2021 was yet another banner year for environmental, social, and governance (ESG) investing. Almost every day another ESG fund launch or sustainable investing hire was splashed across the wires, to say nothing of the myriad newsletters cropping up at every media outlet, dedicated to ESG news.
Anecdotally, after adding a secondary title as Head of ESG and Sustainability to my LinkedIn this fall I was immediately inundated with networking requests asking to learn more about ESG and PR, sales pitches focused on ESG analytics and sustainable goods, and recruiters seeking to fill newly minted in-house ESG communications roles.
Even celebrities are getting in on the action, with Prince Harry and Meghan Markle becoming “impact partners” this fall at Ethic, a $1.3 billion asset manager focused on the ESG space. In a New York Times DealBook exclusive announcing the news, the Duke and Duchess of Sussex cited a longtime desire for “a place where if your values were aligned like this, you could put your money to that same sort of thing” and noting that ESG investing is a natural extension of “the younger generation voting with their dollars and their pounds…when it comes to brands they select and choose from.”
According to the latest biennial Global Sustainable Investment Review, as of the start of 2020 ESG investments had grown to $35.3 trillion and made up 35.9% of total assets under management—figures that have no doubt shot up by leaps and bounds since then. But despite its growing profile and record inflows, ESG remains a murkily defined, loosely regulated realm of investing.
So, what do 2022 and beyond hold for ESG? A few top predictions:
Governments will increasingly move to standardize ESG regulations and reporting, especially around climate risk. Europe, historically at the forefront of all things ESG, will continue leading the global community in developing and introducing ESG regulations, starting with the January 1, 2022 rollout of the European Commission’s new EU Taxonomy Climate Delegated Act.
Across the pond, just this month the U.S. Department of Labor wrapped a comment period for its latest proposed rules on ESG. The new rules would permit fiduciaries “to consider climate change and other [ESG] factors when they select investments and exercise shareholder rights.” While a group of Republican senators and the American Securities Association are both pushing to have the proposal withdrawn, industry observers expect the rules are likely to be enacted, with the final rule expected in mid-2022.
New disclosure requirements based around the Taskforce on Climate-related Financial Disclosures (TCFD) are being introduced or proposed across the globe in countries ranging from South Africa to Japan to Brazil, as investors and governments alike seek to move towards a global reporting standard for climate risk. The next five years will see these regulations beginning to take effect and more and more countries joining the movement. Astute investors, policymakers, and companies will need to be forward-thinking to avoid being left behind.
As ESG matures, it will become as recognizable to the average retail investor as ETFs. According to an August 2021 Yahoo Finance-Harris Poll survey, only a third of U.S. adults are familiar with ESG. While that might surprise folks in the business world, where it feels like you can’t even go one day without talking about ESG, the reality is that there remains an enormous pool of investors (especially younger millennials and Gen Z) ripe for education on the topic.
In the coming years as regulations come into play, ESG terminology becomes standardized, and media outside of the financial press and trades cover ESG more often, retail investors will increasingly discover and consider ESG investing. The same poll found that 77% of the respondents who were familiar with ESG weigh ESG ratings in their investment decisions, a clear indicator that it has room to grow. This is especially true in millennials and Gen Z-ers, with 95% of the former and 97% of the latter who were familiar with ESG noting that it was important to them when choosing specific investments.
In the medium term, investors may also start seeing ESG options offered in retirement plans more often. While some employers currently do offer ESG funds in their 401k options for employees, many plan sponsors are reticent to include what they see as potentially risky funds, especially when so many employees simply go with the default plan option offered to them.
Barron’s Advisor’s Lewis Braham reports that at Fidelity Investments, for example, which oversees $3.2 trillion in retirement plans, ESG options are available in 19.4% of its plans but only account for $8.7 billion of investments. Braham also noted that “[b]ecause employers choose the default option for employees, plan sponsors believe there is added legal liability if they pick poor ones.” Still, as investors clamor for ESG and regulations grow more defined and widespread, we’re likely to see plan sponsors respond by adding more ESG options. Given the significant role 401(k)s play in most Americans’ retirement plans, this shift will boost ESG inflows even more.
ESG will become one of the top considerations for employers. One need only look at the Great Resignation, the popular subreddit r/antiwork, or headlines about worker strikes to know that change is afoot. Changes in how we work, where we work, and how we value that work are here to stay.
Indeed, the most recent quarterly survey from employment site Joblist found that 22% of all job seekers quit their previous job and 73% of employed workers are actively considering quitting. A separate poll by jobs site Monster found that 86% of workers feel like their career has stalled during the pandemic and 80% do not feel their current employer offers growth opportunities.
Now more than ever, it’s critical for employers to listen to their employees and invest in programs that support their development. Workers are also increasingly asking for companies to demonstrate their commitment to ESG and dedication to a corporate purpose. Boards and management must consider ESG in how they manage, compensate, and support their employees or they’ll find themselves struggling to compete in today’s labor market.
As we head into our third year of a global pandemic, with the world at its most interconnected economically, socially, and culturally, ESG’s significance in shaping our future is clearer than ever. The question we need to consider—will we take advantage of the opportunity before us and build a better method of working, a better framework of business, a better global community? Here’s hoping 2022 moves us towards a ‘yes.’ As Robert Swan, OBE, the esteemed environmentalist and first person to walk to both the North and South Poles said, “The greatest threat to our planet is the belief that someone else will save it.”
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