MSCI’s Top 10 ESG Trends to Watch in 2022

Each year, MSCI releases a set of emerging topics companies and investors should have on their radar in the coming year. This year, there is an emphasis on climate change issues, which have become front and center around the world. Below summarizes MSCI’s list of ESG trends you should consider during 2022.

  1. Net Zero Supply Chains

There has been a recent push for corporations to set net zero targets. Almost every firm has energy companies and utilities in their upstream supply chain. If electricity producers convert from fossil fuels to renewable energy, the emissions savings would cascade downstream and help shrink emissions for the rest of the world. Cloud-service providers also have immense potential when it comes to transitioning to net zero.

2. Private Company Emissions

Some critics argue that private companies hold a large portion of carbon-intensive fossil-fuel assets. Private equity funds have raised almost $557 billion in capital in the energy and utilities sectors from 2010 to November 2021, with almost 80% being non-renewables. However, some argue that growth in private equity funds has not been in the most carbon-intensive sectors. If you compare 2010 to 2015 and 2016 to November 2021, the portion of energy-related transactions for private equity cut by more than half, dropping from 19.5% to 8.5%.

3. Rethinking Coal Divestment

Divesting from coal will not get us all the way to a net zero economy. It is becoming clear to investors that both divestment and engagement tools are necessary to meet emissions reduction goals. Moreover, investors should assert a greater voice in climate policy discussions.

4. Financing Climate Adaptation

Regardless of succeeding in limiting global warming to 1.5°C to 2°C above pre-industrial levels, the world will still be subject to extreme weather. As such, funding projects that help us adapt to a changing climate is crucial. These projects can be financed by bonds, issued by governments and supranationals, which would greatly expand the green bond market.

5. Greenwashing

ESG’s credibility has been questioned due to greenwashing. However, this could be solved with an emerging common ESG vocabulary, which would allow for everyone to be on the same page and increase transparency. Using similar terminology will ultimately provide more credible and diverse routes to achieve ESG objectives.

6. Regulation

Companies and investors have been struggling to keep up with the at least 34 regulatory authorities and standard setters spread over 12 different markets beginning formal discussions on ESG in 2021. While some key topics overlap, many issues remain divergent largely because of unique regional priorities. Although, the topic ripe for convergence in reporting requirements is climate-related disclosures as many countries are looking to TCFD for a basis. Ultimately, with increasing regulations worldwide, there will likely be more transparency from ESG reporting.   

7. Putting ESG Ratings in Their Rightful Place

ESG ratings have quickly acquired the reputation that they can answer all the questions the media, public, investors, and companies have about a firm, especially as it relates to ESG and potential risks. There will soon be more clarity as to what ratings can and can’t do through both market and regulatory forces, pushing their primary purpose to serving the investment process and being one piece in the larger ESG puzzle.

8. Biodiversity and the Future of Food

Recent international meetings, such as COP 26, make it clear that our food production and consumption must change. Our food system is responsible for about a third of GHG emissions and is the most environmentally destructive industry. In turn, our food system is threatened by climate change and environmental damage. As such, the food and agriculture industries may be forced to adapt.

9. Bacteria Crisis

Another global health crisis looms on the horizon. It is estimated that by 2050, due to antibiotic resistant bacteria, millions of people each year could perish from diseases that were previously curable. To stave off this crisis, significant investments will be necessary to produce new, more effective antibiotics. Additionally, overuse of antibiotics, particularly in agriculture, will need to be slowed.

10. Just Transition

As investors direct capital towards net zero investments, it has become increasingly clear that, to mitigate the effects of climate change, it is crucial to ensure those that are most at risk are not left behind. Those most likely to bear the brunt of climate change are also those that are least likely to be able to afford mitigation and adaptation strategies. This could cause unemployment and displacement that could further destabilize the world economy.

MSCI predicts that the 10 areas mentioned above will become more prevalent throughout 2022 and beyond. Each trending topic may affect different groups of ESG stakeholders in varying ways. Contact us today and learn how ESG Infinite can help you prepare to address the emerging trends that may impact you the most.