In 2021, businesses experienced greater public scrutiny of their environmental, social and governance policies, with growing public concern over climate change, human rights abuses linked to business activities and the socio-economic impact of COVID-19 perpetuating associated risks. Corporate decision-makers will need to consider strengthening the integrity of their organisations by aligning their stated intentions and actions with the concerns of internal and external stakeholders.

At Sibylline, our annual forecast for 2022 outlines how businesses will face a greater regulatory and reputational risks. In the Middle East, Oman, Saudi Arabia and the UAE are advancing ESG frameworks as they consider securing a future beyond oil and gas. Meanwhile the EU has introduced its Sustainable Finance Disclosure Regulation (SFDR), forcing stakeholders in the European market to consider how their future investments will impact the environment.

In the US, the Biden administration has warned businesses with supply chain and investment ties to China's Xinjiang province that they could face legal consequences, citing evidence of the Chinese government carrying out genocide and crimes against humanity against Uyghurs and other minority groups. Notably, the US House of Representatives will consider the Uyghur Forced Labor Prevention Act this week, which could result in a ban on all imports originating from the Xinjiang region.

The expanding regulatory landscape around ESG policies will increase demand on compliance departments, particularly in the areas of environmental policies and human rights. Existing policies and procedures will need regular reviews to check for weaknesses, with businesses facing ever larger penalties for infringements.

While some businesses have undertaken significant efforts to publicise their ESG policies, companies perceived as greenwashing will face regulatory consequences that can impact financial performance. In August, DWS Group saw their shares fall 13% within 24 hours after financial regulators in the US and Germany launched an investigation into allegations the asset manager was misrepresenting how it used ESG metrics to analyse companies across its investment platform.

Growing pressure from environmental groups and investors is also having a far reaching impact for multinational corporations. In the Netherlands, The Hague ordered Royal Dutch Shell to ensure its net carbon emissions are 45% lower in 2030 than in 2019 after the environmental organisation, Friends of the Earth, brought a court case against the oil major. Meanwhile, Engine No 1, a small hedge fund owning just 0.02% of shares in Exxon Mobil, managed to win shareholder to overhaul the oil company's board, with a mandate to prepare it for a future free of fossil fuels.

Public scrutiny and regulation will maintain current high levels of regulatory and reputational risk across many industry sectors in 2022, particularly those perceived as complicit in business practices that violate human rights and / or amplify environmental risks. Public interest groups will pressure governments to introduce tighter policies and regulations that present challenges for corporate decisionmakers, while global media outlets will continue to cast delicate issues surrounding ESG policies in a negative light.

Going forward, corporate decision makers will need to demonstrate knowledge, strategy and transparency around these issues to mitigate damaging publicity and conciliate stakeholders. Public interest in corporate behaviours will intensify around significant events, such as the Beijing 2022 Olympic Winter Games, elections and levying of sanctions during periods of geopolitical tension.

Conversely, some organisations will find business opportunities in the integration of ESG and global concern around climate change. There will eventually be opportunities for investment in decarbonisation, as well as vulnerability reduction for communities facing a high risk of natural disasters in poorer countries. Businesses that successfully build a foundation of strong ESG credentials in 2022 are likely to see the benefits for client loyalty, market share and attraction of talent as the global economy begins to recover from the pandemic.

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