Increased regulation focus, green money and biodiversity will be the key players in environmental, social and governance investment issues in 2022, as a new report by Jefferies outlines what it sees as the key ESG impacts moving forward.
The reports says while decarbonization will continue to accelerate in the United States, Europe and China, it sees international cooperation declining. Additionally, Jefferies says central banks will become more forceful on green money policy and that biodiversity will become the new climate change.
Overall, the report listed 11 categories that will be regulatory strongholds in 2022.
Right off the bat, the report says the US’s Build Back Better Act, which may not pass the Senate until as late as the second quarter of 2022, will not look like the version passed in November by the House. Still, Jefferies says it sees the legislation as the largest public investment on sustainability to date.
Jefferies also sees the Securities and Exchange Commission considering mandatory ESG disclosures in the next year.
The report says it believes the SEC will iron out ESG regulations in 2022 and they will be put into action by 2023. Jefferies believes the regulations will look similar to what the Task Force on Climate-related Financial Disclosures lays out. Jefferies also sees the SEC, which has been called on to help companies improve ESG reporting, supporting SASB and International Sustainability Standards Boards frameworks because many US investors and businesses strongly advocate the initiatives.
As more businesses seek better ESG standards in Europe and the US, the EU’s Corporate Sustainability Reporting Directive (CSRD) will enter negotiations with the European Parliament in early 2022. Jefferies says they will not be simple talks because of the complexity of what is involved in the regulations and the number of companies involved. It also says a delay by the EU to implement Sustainable Finance Disclosure Regulation into 2023 due to complexities regarding the detail of the disclosures will also have an impact.
Jefferies says there should be no additional delays as companies have more than a year to prepare and further doing so could negatively impact ESG capital in Europe.
Along all the disclosure lines, Jefferies expects the IFRS Foundation, which was established by the International Sustainability Standards Board (ISSB) in 2021, to release its first draft of sustainability standards disclosures in 2022. Jefferies says it sees the ISSB becoming the global standard for ESG disclosures and recommends businesses become familiar with the approach.
The Network for Greening the Financial System (NGFS) released an updated version of its climate scenarios for central banks in June 2021, and Jefferies believes actions like this will become a catalyst for green money heading into 2022. Green, social and sustainability and sustainability-linked bonds were expected to reach $1 trillion in 2021, and Jefferies says as the NGFS framework is implemented, green money policy will shift the focus of investors.
Nature loss is also becoming more of a focus on climate issues and in May 2022 governments will layout a 10-year road map to for reversing it. It will include no net nature loss by 2030 and net gain by 2050. Jefferies says this issue could open up a whole new era for ESG investing because while carbon emissions has been a huge focus, not a lot has been done on natural capital or how nature loss impacts net zero goals. Jefferies believes this will start to change in 2022 and investment opportunities will continue to increase over the next several years.
Jefferies broke out India and China specifically, saying that ESG efforts and focuses in both countries will impact global regulations and movements. It says India will fall short of ambitious renewable energy goals over the next year but will make significant progress in the area. As for China, it could become a trend maker in establishing national carbon markets.
The report also says elections in France and the US will have ESG impacts in the coming year.
Finally, Jefferies says the success of COP27, scheduled for November 2022 in Egypt, will depend on the how well of international regulations are implemented and whether or not high-income countries invest the $100 billion climate money toward emerging economies that was first established at COP15. Investing in middle- and low-income countries has been seen as a key piece to making energy and sustainability transitions and Jefferies says investors should continue to look at funding such efforts in 2022.