ESG trends for publicly listed companies in 2022

ESG trends for publicly listed companies in 2022 

Today’s investors understand ESG investing benefits and expect ESG reporting. But what are the emerging trends in a sustainable investment they should watch in 2022?

Sustainability disclosures are slowly but surely becoming mandatory worldwide and part of the comprehensive integrative reporting. Companies of all sizes face higher scrutiny from investors, who feel responsible for ESG’s practices at the business they invest in.

Regulation is also tightening up, as countries around the globe require mandatory climate reporting post COP26. The Financial Conduct Authority (FCA)  tells companies to ‘comply or explain’ on climate disclosures in the UK. FCA published a set of final rules requiring investment managers, pension funds, life insurers, and publicly listed companies to begin providing Taskforce on Climate-related Financial Disclosures (TCFD), with implementation as soon as January 1st, 2022 for large companies. In support of its new mandatory policies, UK’s financial authority stated that “Better corporate disclosures will help inform market pricing and support business, risk, and capital allocation decisions.”  Singapore Exchange announced mandatory climate and diversity disclosures. In Canada, Prime Minister Justin Trudeau has directed a move towards compulsory climate-related financial disclosures, along with several other initiatives to enable the country to achieve its goal to transition to net-zero by 2050. Those are just a few examples of changes in the current scenario that issuers may face shortly.

The expectation for 2022 is that good ESG disclosure practices will also be adopted by small & micro caps, as investors require sustainability in their investment decision. Even regulators include smaller companies for the following years. For example, European Union will have entire ESG reporting mandatory for 50,000 public and private companies for 2023 (includes microcap and up). First ESG reporting (Board diversity) will be compulsory for all NASDAQ listed companies starting 2022. And besides the obligation, it is now best practice to include at least a couple of slides with ESG data in a standard and easy-to-consume format into the investor deck to appeal to new and prospective investors, not only those with ESG mandates.

And finally, companies realize that it is their interest to invest in ESG-driven analysis, as it helps mitigate risk. As per BofA Quantitative Research as of June 2020, 90% of bankruptcies in the S&P 500 between 2005 and 2015 could have been avoided by screening companies with low ESG scores five years prior. Rating agencies give a higher rating to companies with ESG reports, and share price performance tends to be less volatile and provides above-market returns as well. A McKinsey study of 2,000+ cases showed a 65% positive correlation between above-average performance and ESG implementation. ESG also helps avoid accidental greenwashing and misleading communication. Lastly, consumers tend to buy more from companies aligned with their interests and values.

Amanda Munhoz

Partner, MZ

amanda.munhoz@mzgroup.com