Environmental, Social and Governance issues continue to create a paradigm shift in the way businesses are run. 2022 looks to be another big year in the space, with those slow to adapt left behind.
Earlier this year, we looked at the global ESG themes shaping the Australian legal outlook. Here, we break down key ESG trends to watch for in 2022.
Key takeaways
- ESG refers to the Environmental, Social and Governance issues and opportunities that businesses face.
- These considerations underpin sustainable and responsible investment – imposing evolving compliance, due diligence, financing, and reporting requirements on companies.
- It’s important to keep these trends in mind – including ESG due diligence in M&A transactions – when dealing with your stakeholders.
Scrutiny is the name of the game
ESG focus is the new normal, and the world is watching. While every business will be impacted differently, here are five overarching trends to keep in mind.
- ESG licence to operate. This means satisfying stakeholders – as well as the public – on the integrity of your ESG practices. Topics in 2021 included forced labour in supply chains, net zero commitments, and FPIC. These, and issues like waste management and biodiversity, are likely to be a focus in 2022, too.
- ESG due diligence in M&A transactions. Buyers will look at a company’s approach to ESG – including any past non-compliance, stakeholder complaints, regulatory risk, and general ESG philosophy. Buyers will want the target company to share their ESG standards – particularly around environmental commitments. We expect even greater attention on ESG due diligence in M&A transactions.
- Continued focus on ‘just transition’. How companies engage with communities affected by their operations will be a focus. In particular, how companies treat communities when winding down major projects (such as the decommissioning of energy assets) – and on the flip side, when establishing new projects with large-scale impact.
- Continued growth in ESG-related disclosures and reporting. In recent years, disclosure of climate-related financial risks and modern slavery reporting has grown. New initiatives are now seeking to improve the quality and comparability of ESG disclosures. Notably, the upcoming Taskforce on Nature-related Financial Disclosures (TNFD)1 and the IFRS’ International Sustainability Standards Board (ISSB)2 – one of the few major developments to emerge out of COP26. As voluntary disclosure continues to gather pace, regulators and governments look to mandate such disclosures. Both the UK and New Zealand are introducing compulsory reporting in line with TCFD recommendations, while The European Commission is planning to bring in the second phase of the Sustainable Finance Disclosure Regulation next January3.
- Testing ESG integrity through litigation. We expect ESG strategic litigation to continue, especially when it comes to holding businesses accountable for their public ESG statements, such as net zero and human rights commitments.
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