ESG Trends

The increased focus on environmental, social and governance (ESG) themes in 2021 will continue to influence both companies and the investment outlook in 2022. Shareholders, employees, regulators and ESG activists are holding companies to account, and this engagement shows no signs of abating. We summarize key ESG trends that investors should follow in 2022.

Many investors will have heard of the Conference of the Parties (COP) 26, the United Nations’ climate summit that was held in Glasgow in November 2021. Fewer investors will be familiar with the COP 15, the two-part UN biodiversity summit, which kicked off in October 2021 and is slated to finish (COVID-19 permitting) in May 2022. The outcome of these two COPs will be to set the environmental agenda for the years to come. While metrics like a carbon footprint for climate change are now widely reported, investors are still struggling to find meaningful metrics by which to compare companies on the more complex subject of biodiversity. As a result, the onus is on companies to demonstrate how their businesses are adapting to this new reality. Food and agriculture companies, which sit at the intersection between climate change and biodiversity loss, are likely to experience the greatest scrutiny.

Yet even in the absence of meaningful government action on the climate front to date, investors should expect an end to business as usual. In 2022, levels of carbon dioxide emissions in the atmosphere are expected to reach a dangerous milestone: a 50% increase compared to pre-industrial levels. At the same time, ecosystems are now losing species at rates not seen since previous mass extinction events, and are currently estimated to be between 100 and 1000 times greater than pre-human levels. On a global scale, these changes pose material risks for companies and investors in terms of disrupted supply chains, lower crop yields and greater food price volatility. Investors should thus seek out companies that are able to manage these risks, as they are likely to outperform in the long term.

Solutions that address the twin crises of climate change and biodiversity loss could lead to a potentially unprecedented investment opportunity. From climate-smart and regenerative agriculture to alternative proteins and reduced food waste, investing in nature-positive solutions could create USD 10 trillion in new business opportunities while delivering up to 37% of greenhouse gas (GHG) emission reductions by 2030, according to a 2020 article on the World Economic Forum website: How investing in nature can help tackle the biodiversity and climate crises.

Turning to the gig economy, which ranges from low-skilled, routine work right through to highly-skilled workers, and also includes those working in creative and digital industries, education (EdTech) and, more recently, healthcare professionals. At the more skilled end of the spectrum, competition is fierce and employers have to pay competitive rates to secure the skills they need for business-critical projects or to fill shifts. Done the right way, the online freelance economy matches talent to labor gaps, provides transparency and brings certainty that skills are fairly rewarded for workers who are in high demand. Women have increasingly turned to the gig workforce for income during the pandemic. This is because they were overrepresented in industries that were hit hard by the crisis including hospitality and services, or they were forced to give up stable jobs to care for children or other dependents. While gig jobs provide flexibility and opportunities for marginalized workers, the wages in lower-skilled work are often low and unstable and there is a lack of employment protection.

Gig platform companies have generally entered highly regulated markets. By engaging in regulatory arbitrage through the misclassification of workers as independent contractors to circumvent employment law, low-skilled gig workers may be paid less than the minimum wage, and costs such as insurance and capital expenses may be borne by the worker. Moreover, these gig workers may lack standard protections, such as paid sick leave, holiday pay and pension/superannuation. Many jurisdictions are introducing regulation to protect gig workers with the aim of building a more balanced relationship between the gig platforms and their workers. Legal and regulatory pressures on the platform business model will likely continue through 2022, with some companies responding better than others to the evolving gig environment.

Investors can stay ahead by taking a proactive stance on robust human rights and improved disclosure on workplace policies and practices, which contribute to creating long-term value and reducing liability, reputational and operational risks, in our view. In addition to emerging areas such as EdTech, investment opportunities span technologies that stand to benefit from an increasingly flexible working environment, with cloud, enterprise SaaS (Software as a Service) and cybersecurity providing exposure to the gig economy. The gig economy ecosystem also includes new mitigation opportunities for investors, such as insurtech products that offer innovative short-term, pay-as-you-go insurance solutions for gig workers. Adjacent technologies including innovative payment networks can increase financial accessibility for the underbanked and pay workers immediately instead of forcing them to wait for weeks for their paycheck, helping to improve gig workers’ standard of living.

While the speed of the recent digital transformation to enable business continuity, remote working and automation is likely to continue in 2022, digital security will be a high priority as many sectors including education, healthcare, commerce, manufacturing and entertainment are all transformed by a digital-first approach.

As the world emerges from the COVID-19 crisis, however, digital experts are in combat with a pandemic of a different kind. Cybercrime is predicted to inflict damages of USD 6 trn globally in 2021 from lost productivity, damage and destruction of personal and financial data and theft of intellectual property. With reputational harm and ransomware attacks becoming more prolific and expensive, damages are forecast to reach USD 10.5 trn4 in 2025. Breaches and recent ransomware attacks in diverse sectors have highlighted the risk of poorly secured infrastructure. Awareness is growing and spending on cyber resiliency will continue into 2022 given the risks that firms must manage in this area.

Although cybersecurity has been typically regarded as a technological issue since it protects systems, networks, software and data, cyber vulnerabilities are considered to be an existential business risk that investors should not ignore and it is managed within ESG as part of the “S” dimension.

Cybersecurity is becoming an increasingly high legislative priority; in the USA, there is now bipartisan commitment for legislation to improve cyber incident reporting and for funding for infrastructure projects. In the European Union, the new Cybersecurity Strategy calls for state-of-the-art cyber defense capabilities to combat cyberattacks across the region.

Leading companies in this area know that cybersecurity is both a business and a technical issue and build cybersecurity into their business products, services and processes. The best-performing companies have already increased their focus on cyber-risk management, skills and infrastructure throughout the organization including supply chains, and others companies will follow. Investors should consider a company’s cybersecurity preparedness as a part of their investment decision, as companies that can manage these risks are more likely to outperform over the long term.