Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.
If 2022 revealed anything about the state of sustainability in the world of business, it is that the link between profitability and sustainability is becoming clearer to those at the firm level and in governing bodies. This is reflected in substantive increases in sustainability & ESG reporting, the strides made in regulatory policy to streamline both reporting and investment in the clean energy transition, and market forces persisting when it comes to delivering a greater supply of cheaper and more advanced climate and environmentally friendly technology. Successes were made despite 2022 ushering in a tumultuous political landscape fraught with a rise in greenwashing, an antagonizing and highly political anti-ESG movement, a decline in stock market value and environmental concerns being shelved in the face of a looming recession, a decoupling of the global supply chain through resource depletion, inflation, and turbulent international relations, and volatile energy prices. Below, we will discuss the key topics that made an impact in 2022:
Convergence of reporting frameworks
For years investors, stakeholders, and reporting corporations have called for more consolidated, consistent, and transparent standards when it comes to navigating the “alphabet soup” of ESG reporting frameworks out there. While globally consistent reporting standards are still an aspiration, 2022 made significant headway with three ESG framework proposals expected to transform and standardize the ecosystem of ESG reporting in 2023:
- EU regulations and disclosure proposal
- The EU regulations are part of the Corporate Sustainability Reporting Directive and require entities to provide mandatory sustainability disclosures. The scope of the CSRD will include EU subsidiaries of non-EU parent companies, including US companies and other global multinational companies. The directive resulted in the development of the European Sustainability Reporting Standards (ESRS), as proposed by the European Financial Reporting Advisory Group (EFRAG). The ESG disclosure mandates of this regime will be much more comprehensive than that of the SEC of ISSB
- Adoption expected: mid 2023
- International Sustainability Standards Board (ISSB) proposal
- The ISSB and the Global Reporting Initiative (GRI) are working together to drive the consistency and compatibility of investor-focused baseline sustainability information, while also including border stakeholder concerns
- The formation of the ISSB was announced at COP26, the United Nations global summit to address climate change in November 2021
- ISSB will issue sustainability reporting standards with an objective of delivering a global baseline of sustainability disclosures that satisfy capital market needs. Individual jurisdictions will subsequently decide to require or permit application of ISSB standards as a basis for sustainability reporting, similar to the process for adopting IFRS for financial reporting
- Standards expected to be published: early 2023
- U.S. Securities and Exchange Commission (SEC) proposal
- The SEC issued a proposal in March 2022 that would significantly enhance climate-related disclosures in annual filings and registration statements.
- The proposal focuses specifically on how climate risks are identified, assessed, managed, and disclosed; the financial impact of severe weather and other natural events as well as transition activities; and greenhouse gas emissions (GHG)
- A final rule expected: beginning of 2023, at the earliest
U.S. Inflation Reduction Act (IRA)
The inflation reduction act of 2022 marks the single largest commitment of public dollars to address climate change to date. Credit Suisse estimates that over USD 800 billion in potential funding could be generated from this piece of legislation as there is no budget or limit written into the law dictating how much the government can spend. The act includes important provisions in the form of “uncapped” tax credits that include incentives for electric vehicles and zero carbon electricity. Cited numbers on spending totals are based on estimates of how much those tax credits will get used. Money flowing into the green-energy industry will enhance the U.S. competitive advantage in all forms of energy production and by 2029, U.S. solar and wind could be the cheapest in the world. Additionally, IRA funds will continue to flow despite possible recessions, making bets and investments in clean energy and the environment highly attract recession-immune and risk-free business opportunities.
Renewables reaching a turning point
Renewables costs have dropped significantly in the past decade and frequently outcompete fossil fuel generation when it comes to the levelized cost of producing that energy. Even without carbon taxes and penalties, fossil fuels are getting more costly as evidenced by geopolitical conflicts like the Russia-Ukraine war exposing the fragility of carbon & the risk of stranded assets, and investment opportunities in renewables and energy efficiency becoming more appealing overall. The World Energy Outlook predicts that fossil fuel emissions will peak by 2025. In the U.S. solar is now 33% cheaper than natural gas. The University of Oxford in a new study shows that transitioning to 100% renewables would result in USD 12 trillion in energy savings by 2050 versus our current energy system. Additionally, in spite of 2022 seeing large layoffs and downturns in traditional tech firms, climate tech is still seeing a boom in new hires, capital flow, and tech advancements reaching 2.5x pre-pandemic investment levels.
Rise in ESG and sustainability investing & reporting
Sustainability reporting is hitting new highs with the G&A institute reporting that 96% of S&P 500 companies and 81% of Russell 1000 companies now publish ESG reports, SASB being the most used reporting standard. Additionally, a new study from PWC identifies investor expectations of ESG. The study states that eight out of 10 investors plan to increase their allocations to ESG products over the next two years, and ESG-related assets under management (AUM) are expected to continue to surge reaching USD 34 trillion or 21.5% of all assets by 2026. New SEC rules and the US Department of Labor finalizing a rule to explicitly permit retirement plan fiduciaries to consider climate change and other environmental, social and governance factors when selecting investments and exercising shareholder rights demonstrate a reflection of sustainability materiality in mainstream investment decisions.
Research continues to show that the majority of green claims are exaggerated, false, or deceptive, which points to greenwashing on an industrial scale. Additionally, a significant share of companies that are setting net zero or emissions targets don’t want to talk about or publicize them, leading to a new term being coined in 2022: “greenhushing”. Companies are likely keeping quiet out of fear of anti-ESG pushback, increased scrutiny, and accusations of greenwashing.
The rise in greenwashing is followed this year by regulatory scrutiny at scale. Recently, the SEC charged Goldman Sachs’ asset management division for failing to implement and follow policies and procedures for some of its ESG funds The European Securities and Markets Authority (ESMA) proposed naming rules on the use of ESG or sustainability-related terms in the names of investment funds aimed at protecting investors from greenwashing risk.
In November, the world’s most preeminent leaders and policymakers gathered in Sharm el-Sheik, Egypt to take action towards achieving the world’s collective climate goals. This year’s Conference of Parties aimed to provide clarity on a variety of topics such as climate finance, mitigation, emissions targets, industry solutions, methane, plastics, climate adaptation, and resilience.
Countless initiatives were advanced or kicked off at this year’s climate conference, however, many are expressing concern at the lack of action-oriented consensus on fossil fuel emissions mitigation. Commitments needed to hold warming to less than 1.5C degrees were largely absent, in favor of discussions that centered around paying for loss and damages, and adaptation, as well as more niche philanthropic initiatives.
Despite a lack of concrete progress or bold commitments on the part of government entities and global bodies, businesses and corporations were able to demonstrate their key role in addressing climate change at scale during the conference with new technology taking center stage.
To stay competitive and aid in advancing climate progress organizations must consider new business models of sustainability and adoption of new technologies to accelerate and adapt – all while balancing this innovation with risk, regulatory and legal shifts, and market considerations in 2023.