Five sustainable investing trends for 2022

THE The pandemic may have thrust sustainable investing into the mainstream, but it’s still a work in progress. For investors, a lack of standardization makes comparisons difficult, while measurement and reporting remain heavily focused on the “e” (environment), rather than the “s” (social) or the “g” (governance) . Could this change in 2022? Here are five sustainable investing trends for the year ahead.

No more greenwashing?

It has become uncomfortably clear that for a number of investment groups, their commitment to environmental, social and governance analysis is superficial at best. To date, investors keen to see if fund groups are truly committed to this change have had to really do their homework. This posed a real threat to the entire industry – could investors trust what they were being told?

However, regulators, rating agencies and institutional investors have recognized the problem. Increasingly, a common vocabulary is emerging, alongside appropriate independent notations. This should improve transparency and reduce the time spent on greenwashing across the industry.

Beyond Carbon

Reducing carbon emissions has been the immediate priority of governments, regulators and the corporate sector. This is perhaps understandable, given the urgency of the problem. However, with carbon targets well established and understood, attention is likely to shift to other areas. Biodiversity and methane targets emerged from COP 26, but there is also a growing focus on social issues such as diversity and inclusion, or labor rights. The pandemic has shed light on how companies treat their staff and a greater focus on wellbeing can expose those with poor practices.

A common language?

A recent Morningstar report showed that there were at least 34 regulators and standard setters in 12 markets undertaking formal ESG consultations in 2021 alone, adding “it’s no wonder that corporate heads and investors turns”.1 Although there is still little evidence of this, hopefully common sense will prevail in 2022 and national regulators will start to cooperate. This would make it much easier for companies to comply with these standards, many of which operate across international borders anyway.

The trickle down effect

The more pressure is put on individual companies, the more it creates a virtuous circle. Companies put pressure on other companies in their supply chain, rather than being tainted by the association. Powerful buyers with net zero goals can drive change from above, while suppliers with strong green credentials have a competitive advantage. Thus, good environmental practices should become routine.

Collective mobilization

The easiest way to get rid of a carbon problem in an individual portfolio is to sell the polluting stock and move on. However, there is a growing realization that this simply shifts the problem elsewhere rather than bringing net zero one step closer. As such, many investment groups are increasingly emphasizing engagement with companies to push them to change their behavior. In areas such as board diversity, major asset management groups now routinely vote against large companies that do not have a minimum number of female and minority board members. This should be a powerful catalyst for changing business behavior in the year ahead.