Washington, DC - Responsible Investing, which uses environmental, social and governance (ESG) information as one of several inputs, encompasses many issue areas. Thinking about the 2022 outlook for ESG, we believe carbon risk and human capital management are two areas that will have broad application and impact across industries and corporations — and garner the most regulatory attention.
Across global capital markets in 2022, we expect regulators, corporations and investors to place greater emphasis on ESG factors in investment decision-making. Worldwide, we are in the early stages of building the necessary capital market infrastructure to fully price companies' greenhouse gas (GHG) emissions, people management impact, and board and employee diversity into security prices. However, the financial materiality of ESG factors is increasingly evident across multiple risk vectors, such as climate, inequality and competition for intellectual capital.
Standardizing ESG data reporting
Currently, investors receive information about companies' carbon exposure, human capital and diversity information from a range of non-standardized sources, such as company websites, corporate social responsibility reports, sustainability reports, company regulatory filings or simple estimates.
Government regulators around the world, however, have indicated they will begin — or advance — requirements for uniform disclosure standards around carbon, human capital and some diversity data. We expect ESG disclosure rules in major global markets, including the U.S., to have enough clarity to produce a meaningful impact on markets and security pricing in 2022. A new environment of higher-quality data may increase the need for expert ESG analysis to incorporate the information into prices of securities.
We think stock and bond prices in 2022 will be affected by changes in how companies provide ESG information to investors. As ESG data reporting and transparency improves, we think more institutions and investors of all types will appreciate its financial materiality. Understanding these factors and system-level changes will become essential as more investors incorporate ESG information into their investment decisions.
Investor activism moving mainstream
In addition to near-term developments by regulators in many regimes throughout the world, ongoing investor activism has met with growing acceptance from mainstream investors. We believe this combination of influence has reached a critical point and could potentially drive this trend further in 2022. The most recent example is Calvert's shareholder resolution for the disclosure of diversity and human capital data at one company. Calvert's resolution was opposed by company management, so presumably did not garner votes from shares controlled by insiders, but had such strong support from outside shareholders that the resolution passed with 57% support.
Another example is one financial services company, where Calvert filed a shareholder resolution asking the company to disclose its Equal Employment Opportunity survey data (EEO-1) that divulges workforce composition and diversity. In the U.S., companies with more than 100 employees are required to file an EEO-1 survey annually with the government. However, they are not required to disclose it publicly. This particular company sued Calvert to not disclose and won. However, the company subsequently began to publish its EEO-1 information voluntarily. As we have seen so many times, pressure works to inform public opinion and effect change. We believe we will see more of these efforts on the part of governments and the ESG community in 2022.
Virtuous reporting circle
Due to ongoing activist investor demands catalyzed by Calvert and others, and in anticipation of regulatory changes, we expect companies to strengthen the rigor of their reporting and to create greater transparency. As this occurs, we believe investors and companies will quickly see which companies are leaders and which are laggards in managing their ESG risks, and a competitive dynamic will accelerate. One potential outcome is that investors may have enhanced performance expectations for those companies with strong ESG management practices and seek companies with lower risk exposures across the areas of carbon, human capital and diversity.
Bottom line: In 2022, we believe we will begin to see governments issue regulations for standardized ESG data disclosure, particularly in the areas of carbon and human capital management. Investor activism, backed by investor demand for increased data transparency, will push this initiative forward. In our view, recognizing and pricing ESG factors into a company's financial picture is vital to markets and will ultimately support shareholder value.