that it will diversify, resulting in new innovations in financial instruments and incentives tied to sustainability.
Some innovations are already emerging, such as credit offered on condition of net zero goals and progress (like the recently announced £850m for the UK’s Marks & Spencers from BNP Paribas) and ESG focused investment funds (such as the newly listed equities fund from UBP that targets positive contributions to biodiversity).
Banks are also taking steps in this direction, with almost 100 globally having signed up to the Net-Zero Banking Alliance, requiring a commitment to reach net zero by 2050 for their lending and investment portfolios. Other signals include Taiwan's largest pension fund preparing to issue what is possibly Asia's first climate change focused stock mandate, worth $2.3bn, and the World Bank releasing a framework designed to support and encourage sovereign sustainability-linked bonds (SLBs). According to the Glasgow Financial Alliance for Net Zero (GFANZ), financial sector commitments to net zero now exceed $130tn.
2. Net zero scramble – and scrutiny
With the imperative of net zero now embedded in both sustainability and public domains, companies are under pressure to adopt increasingly ambitious climate targets. A higher level of scrutiny – including of their actions compared with their promises – will translate into additional pressure: to deliver and evidence their progress. Net zero will effectively become an additional, corporate reputational marker. The technology sector is currently head of the pack in responding to these issues, and we predict it will remain in pole position through 2022.
Other related trends include an enhanced focus on the value chain, without attention to which full value chain (i.e. not just operational) net zero cannot be attained; and growing demand for high quality carbon credits, especially from projects that also deliver social benefits. The price of carbon credits will continue to rise steeply, bringing potentially lucrative opportunities for organisations who can deliver them while overcoming the project-funding "valley of death".
"Those who join the race to net-zero and nature-positive too late, may never catch up," said Johannes van de Ven, executive director of Good Energies and board member of the World Resources Institute, in a social media post.
3. Full alignment of values and purpose
Conversations held by Environment Analyst with business leaders through 2021 revealed a burgeoning awareness that enacting transformational shifts within companies requires more than just operational tweaks: there must also be a transformation in corporate culture, and this must be clear and powerful enough that it also ripples outward to their value chains.
Key starting points for such transformations include defining values appropriate for the era of climate, environment and social awareness, and identifying an organisational purpose that aligns with those values. These processes entail substantial investments of time and effort, and rewards come not only in terms of enhancements to reputation and risk management, but also in terms of employee engagement and satisfaction. This translates into greater ability to recruit and retain talent, both critically important given the green sector’s skills shortages combined with young people’s growing insistence on ethical, meaningful work.
"The companies who set themselves up to be successful in a sustainable world are the ones who are going to be able to attract and secure the right people now. Companies need to align themselves with value-driven employees, and provide them with a flexible work environment where they can flourish. Companies that don’t move swiftly enough will miss the opportunity to have the right team on board," said Laura Hughes, country director UK, at Fugro.
These points have been underscored by BlackRock chair Larry Fink’s annual letter to CEOs for 2022, in which he implores business leaders to use purpose as their "north star".
"Putting your company’s purpose at the foundation of your relationships with your stakeholders is critical to long-term success. Employees need to understand and connect with your purpose; and when they do, they can be your staunchest advocates," he writes.
4. ESG: rise of the G…and the S
ESG, which through 2021 consolidated its position on the board agenda, is now understood to require not just lip-service but a strategy and roadmap. This turns the spotlight on governance, begging questions such as: how should C-suite/leadership teams evolve to ensure they have the capacity to oversee, enable, and support delivery of a company’s ESG strategy? How should they develop the capacity to engender the right culture and mindset (ref. the point above) and redefine the company purpose? How can they attain and deliver "climate competence" throughout the organisation? We predict that the governance aspect of ESG will move from being something that is assumed to something that demands deeper examination and action, and the engagement of expert consultants and business advisers.
The social factor will also continue to rise in prominence as companies confront the impacts of their business not only on their employees and geographical neighbours but also on all involved in their value chains. Signs are that social standards will become enshrined in law in more progressive countries; Germany, for example, introduced national legislation on human rights due diligence in June 2021, with implications for supply chains.
5. Natural capital comes of age
As finance turns to nature-based solutions (NbS) for solving climate adaptation challenges, providing infrastructure solutions or meeting carbon sequestration demands, methods for identifying, valuing and accounting for natural capital will be in growing demand (with the risk that they will proliferate). Initiatives such as the EU’s Mapping and Assessment for Integrated Ecosystem Accounting – which promotes the mainstreaming of natural capital accounting in EU member states and Norway – give an indication of the complexity involved and reflect the current state of development of natural capital accounting at the national scale. (Note that some countries are further ahead than others: The Virgin Islands has recently published its 2019 ecosystem accounts, which its government says provide evidence in support of policy development and decision-making relating to action on the environment, climate change and delivery of the UN SDGs.)
