ESG will be the environmental issue of the year, if not also among the biggest business issues of the year. ESG is everywhere. And yes, this is with appreciation that environmental is only the E in ESG.
This is more than a Magic 8 Ball prediction, although we do regularly consult one of the 1960s era plastic spheres I keep on my desk.
There has been an obvious if not dramatic shift in Western society’s demand for matters ESG.
While the number seems tripe, at the beginning of 2022 more than $17 trillion of U.S. assets under management are dedicated to ESG related strategies, according to the Forum for Sustainable and Responsible Investment, and that dollar amount is expected to grow at a greater velocity in 2022than the 20% last year. But even with the oversized flow of dollars into this category, this is not the key driver of ESG (.. is it likely more accurately the end in and of itself, not the means).
Still with almost no regulation, funds that elect to focus on companies’ ESG practices may have broad discretion in how they apply ESG factors to their investments. Several recent reviews showed environmental factors are weighted dramatically more heavily than social and governance.
We wrote in a recent post about the key driver in the U.S., Brand Reputation is Number One Reason Businesses Engage in ESG. Businesses reported stakeholders are concerned about climate change and social justice and in follow up questioning respondents identify the death of George Floyd and extreme weather becoming more frequent as rising to the top of recent concerns.
But there is little doubt a key catalyst for momentum in this space is the federal government. Congress is expected to act on EGS mandatory disclosures in 2022. The Department of Labor published a proposed rule in November removing barriers to the use of ESG factors, which regulation will be final in 2022. And the SEC has already issued some ESG enabling guidance, but that is anticipated to be only the first of many SEC moves to prioritize ESG in 2022.
We have previously described that 2022 will be the Paleolithic year of ESG law. Instead of the development of stone tools, we will see the development of the emergent and fast paced area of the law trying to catch up with society’s movement of ESG issues.
2022 will also see the effective date of Nasdaq’s SEC approved ESG rule on board diversity.
Stakeholders will be emboldened in 2022 when you consider upcoming annual meetings of public companies as we posted in New SEC Guidance Portends More Stockholder ESG Activism. Contrasted the subject of ESG shareholder resolutions this year with one of the earliest corporate social policy measures 50 years ago, when in 1971, only 1% of General Motors’ shareholders backed a shareholder resolution for the company to withdraw from South Africa over the country’s racist social policies.
Matters of lead in drinking water will be a distant second place environmental issue both in that it is largely a U.S. domestic matter and that the recently passed infrastructure bill contains $2.9 Billion to begin replacing lead pipes across the country (the total cost if which is estimated to approach $60 Billion).
High on the list of environmental issues should be, but will not be, is ventilation and controlling indoor air quality as major influences in the spread of Covid 19 and particularly some of the more highly transmissible variants (not to mention airborne bacteria that cause other diseases). There has been an abject failure on the part of codes officials not to mention a complete void in leadership by the green building industrial complex, all who are more concerned with the progressive issue of energy reduction than ventilation that today translates directly into human health. Unfortunately, with ventilation and controlling indoor air quality not a key environmental issue in 2022, the U.S. may see more pandemic and germ theory related issues into 2023.
Some suggest that all of this makes sense in 2022 when emerging virus variants are “out” and viruses emerging from a melting permafrost are “in.”
Business forecasting to produce strategies based on informed predictions is not for the faint of heart. Some share of the market steadfastly suggest that ESG is a black swan event, while others suggest it is a cygnet at this point, not dissimilar than the dot.com boom. And while we acknowledge ESG is new and emergent, all the hard trends point to ESG dominating as an environmental issue for business beginning in 2022 (even as Covid continues to knock down much of the marketplace).
As we wrote in a recent blog post, You can Participate in our Survey of ESG Activity in the Marketplace. We are accepting responses through January 10 and will blog about the findings shortly thereafter.
And despite that we are entering the third year of a worldwide pandemic and despite inflation in Western economies is at a thirty year high, ESG will be “the” environmental issue of 2022.