ESG moved further into the mainstream in 2021 and is showing no sign of slowing as we enter the new year. How organisations respond to this agenda and communicate their intentions will be critical. Social’s Account Manager Dominic Brady takes a look at some potential themes to look out for in the world of ESG.
Greater demand for more robust data
With regulators and governments demanding more transparency in the financial markets, and with ongoing efforts to standardise ESG and sustainability reporting, there will be increased pressure among investors and stakeholders for robust ‘environmental’ data and greater focus on defining and measuring the ‘social’.
While environmental metrics are better established there will be a push to improve analysis of social metrics like ‘human capital’ – including workers’ rights, wellbeing and DEI (diversity, equity and inclusion) – social inequality, and community investment. All set against the backdrop of ESG reporting being a moveable feast which will need to evolve with the times. We also expect to see greater alignment between the E and S, amid recognition of the inherent impact of one on the other.
Tracking performance and progress
As ESG reporting progresses, organisations will need more robust systems in place to record hard data on their environmental impact and track their progress against previous years.
For those just starting out on their ESG journey, 2022 will be a crucial year in demonstrating their direction of travel, putting the structure in place and ultimately deciding what ESG means for them and what they want to make of it.
Businesses must show warm words are being turned into action, and that progress is being made in both reporting and real terms or risk losing the trust of stakeholders and investors.
More housing associations and funders signing up to SRS
Since November 2020, the Sustainability Reporting Standard for Social Housing (SRS) has attracted close to 100 adopters from the affordable housing and finance sectors. Its popularity is encouraging and shows the appetite for a standardised ESG reporting method.
The potential for growth is enormous with hundreds more housing associations yet to sign up. Meanwhile, demand for truly affordable housing across the UK remains exceptionally high, making this a natural place for ESG investors to put their money as the sector looks for competitive pricing on ESG finance that will help it retrofit millions of existing homes while investing in new build and communities.
Businesses must show warm words are being turned into action, and that progress is being made in both reporting and real terms or risk losing the trust of stakeholders and investors
More focus on what ESG means for wider stakeholders – including customers
As conversations around ESG continue apace it’s easy to become distracted from what its purpose is – to show how the business is managing environmental and social risk, while demonstrating responsible business practice and delivering a positive impact to the environment and society.
A central ESG stakeholder is the customer, as well as the people within the business.
In 2022, we expect to see companies and organisations widen the focus to other vital stakeholders – such as customers – to both help shape their ESG approach and show what the real-world impact of their ESG efforts are, outside of the metrics and targets.
Monitoring and measuring ESG down the supply chain
Supply chains are critical to any business’ ESG risk, commitments and performance. Developing an ESG framework internally is a massive undertaking – but it’s only part of the process. According to Carbon Trust, ‘Scope 3 emissions’ – emissions created by an organisation’s supply chain – represent between 65% to 90% of its total emissions.
So organisations must consider whether its supply chain undermines its overall goal. We expect to see a greater scrutiny of supply chains in 2022, especially in the built environment sector.
Transitioning from responsible business/CSR to sustainability and ESG
Businesses across the built environment have for a long time been communicating their own Corporate Social Responsibility (CSR) and responsible business credentials. But whether it’s through their investors, shareholders or customer, ESG will be finding its way into the boardroom.
With more and more ESG-related frameworks being created in the last few years, businesses may look to merge and evolve their CSR efforts into an ESG framework which is both measurable and comparable to competitors. This will undoubtedly be a challenge for some, where there is work to do in particular around the S and G.
Regulatory and government action and clamping down on greenwashing
At COP26, the International Financial Reporting Standards (IFRS) Foundation agreed a number of measures to promote better disclosures by financial markets around climate and sustainability issues, which will be developed by the International Sustainability Standards Board (ISSB).
In the UK, the Financial Conduct Authority (FCA) has declared that issuers of listed shares must state whether they meet the recommendations of the Taskforce on Climate-related Financial Disclosure (TCFD) – a key international sustainability reporting framework being adapted and adopted in the UK.
FCA-regulated asset managers also have to disclose how they take climate-related risks and opportunities into account in managing investments.
These measures are part of the UK Government’s coordinated work to introduce TCFD-aligned disclosures across the economy by 2025, as part of the UK’s wider net zero commitment.
From 6 April 2022, UK becomes the first G20 country to legislate for TCFD-aligned requirements, meaning over 1,300 of the largest UK-registered companies and financial institutions will have to disclose climate-related financial information on a mandatory basis.
Aviva, along with other key investors in housing, real estate and infrastructure, and companies like Tesco and Unilever are already providing TCFD-aligned disclosures.
ESG-specific business hires
Credit Suisse, AllianzGI and KPMG are just some of the large financial institutions that made high profile ESG-related hires last year as they look to strengthen expertise.
In 2022 we expect to see smaller firms following this trend and installing their own ESG experts and bolstering the sustainability function to help drive the agenda.
In some cases the shift to ESG will be more than just hiring a handful of experts. For instance, last year accounting giant PwC said it would hire 100,000 more individuals to help with climate and diversity reporting.
Continued growth in ESG investment
The last few years have seen cash flooding into ESG funds, and in 2020, ESG funds outperformed fossil fuel-led funds. However, in 2021 that trend was reversed but at the same time in the US more ESG funds than ever launched in Q3 of 2021.
Competing with well-established investment practices is a tall order and ESG will investing may take some time to achieve a recurring dominance over traditional funds. And of course, there remains fierce debate around what qualifies – or is being lumped in with – ‘sustainable’.
On a sector level, we expect to see more issuers and borrowers go further with sustainable finance, including holding themselves to account with more robust KPIs.
The appetite for more sustainable investments will no doubt continue in 2022.
In short, this will be a central feature for organisations seeking finance, communicating their priorities and objectives and operating across housing, property and infrastructure in one way or another.
Please do get in touch with the Social Invest team to discuss any of the above or how we can help you plan, execute and communicate your ESG story.