The focus on ESG across the business spectrum ramped up over the course of 2021, surpassing several milestones along the way and resulting in a surge of regulatory changes and new initiatives by the end of the year. Taking stock of the last 12 months, it is clear that Europe continues to be the early mover in regulatory matters, promising to make 2022 a watershed year.
Indeed, since 2018, when the European Union adopted its Action Plan on Financing Sustainable Growth, it has been moving forward to adopt regulatory requirements to meet its ESG objectives. They include: (i) reorienting capital flows toward sustainable investment in order to achieve sustainable and inclusive growth; (ii) managing financial risks stemming from climate change, environmental degradation, and social issues; and (iii) fostering transparency and long-termism in financial and economic activity. Since that time, and culminating in 2021, the European Union has rolled out the three cornerstones of this strategy:
- A classification system, or "taxonomy," of sustainable activities, which will be used by most economic actors as a common screen tool to determine which economic activities contribute to environmental objectives, with reporting under the system phasing in starting in 2022;
- A disclosure framework for nonfinancial and financial companies, including the Sustainable Finance Disclosure Regulation that took effect in March 2021, and the proposed Corporate Responsibility Reporting Directive, which was proposed in April 2021; and
- Investment tools, including benchmarks, standards, and labels, such as the EU Green Bond Standard proposed in July 2021.
With these tools in place, corporates, financial institutions, and investors need to adapt quickly to the new European reporting requirements and the new investment criteria that are increasingly being used by market participants across all types of transactions. They should also continue to prepare for further change. From ESG due diligence in financing and M&A transactions, to sustained investor appetite for IPOs and other capital markets transactions responding to ESG criteria and concerns, we saw capital flows both responding to and driving regulatory initiatives, particularly in Europe, with the attendant changes in behavior by corporates, financial institutions, and state actors. With no signs of letting up, ESG in 2022 will continue to reshape the landscape.
Originally published January 2022
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