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Embedding ESG and Sustainability: Key Trends in 2022

Environmental, social, and governance (ESG) challenges are demanding a paradigm shift in how organizations are managed. 2022 appears to be another major year in the space, with companies that are sluggish to adapt falling behind.”

Overview: Looking back in 2021

Continued Investing in ESG Funds

Inflows into ESG funds continued to rise in 2021, exceeding the total inflows of $51.1 billion in 2020 at the end of the third quarter in 2021. According to current estimates, there are more than $330 billion in assets under management in ESG funds, with additional ESG funds projected to be created in 2022.

Instead, as predicted, ESG problems gained significance and attention among regulators, employees, consumers, and other stakeholders in 2021. Organizations are progressively incorporating ESG considerations into their overall operations and governance. Some firms have opted to focus on ESG due to investor or board pressure, others to shield themselves from regulators, shareholder, and activist investors, and still others in anticipation of growing government regulation.

In 2021, there were unprecedented levels of ESG investment, published disclosures by prominent organizations, and filings of shareholder proposals. Throughout the year, rulemaking and reporting standards were also key priorities, as regulators increasingly included ESG factors on their agendas. As of this year, sustainable investments were predicted to account for one-third of all assets.

ESG frameworks this year: 2022

Rising action demands will very certainly raise pressure for more accountability, increased regulatory scrutiny, and credible disclosure supported by improved data. The E, S, and G patterns, as seen in the figure below, show overlaps and interactions that will have a direct impact on the possibilities for real progress on ESG concerns in 2022. Moreover, they should not be examined in isolation, but rather in connection to one another.

Source: S&P GLOBAL

Strengthen your ESG abilities: Pressure on business boards and government officials

Corporate boards and government officials will face increasing pressure in 2022 to demonstrate that they are fully prepared to comprehend and supervise ESG concerns ranging from climate change to human rights to societal unrest.

Government and business leaders are under increasing pressure to improve their ESG abilities and incorporate sustainability into their policy and planning efforts. They will include adaptation and resilience measures in their investment plans as the economic effect of climate change grows. In 2021, the United States faced twenty storms, each with losses of more than $1 billion.

Stakeholder expectations are rising

The pandemic's erratic impact has intensified already-existing fears about digital disruption, social inequality, and climate change. Employees, consumers, and citizens are increasingly turning on firms to demonstrate leadership in these areas and develop answers to global issues.

Stakeholders continued to press large investors to pay greater attention to all areas of ESG. Identifying and evaluating substantial ESG factors is central to their investing approach. These ESG ‘screens' are a critical component of ambition to attain net-zero emissions by 2050, as well as deliver aggressive intermediate objectives like reducing carbon intensity by two-thirds this decade.

ESG Impact: M&A and Investment Activity

The switch to cleaner fuel sources is gaining momentum, but it is bringing challenges for oil and gas producers. In many cases, this has resulted in increasing consolidation, with merger and acquisition (M&A) activity accelerating across the sector, particularly among independent U.S. producers.

With natural gas prices increasing by 40% last year and resulting in purchases such as Southwestern Energy's $2.7 billion purchase of Indigo Natural Resources, it would be fascinating to watch if this trend continues, resulting in additional M&A activity in 2022. Even though M&A activity is at all-time highs, economic trends will continue to drive capital demand. Major nations are considering the most extensive infrastructure reconstruction plans in a generation while developing economies are investing in infrastructure to expand their middle classes.

In the short term, coal power plant conversions to cleaner fuel sources (e.g., natural gas) and the industry build-up in renewable capacity and battery storage might be further drivers for M&A activity.

U.S. Municipal Sustainable Debt Issuance: Exceeds $60 Billion in 2022

Total municipal sustainable debt issuance in 2022 may reach at least $60 billion, a $14 billion increase over 2021. Several reports predict $1.5 trillion in global sustainable bond issuance and a 34% increase in municipal sustainable debt to $62 billion in 2022.

Source: S&P Global ratings

Several factors will unite in 2022 to drive this market sector forward:

  • The market segment's strong pace is fuelled in part by a growing emphasis on environmental, social, and governance (ESG) factors.

  • Municipal debtors' constant demand for capital.

  • Interest rates will stay low, even if they rise somewhat to help in the management of inflation. As per the report, at least five interest rate increases in 2022, although the federal funds rate will remain low by historical standards.

  • Municipal issuers in the U.S. desire to broaden their overseas investor base.

The Green Future

Looking ahead, we expect that sustainable debt will continue to gain a greater proportion of the municipal market in 2022 and beyond, with issuance becoming more diverse as more issuers adopt green, social, and sustainability debt labels. External review, how certain subsectors respond and recover from the pandemic, and if issuers use or discover a price advantage for labeled debt are all factors that will contribute to the segment's development and expansion.

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