Expect 2022 to see greater ESG scrutiny as expectations and standards rise to drive greater transparency and accuracy

This is the final ESG column of the year, so a natural time to reflect on the highs and lows of 2021. The reality of course is that this has been another year like nothing that has ever gone before it, in which business has had to be agile in tackling everything thrown into its path by the virus while trying to stay focussed on long-term transformation amidst the mass disruption of markets.

It has been gruelling. Growth and opportunity have been tempered by unseen risk and a very human crisis.

Looking back at analysis of 2020 and what this year had in store, reflections were about the promise of rapid vaccinations and the way in which industries would aim to get back to a ‘new normal’, even talk of when the pandemic would be over. And after 2019, when the priority of ESG versus the need to get the global economy firing again came into question frequently, the consensus appeared to be that 2020 would see greater priority around sustainable business transformation, particularly with COP26 on the horizon.

This has certainly been a year when ESG has been in the headlines regularly, but both around the swelling volume of investment and the need for greater standards, particularly in reporting on ESG credentials and achievements.

As we now look ahead to what 2022 will bring amidst a rise in protective public measures in many countries, questions over the true impact of the Omicron variant and the prospect of even further uncertainty, at this point it may feel like business faces many more risks than we envisaged a year ago.

The reality may be quite different of course. Companies have had to adapt quickly and embrace these buffeting headwinds in their risk analysis. But looking specifically at ESG and what lies ahead, as scrutiny and expectation rise, and standards drive transparency and accuracy, 2022 will surely be a year marked by investors needing to take better stock of the ever-evolving risks around ESG.

The news from the Norwegian Sovereign Wealth Fund, the world’s largest, this week underlines that, having weeded out nine unnamed firms over ESG investing risk. The fund has already extended the range of its scrutiny to many smaller companies too. But announcing that the nine are now off-limits send a clear signal about its future intentions - and may prompt some journalists to try to unmask who the nine are.

Sovereign wealth funds have become the organisations that do much to set the agenda in ESG investing. This week economists called on the Swiss National Bank to form its own sovereign fund. And in a recent interview in The Economist, the head of the Norwegian fund who “communicates far more often with the public and the media than his predecessors, in an effort to make the workings of the fund more transparent”, is leading an organisation that, in the magazine’s broad assessment, is meeting or exceeding its own performance expectations.

This all adds up to the world’s largest investors, and biggest influencers of investment, increasingly sharpening their pencils on risk. While the business world does its best to see around proverbial corners and work through new pandemic twists, major investors are continuing along the path of setting criteria and taking action when companies represent too great a risk against the parameters they’ve defined.

It will still take time for standards to develop and be bedded in, but we can expect 2022 to be a year in which long-term ESG investment risk, and associated reputation risk, becomes more prominent. Businesses may be still working through the consequences and new opportunities created by the pandemic, but are going to have to do more to demonstrate sustainable transformation and align how they do that with the risk horizons of ever-more expectant investment markets.

The ESG News Review is written by Steve Earl, a Partner at BOLDT.

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