It’s December, so you know what that means: ESG Predictions for what’s to come in 2022.
Business executives around the globe are eagerly looking forward to what they believe will be a strong year for business in contrast with the past two. To help companies prepare now for ESG success in 2022, we asked our network of sustainability experts for their best ESG predictions. We’ve honed the list down to our top ten:
1. A broad shift from qualitative to quantitative ESG
Say goodbye to squishy sustainability metrics and hello to a rigorous data-based approach to ESG that can be audited, proven, and transparent. While demand for a shift from qualitative ESG platitudes to quantitative metrics is clear, the exception that might prove the rule is the electric vehicles market.
Rivian, Ford, and GM will all launch electric pickups and SUVs in 2022, giving those who really need (or want) that kind of vehicle an all-electric option. But not all EVs achieve equal efficiency. Consider that there’s more than a two-fold difference between the most and least-efficient EVs – with one of those new SUVs using twice as much electricity per mile as the most efficient EV cars. Will miles per gallon equivalent (MPGe) or kWh/100 mi become a new automotive benchmark, or will the consumer heuristic that “EV = green” hold out another year? Time will tell.
2. ESG becomes the next competitive business advantage
No longer just for Fortune 500 companies mandated to report on their sustainability metrics and ESG performance to investors, our prediction is that ESG will move from a “nice to have” to a “must have” for companies across the board. A recent NAVEX Global survey of 1,250 senior-level executives found that 88 percent of publicly traded companies have ESG initiatives in place already, followed by 79 percent of venture and private equity-backed companies, and 67 percent of privately owned companies highlighting the growing trend. Companies that align with ESG issues can expect to be rewarded with better access to capital, higher valuation, and to benefit reputationally from a sustainability premium.
3. Executives shift from short-term problem-solving to long-term ESG improvement
More executives are considering ESG as essential to long-term business viability and innovation. According to the same NAVEX Global survey, 87 percent of executives agree that a business’ reputation is impacted by its performance on ESG metrics. Given this, our ESG prediction is that companies can no longer ignore environmental (and social and governance) concerns and expect to do business well into the future. Most business leaders are willing to make investments into ESG for longer term gain, and no longer see it as a cost center, with sixty-four percent of executives stating that their company increased its focus on ESG in 2020, and a similar number (63 percent) said their companies were planning to increase spending on ESG in 2021. We predict this trend will continue into 2022.
4. Lofty claims will require the ESG data accounting to back them up
More companies are making headlines daily for their lofty ESG targets which certainly sound impressive. For example, in just the past few weeks,
While these ESG targets are extremely impressive at face value it can be difficult to understand whether these claims are “ambitious enough” without additional context. Are others in the same industries doing more, better, faster?
We’re encouraged to see companies across the globe stepping up their focus on ESG as they cater to a growing class of environmentally and socially conscious consumers and investors, however, companies are wise to also look at peer and competitor ESG targets when setting their own. ESG benchmarking is as much about education as it is about a company improving its own operational performance and companies can learn not only from their industry leaders, but also from smaller, less resourced companies employing extremely creative or innovative approaches.
5. Progress tracking becomes essential for ESG improvement
The adage that “you can’t manage what you don’t measure” has become truer than ever. Setting ESG targets is no longer enough on its own and more companies are coming under fire for issuing targets publicly without a plan and auditable data trail to get there. Companies wanting to track their ESG progress need the right tools to evaluate their baseline, prioritize areas of focus, and define a meaningful and well-resourced plan of action.
Operationalizing ESG to achieve meaningful objectives requires a company to have a detailed picture of its performance on material ESG metrics. Progress against these metrics must be monitored and reported on to give stakeholders comparable data on which to assess the business.
This focus on data and measurability is what sets today’s ESG apart from previous corporate social responsibility or sustainability initiatives; getting access to the correct data and inputting it into systems for ESG tracking and analysis will be a key operational area for companies to address in the new year.
Rather than launch a sustainability or ESG program with no plan in place, more companies have a desire to launch correctly from the start. As companies move quickly to act, many fall victim to the common pitfalls of a haphazard or ill-conceived ESG program, or one assigned to an uncompensated employee working group. ESG requires a company-wide effort to examine every aspect of your operations to understand where improvements can be made. If your team is simply checking the box on ESG they may just be spinning their wheels and missing out on opportunities for real performance.
