While 2021 was a big year for ESG pledges, climate ambitions and keeping the 1.5°C target within reach, 2022 will be the year of action. Russell Smyth outlines the seven ESG themes we will likely see this year.

The global emphasis on environmental, social and governance (ESG) issues increased significantly in 2021 among governments, NGOs, the business sector, and other stakeholders. Given the remarkable momentum achieved last year, mainly stemming from the run-up to, and discussions at COP26, we expect the ESG growth trend to continue apace in 2022.

Here are seven ESG themes we expect to see throughout the year.

1. Moving beyond the pledges

At the close of the year, more than 2,000 companies worldwide had set or committed to setting emission reduction targets in line with the Paris Agreement climate goals through the Science Based Target initiative (SBTi). At COP26, global leaders agreed to the Glasgow Climate Pact, securing a near-global net-zero with over 90% of world GDP now covered by net-zero commitments. These actions have kept the 1.5°C target alive, but 'its pulse is weak', as stated by COP26 president Alok Sharma.

In the year ahead, there will be increased pressure and scrutiny on corporates and countries to deliver on these (often vague) commitments, with regulators and stakeholders seeking transparent and robust evidence of tangible action, quantifiable progress, and interim targets well in advance of 2050. Companies failing to act on their climate and broader ESG goals risk suffocating the already weakening 1.5-degree target as well as experiencing the expanding impact inaction will have on business continuity.

2. You've got to bring your supply chain with you

For companies, a key opportunity to deliver effective change in 2022 sits within their supply chain. Supply chain emissions, or so-called ‘Scope 3’ emissions, are typically the most difficult emissions for companies to track and influence depending on the complexity of their supply chain. However, tackling them can be transformational for corporate climate action. This stems from the fact that supply chain emissions often significantly outweigh a company's direct emissions – on average, supply chain emissions are 11.4 times that of operational emissions.

Decarbonising Scope 3 emissions will require a rethink and possible redesign of current value chains but also provides a significant untapped opportunity in the drive towards a net-zero carbon economy.

3. Quantifying climate risk

The corporate ESG agenda has to date focused on quantifying and reducing the impact companies have on the environment (e.g. carbon emissions, waste production). Now, however, the focus is shifting to the impact of ESG, particularly climate change, on companies.

This will include quantifying, in monetary terms, both physical risk (e.g. flooding risk to factories) and transitional risk (e.g. new regulations, changing consumer sentiment) to a business, driven by the requirement to report against frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD) and investor demands. This will involve moving beyond qualitative assessments of climate and environmental risk to the provision of quantified and financially-based risk assessments to inform investors on the business's risk profile and assist management in business planning and strategy.

4. ESG reporting is coming of age

• EU Taxonomy: A new type of classification system which establishes a list of environmentally sustainable economic activities. The Taxonomy will require financial market participants and companies to disclose their climate change mitigation and adaptation performance in a comparable way by the start of 2022 and other environmental objectives by January 2023.
• The Task Force on Climate-Related Financial Disclosures: Provides a framework for companies to issue climate-related financial information.
• Corporate Sustainability Reporting Directive (CSRD): CSRD will come into effect in December 2022 and will entirely replace the NFRD. The proposed changes made by the CSRD include the extension of reporting requirements to include additional categories of companies and the inclusion of the 'double materiality concept'.
• International Sustainability Standards Board (ISSB): The ISSB is tasked with developing mandatory corporate ESG disclosures.

5. Biodiversity

Biodiversity is fundamental to long-term business survival. Businesses depend on highly-functioning ecosystems for important inputs into their production processes and essential services like air, soil and water quality.

This year will see the global biodiversity conference, COP15, take place in China after two years of delay due to the pandemic. The conference aims to set a Paris Agreement-style global goal for nature, with many organisations calling for a worldwide goal for businesses to be "nature-positive." A nature-positive world requires no net loss of nature from 2020, a net positive state of nature by 2030, and full recovery by 2050.

To mitigate impacts on biodiversity, businesses are asked to avoid and reduce pressures on nature loss, restore and regenerate, so that the extent and integrity of nature can recover, and transform underlying systems to address the drivers of nature loss. It will be easier for companies to solve these issues by setting science-based targets for both nature and climate.  

6. The emergence of the green consumer

According to the Harvard Business Review, consumers want more sustainable products, but when faced with them, they don't consistently buy them and "keep reverting to old, habitual behaviour". The tide seems to be changing in 2022 as consumers become more aware of how individual actions can be part of climate change mitigation. In addition, governments are increasingly pressuring businesses to nudge consumers towards making that sustainable purchase.

7. The role of the circular economy

In 2022, all businesses should investigate measures for enhancing waste management, increasing product durability and quality, and seek to involve recycling/take-back schemes for product end-of-life. These methods, among others, are examples of how companies can begin to implement circular economy principles into their day-to-day processes to become a more sustainable business.

In Europe, the Commission has estimated that adopting circular economy principles could increase EU GDP by 0.5 percent by 2030 and create an additional 700,000 jobs. In the context of Ireland, EPA estimates suggest a 5 percent material reduction in the 100 million tonnes used annually could correspond to an annual €2.3 billion opportunity.

In December 2020, Ireland launched its first Whole of Government Circular Economy Strategy, in which it estimates that annual savings of €2.3 billion could be achieved by boosting Ireland’s circularity.

Russell Smyth Sustainable Futures Partner in KPMG.