2021 saw significant progress on the two leading areas of concern for responsible investors: climate and workplace diversity. Can we hope for more in 2022? We see reasons for increased optimism moving forward.
Responsible investing has taken the investment field by storm and become mainstream. As we look to 2022, investors continue to be particularly interested in two predominant ESG themes that have been main points of focus for the past several years: the climate and diversity. Other emergent themes like biodiversity and human rights may also make headway as investors are dedicating more of their attention to them, but we don’t expect them to take center stage.
What’s new with climate?
Lots, but depending on the initiative, we’re seeing various levels of momentum and progress. As we look at climate areas that are evolving, three come to mind: SEC climate disclosures (hopefully imminent), net zero initiatives (picking up steam), and the UN Climate Change Conference in Glasgow (COP26) (dragging a bit).
SEC climate disclosures
The industry expects the SEC to propose requiring companies to do a better job disclosing climate and ESG risks and opportunities in early 2022. When the SEC requested public input into its process and considerations, Parametric and more than 500 other market participants responded with recommendations. While we originally expected the SEC to make a proposal in 2021, SEC chair Gary Gensler has acknowledged that the SEC is currently working on its proposal, which will likely come out in early 2022. We hope they take our recommendation to make climate disclosures mandatory. We also believe the SEC would be wise not to reinvent the wheel. The Task Force on Climate-Related Financial Disclosures framework and Sustainability Accounting Standards Board standards are already established, focused on materiality, and respected by investors. We recommend that the SEC use them as the basis for a proposed rule to help investors make informed investing decisions.
Net zero initiatives
Signatories to the Net Zero Asset Manager initiative commit to “support the goal of net zero greenhouse gas emissions by 2050 or sooner, in line with global efforts to limit warming to 1.5 degrees Celsius.” The Net Zero Asset Managers initiative was only launched in December 2020 but has already seen astonishing growth, with 220 signatories representing $57 trillion in assets under management.
The net zero movement has also garnered a lot of notable supporters, beyond investors, trying to shed a light on a credible path to transition to a low-carbon economy. In particular, we were pleasantly surprised by the sudden change of heart from the International Energy Agency with its May 2021 publication of the Net Zero by 2050 roadmap for the global energy sector. Getting to a world with net zero emissions by 2050 is far from an easy task, as investors still struggle with a lack of basic disclosures. Companies are still in the midst of figuring out how to report greenhouse gas emissions.
Last year’s UN conference drummed up quite a bit of excitement but at the end of the day was disappointing. It plainly fell short of the two overarching immediate goals it had set: renewing targets for 2030 that align with limiting warming to the 1.5 degrees Celsius set out in the Paris Agreement and negotiating a way for countries to accelerate the phase-out of coal. Climate Action Tracker’s report predicts that even if all governments kept their promises and achieve their 2030 targets, end-of-century warming would be approximately between 2.1 and 2.4 degrees Celsius, far above the world’s 1.5 degrees Celsius target. As for the goal to phase out coal, it looked like that was in the cards until India successfully passed a last-minute phrasing change from “phase out” to “phase down.” That change triggered COP26 president Alok Shamra’s tearful and apologetic speech at the conclusion of the summit, in which he reflected on COP26’s shortcomings and apologized for what he perceived as a personal failing.
When it comes to climate, things are moving, but it sometimes feels like they’re moving at a snail’s pace. Investors are still clamoring for the type of “code red for humanity” action that the Intergovernmental Panel on Climate Change called for in its report published months before the COP26.
One of the tallest hurdles investors face when it comes to tracking and encouraging more diversity at the board and senior levels of companies is lack of disclosure. We saw a lot of progress on that front in 2021; in fact, while only 24% of S&P 500® companies and 8% of Russell 3000® companies disclosed racial composition of their boards in 2020, the Conference Board reports that 59% of S&P 500® and 27% of Russell 3000 companies now do. Disclosure is incredibly important, as we can’t expect companies to make progress if they don’t track or monitor it. Publicly reporting this progress allows for true corporate accountability.
Disclosure isn’t lacking only at the board level but also at the senior management and higher levels of corporations; but that too is getting better. One basic workforce disclosure already required to be filed with the US government for the vast majority of US companies is the EEO-1 data report. This data describes the gender, racial, and ethnic breakdown of company workforces by 10 job categories. Parametric, along with Calvert and the New York City Comptroller’s Office, has been a leading investor in pushing for more disclosure of workforce diversity metrics through its engagement program. In 2021, we sent letters to the CEOs of 50 S&P 500® companies that currently don’t disclose EEO-1 data. We see this reporting as a bare-bones minimum disclosure that requires no additional cost to companies (given that it’s already collected and reported to the EEOC). Yet, according to As You Sow, only 21% of S&P 500® companies released or committed to releasing workforce composition as a consolidated EEO-1 form. We predict some investors may start voting against directors at companies that don’t disclose EEO-1 data or make more headway in their reporting.
The bottom line
So much more needs to be done when it comes to climate change and diversity. That’s why we expect investors will continue to be laser focused on these themes. We’re optimistic climate and diversity will continue to gain momentum both in terms of investor scrutiny and in terms of actual progress in 2022 and beyond.