The most successful companies plan from the start to conduct a materiality and baseline assessment to understand what impact areas matters most to their company, align those findings with stakeholder expectations, uncover what are others in their industry doing, and then determine what ESG targets to set based on where they have the resources to drive impact. Only then does it become time to put a plan into action and consider reporting and ratings once the groundwork for a progress improvement plan has been put into place. An easy place for companies just getting started on their sustainability journey and wanting to define priorities, assess progress, and plan actions to begin is with Good.Lab’s free ESG Calculator.
7. More focus to fall on corporate Governance
Environmental work has been underway for years, and while the ‘S’ for ‘social’ has historically been overlooked, COVID-19 magnified awareness surrounding the social pillar of ESG with the pandemic exacerbating existing societal issues in areas such as healthcare, education, and employee working conditions. In the past two years social initiatives have picked up speed and more companies are keen to deliver products and services that also have a positive impact on society. According to Just Capital, most employers (94 percent) and employees (74 percent) say that their organization has made a commitment to advancing DEI in the workplace.
While there is more work to be done across the ESG spectrum, the latest area of focus to come to the forefront is the ‘G’ for corporate ‘governance’. Despite a lack of recognition, and even understanding surrounding governance, it is nonetheless vitally important to ESG success, securing stakeholder confidence, and for the creation of a sustainable business. This becomes clearer when considering the impacts of various strands of governance, including corporate accountability, transparency, data security and customer privacy, boardroom diversity, and creating and enacting policy.
8. ESG reporting standards will coalesce
ESG and sustainable finance have long been considered the Wild West, however, the launch of the International Sustainability Standards Board (ISSB) at the COP26 climate conference was perhaps the most exciting development in our industry this year. The ISSB will combine the IFRS Foundation with the Climate Disclosure Standards Board (CDSB, a CDP initiative) and the Value Reporting Foundation (created after the merger of SASB and the Integrated Reporting Framework).
The need for standardized reporting is imminent. According to the US Government Accountability Office, ESG reporting requirements for public companies now include over 400 sustainability instruments in 64 countries and according to MIT, correlation amongst top ESG rating peers is 0.61% (0.99% between Moody’s and S&P) due to reporting discrepancies.
The IFRS Foundation Technical Working Group also published a climate and general disclosure requirements document during COP26, suggesting a move toward standardization is truly on the horizon, leaving many companies breathing a sigh of relief as they yearn for consistent measures to report on.
9. Supply chains will come under greater ESG scrutiny
Mastering the supply chain will become an even bigger competitive advantage in the coming year as demand will remain high for the foreseeable future, new COVID-19 variants will continue to impact production and logistics, creating risks around labor responsibility and environmental compliance, regulatory oversight, and customer scrutiny of ESG risks will intensify.
Companies that can expertly address and implement ESG management for supplier performance, ethics and code of conduct, and ESG risks will earn the majority share of supply chain, partner and consumer support because customers looking closely at these issues will switch to the brands that can consistently and transparently deliver despite system shocks.
10. ESG reporting goes mainstream for public and later stage private companies
ESG reporting is still largely voluntary for public companies in the US today, but the UK becoming the first G20 country to make it mandatory for larger businesses to disclose their climate-related risks and opportunities may serve as a precursor of what’s to come in the US. Growing demand for information in this area and new ESG guidelines will make it difficult for companies to exclude ESG data from investor relations materials. And ESG reporting may also become a vital consideration for private companies looking to go public in the next few years.
The past few years have undeniably presented a challenging business climate for most sectors and the importance of ESG has quickly become part of how companies create long-term value for all stakeholders. Companies of all sizes should begin to plan now for a future where ESG is a regular component of doing business. At Good.Lab, we’re excited to support companies on their ESG journey and accelerate from zero to one. To get started on your ESG initiatives, start tracking your progress today with our free ESG Calculator or explore our custom ESG Solutions designed to help mid-market companies drive toward a position of ESG leadership.
Disclaimer: Good.Lab does not provide tax, legal, or accounting advice through this website. Our goal is to provide timely, research-informed material prepared by subject-matter experts and is for informational purposes only. All external references are linked directly in the text to trusted third-party sources.
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