ESG in 2022 ESG in 2022 ESG in 2022

2021 significantly increased emphasis on Environmental, Social and Governance (ESG) topics by governments, NGOs, business sector and various other important stakeholders at a global scale. Given the remarkable momentum achieved last year, particularly stemming from the run up to and discussions at COP26, we expect the ESG growth trend to continue apace through 2022, writes KPMG’s Sustainable Futures team.

KPMG have identified 7 key ESG themes for Irish corporates in the year ahead:

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.

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 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.  

Key to demonstrating this action will be the production of reliable carbon and ESG data that will need to be managed, analysed, and assured. Organisations will need to adapt and update their systems to collect and capture the relevant data for disclosure. Ensuring creditability of this data will be a key requirement of this process, avoiding the increasing risk of greenwashing accusations and meeting the demands of growing regulations such as EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD).

The importance of independent verification and assurance of data to provide a high level of confidence to all stakeholders will heighten in 2022 and ensure organisations are taking the required action to meet their targets. Companies failing to act on their climate and wider ESG goals risk suffocating the already weakening 1.5-degree target as well as experiencing the expanding impact inaction will have on business continuity.

For companies, a key opportunity to deliver effective change in 2022 sits within their supply chain. Supply chain or so-called Scope 3 emissions are typically the most difficult emissions to track and influence for companies 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.

The supply chain opportunity shines a light on insetting activities – which in contrast to offsetting focus on interventions within the supply chain to drive sustainability and reduce emissions. To support companies in their endeavours to implement value chain interventions, Gold Standard and associated partners have launched the Value Change programme that features guidance and tools for corporates to reduce value chain emissions and to credibly report outcomes in line with accounting frameworks such as the GHG Protocol and Science Based Targets.

While the focus to date for companies has been mainly on decarbonising direct emissions (Scope 1) and purchased electricity, steam, heat and cooling (Scope 2), combatting Scope 3 emissions will be crucial to get us on track to achieve the Paris Agreement goal. Decarbonising Scope 3 emissions requires 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.

While the corporate ESG agenda to date has focused on quantifying and reducing the impact companies have on the environment (e.g. carbon emissions, waste production), a lens that will be increasingly applied in 2022 will be the impact ESG, and in particular climate change, will have 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) on a business, driven by regulations such as 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 risk profile of the business and to assist management in business planning and strategy.

The ESG disclosure and reporting rhetoric to date been dominated by the challenges posed by the proliferation of competing metrics and subsequently the lack of consistency in measurement and disclosure. In 2022, however, a tipping point has been reached and the next phase of ESG reporting is unfolding rapidly.

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 (TCFD): provides a framework for companies to issue climate-related financial information. Since 2020 over 1,000 additional organisations have pledged support for the TCFD recommendations with the Task Force having over 2,600 supporters globally as of October 2021.

CSRD: set to come into effect December 2022 and entirely replace the NFRD. The proposed changes made by the CSRD are profound and will strengthen the nature and extent of sustainability reporting in the EU over the coming years. Notable changes include the extension of reporting requirements to include additional categories of companies and the inclusion of the ‘double materiality concept’.

ISSB: The IFRS Foundation announced during COP26 the creation of the International Sustainability Standards Board (ISSB) which is tasked with developing mandatory corporate ESG disclosures. IFRS accounting standards are adopted by more than 140 countries globally, thus, new ESG reporting standards could have an enormous impact on countries around the globe.

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

2022 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 global 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.

The Science Based Targets Network (SBTN) is a collaboration of leading global non-profits and mission driven organisations working together to equip companies with the guidance to set science-based targets for all of Earth's systems. Companies need to take an innovative approach to finding nature-positive solutions alongside rapid decarbonisation. Businesses need to halve emissions and reverse nature loss by 2030 to avoid catastrophic consequences, which at only eight years away means radical action needs to be taken now.

To mitigate impacts on biodiversity, businesses are asked to avoid and reduce the 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.  

The ‘Elusive Green Consumer’ highlighted the ‘intention-action gap’ increasingly prevalent amongst shoppers. Consumers say that they 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 about how individual actions can be part of climate change mitigation and governments increasingly put pressure on businesses to nudge consumers towards making that sustainable purchase.

In France, car advertisements from March this year will legally have to carry environmental warnings (or face a €50,000 fine) advising potential customers to prioritise cycling, walking, public transport, or lift-sharing instead. Businesses too are implementing new initiatives to direct consumers towards long-term sustainable habits, such as M&S’s new behaviour change programme. With Ireland proposing to use ‘incentives, disincentives, regulations and information’ to tackle climate change and the UK proposing a meat tax, a frequent-flyer levy, and green surcharges on gas bills, 2022 is set to be the year where government influence could push to move consumers away from old, habitual behaviour.   

In 2021, COP26 achieved global ambition to reduce global carbon emissions, however, this alone will not address all aspects of the environmental crisis, such as the amount of waste we produce. Although not every business has the capacity to operate fully circular, 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 the adoption of circular economy principles could increase EU GDP by 0.5% by 2030 and create an additional 700,000 jobs. In the context of Ireland, EPA estimates suggest a 5% material reduction in the 100 million tonnes used annually could correspond to an annual €2.3bn opportunity. In 2022, several key policies will induce change in an attempt to pivot towards a more circular economy in Europe and Ireland. At an EU level, the Zero Pollution Action Plan will encourage public and private sector operators to make ‘zero pollution pledges’ to promote best available, ‘near-zero waste’ options, and in general products and services proven to be less polluting over their whole life cycle.

In the Irish context, the ‘Whole of Government Circular Economy Strategy (2022-2023)’ will introduce a number of initiatives, such as identifying priority sectors for the development of sectoral circular economy roadmaps and the new Deposit Return Scheme (DRS) for plastic bottles (up to 3 litres in volume) and aluminium cans, to become operational in 2022. This government strategy will also be given a statutory footing through the Circular Economy Bill 2021, which is due to be enacted in early 2022.

The pace of change is challenging leaders like never before. To find out more about how KPMG perspectives and fresh thinking can help you focus on what’s next for your business or organisation, please get in touch with Russell Smyth of our Sustainable Futures team. We’d be delighted to hear from you.