At the project level, growing numbers of disruptive fintech enterprises such as Endangered Wildlife and Sylvera can be expected to move into the sector, with data-based services and offerings designed to help value biodiversity and calculate environmental footprints.
6. Regulatory pressure
The legislative landscape is shifting quickly, with mandatory reporting and disclosure requirements being seen on a number of fronts globally. For example, Canada is bringing in mandatory climate-related financial disclosures, as are the UK, Singapore and New Zealand; the EU is legislating for double materiality reporting in its Corporate Sustainability Reporting Directive (CSRD) (meaning reporting on both the financial and the environmental and social impacts of products and practices); and Japan, the US Securities and Exchange Commission (SEC) and the EU will require climate and environmental impacts to be included in financial disclosures in 2022.
These examples point to a tendency for sustainability to be increasingly state-regulated, with international conferences such as COP26 indicating the possibility of global accords that set out minimum acceptable sustainability criteria. Look out for ongoing developments at the national level through 2022.
Accompanying these legislative shifts will be a flurry of new standards for reporting, particularly focused on nature and biodiversity, including the new biodiversity standard being jointly developed by the European Financial Reporting Advisory Group (EFRAG) and GRI for release later in 2022; and new guidance from the Climate Disclosure Standards Board (CDSB) for disclosure on water stress and the loss of biodiversity. While proliferation and confusion will likely remain problematic for some time, there is hope for better alignment between standards with the establishment of the International Sustainability Standards Board (ISSB), intended to provide a global baseline of high-quality sustainability disclosure standards to meet investors’ information needs. The ISSB will release two reporting protocols on disclosures in the second half of 2022.
Eric Hespenheide, then interim CEO of GRI (replaced at the beginning of 2022 by Eelco van der Enden, formerly of PwC), said: "I’m confident we can drive up quality disclosure without undue reporting burden. We expect the new EU standards to closely align with GRI, as indicated by the European Financial Reporting Advisory Group’s engagement in our update process on biodiversity. The plans by the IFRS to develop investor-focused sustainability disclosures is welcome. Alongside sustainability reporting […] we need both these pillars to be on an equal footing as part of a robust and consolidated corporate reporting system."
7. Legal action
Lawsuits against polluting companies and unresponsive governments have seen increasing success in recent years. In 2021, legal action brought by Friends of the Earth Netherlands, together with 17,000 co-plaintiffs and six other organisations, resulted in a ruling that Shell must reduce its CO2 emissions by 45% within 10 years, setting a significant precedent for similar suits. The American Bar Association has observed that climate litigation is rising, while non-profits like Client Earth, which provide expert support for such actions, are garnering growing support.
The new year has already seen a new climate lawsuit, with papers reportedly filed by Friends of the Earth and Client Earth against the UK government for allegedly failing to include the policies required for its net zero strategy.
We expect to see the legal action trend develop further through 2022, with the law increasingly deployed as a powerful lever for change, also representing an important risk factor for companies or governments not reacting in a responsible way to the climate and environment crises.
Golden threads
Three cross-cutting themes stand out for Environment Analyst as critical aspects of many of the changes underway.
First and foremost is nature, now belatedly recognised as both finite and essential to the stabilisation of a living biosphere. Biodiversity is increasingly reflected within legislation, standards and disclosure frameworks, ESG investing, risk management, natural capital and pathways to net zero. There may come a point when it is protected legally as well – such as by an international law against ecocide – but this is likely some time off.
Second is the theme of ESG analytics and data, both crucial to the delivery of much sustainability reporting, investment and transformation. With data analytics capacity recognised as a critical asset, the bullish rate of acquisition of sustainability-themed tech companies can be expected to continue.
And finally: the value chain. Again, a late realisation (perhaps a reluctant one): that organisations are connected, and a company’s impacts cannot be divorced from those of its suppliers nor those of its end-users. Science-based targets and wider pressures are demanding that the entire value chain be taken into consideration when optimising for ESG. We believe this will lead to challenges for a number of sectors, which will present through the coming year – but also, potentially, some marked breakthroughs. If enough companies select suppliers on the basis of their ESG credentials, the requirement for higher standards could cascade through the business ecosystem, and that could lead to wholesale transformation.
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