After rising to prominence in 2021 on the strength of growing global concerns over climate change and social inequality, addressing environmental, social and governance (ESG) factors became “the new normal” for investors and businesses in 2022. With ESG considerations firmly embedded in mainstream markets, investors and regulators have demanded better reporting and compliance from businesses on their ESG performance.

Throughout 2022, White & Case assisted companies, investors and sovereigns with a variety of ESG issues, including green investing, ESG-linked debt compliance, reporting and new ESG regulation. Here are some key themes that our client work focused on during the year.

Compliance and regulatory focus intensifies

As the number of ESG-badged equity and debt products has grown, investors, companies and consumers have seen the proliferation of ESG metrics and benchmarks. This trend has driven calls for greater standardization, consistency and transparency regarding the real impact of ESG policies. 

Meanwhile, governments and economic blocs—against the backdrop of their commitments under the Paris Agreement and subsequent agreements at international climate conferences COP26 and COP27—have incentives to encourage ESG integration through means that include voluntary and mandatory disclosure regimes.  

In Europe, the European Commission advanced proposals for the Corporate Sustainability Due Diligence Directive that outline requirements for large businesses to conduct due diligence to identify and address adverse impacts on human rights and the environment; produce climate plans; and require directors to consider environmental and human rights impacts of business decisions. The US Securities and Exchange Commission (SEC), meanwhile, put out long-awaited proposals to require climate change disclosure in the annual reports and registration statements of public companies. 

On the regulatory front, the SEC is developing “nutrition labels” that will require disclosures on how ESG funds are marketed and how ESG is built into investor decisions, with the Australian Securities and Investments Commission (ASIC) releasing guidance for the providers of sustainability-related financial products to prevent making misrepresentations in promotional material and regulatory filings. 

The work of the SEC and ASIC in strengthening disclosures around the marketing of ESG-badged funds and products has formed part of a wider global regulatory drive to require private companies to disclose and prevent the impacts of their activities on the climate.

Social elements of ESG gain prominence

The urgency of climate change risk has increased awareness of the environmental aspects that drive the ESG agenda, but in 2022 the social elements of ESG policies became more prominent.

Human rights and social equity have come to the fore as a growing cohort of businesses have recognized that the well-being of their employees has become important to shareholders and clients, and that failing to uncover and remedy poor labor practices in supply chains can carry significant reputational and litigation risk.

A White & Case analysis of the ESG disclosure trends in SEC filings underscored how the S in ESG has gained increasing attention. According to the analysis, human capital management disclosures in proxy and Form 10-K filings increased by 30 percent on the previous year in 2022, with diversity and inclusion disclosures up 12 percent. Disclosures related to corporate culture, meanwhile, almost doubled, with social impact and community disclosures rising by more than a quarter.

Regulators have also zeroed in on social factors in ESG, putting forward proposals focused on human rights and labor practices. The European Commission, for example, advanced legislative proposals to ban the marketing of goods made using forced labor. The proposals could drive significant changes to supply chain due diligence and management.

Sustainable financing grows and diversifies

While global market volatility became evident with year-on-year declines in 2022 deal volumes and values generally, green, social, sustainable and sustainability-linked bonds and loans represented ever-larger shares of the market in terms of volume and value during the same period. In addition, the focus on ESG factors has expanded beyond vanilla loans and bonds to more esoteric products such as sustainability-linked derivatives and green and social securitizations, which are on the rise. 

Industry bodies continued to publish best practice standards and guidance on how to structure sustainable finance transactions. For example, the International Capital Market Association updated its registry of approximately 300 sector-specific key performance indicators. These and other recommendations aim to move the industry toward a level of consensus that could help sustainable finance transactions continue to scale up.

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