Toward ESG clarity
Three things to watch in 2022.
If 2021 was the year ESG hit the mainstream, 2022 should be the year it becomes depoliticized, investors better understand its nuances and sources of its data improve.
- It’s not an investment approach—it’s data Many investors interested in environmental, social and governance (ESG) think it stands for a strategy. 2022 may be the year more of them realize it’s part of the process, providing incremental information that could lead to a better evaluation of risks and opportunities when making portfolio decisions. If investment managers are successful in communicating this, more people also will become familiar with the distinctions and mechanics of how ESG data is used to achieve different outcomes, from supporting risk adjusted returns to thematic and impact investing.
- Closing the loop on disclosures Expect corporate reporting to get its act together in 2022 and deliver more robust, comparable and useful ESG information. The newly formed International Sustainability Standards Board (ISSB) is set to deliver a baseline of global disclosures to meet investor needs, creating one ESG standard to pair with current financial accounting practices. Consistent universal data should make assessing industries and companies more reliable. And with clear standards, companies likely will report more material information—a boon for investors!
- DOL revisits retirement plans The tone of the Department of Labor’s Financial Factors rule, passed under the Trump administration, had a chilling effect on the role of ESG in retirement investments. A year ago, many ERISA fiduciaries perceived that ESG factors were banned from consideration in employer-sponsored plans, notwithstanding the language of the rule. President Biden issued an executive order directing the DOL to stop enforcing it and revisit the subject. It proposed a new rule in 2021 that has a decidedly more ESG-friendly tone, explicitly promoting the appropriateness of considering material nonfinancial factors within a fiduciary’s investment analysis. Look for the final rulemaking this year.