Interest in ESG has soared in recent years and it appears poised to remain in the spotlight in both regulatory and corporate culture for a long time. 2022 was a great year for ESG in both visibility and urgency but the big question is whether the momentum will continue. Rising demands for actions have led to the introduction of key ESG standards bordering on accountability, regulatory scrutiny, and credible disclosure backed by improved data. Here are the top trends that will be shaping the ESG agenda for 2023.
- Increased regulatory burdens
As awareness of ESG continues to rise exponentially, many large companies are setting sustainability goals but some organizations have been found guilty of a trend known as greenwashing. In a bid to stamp the practice, investors, regulators, and the broader public are exercising efforts to scrutinize the sustainability-related efforts of corporate organizations.
In 2021, the European Union rolled out the Sustainable Finance Disclosure Regulation, which is aimed at regulating the sustainable finance space. The regulation is designed to increase transparency on sustainability among financial institutions and market participants by standardizing sustainability disclosures.
Under the SFDR, organizations are expected to make organizational, service, and product levels disclosures to counter greenwashing and allow for comparisons for sustainable investment decisions. The regulation highlights the role of the financial sector in helping investors access sustainability information for decision-making.
- New acts from governments
The worsening effects of climate change have made it more necessary than ever before for stakeholders to walk the talk. At the recently held COP26, many countries made pledges to improve their efforts at tackling the climate crisis. The scale of action required to do so is massive and may involve key changes in different sectors including energy, manufacturing, transport, infrastructure, etc.
In 2023, we will witness governments around the world stepping up to make good their promises. Different approaches exist to addressing sustainability challenges and these include subsidies and tax rebates. The United States blazed the trail when President Biden signed into law the Inflation Reduction Act earlier in August, which is expected to reduce its greenhouse gas emissions by 40% by 2030.
The law provides a system of tax credits and incentives for electric vehicles and charging infrastructure, renewable energy production, energy storage, sustainable aviation and biofuels, GHG emissions reporting, etc. With the United States taking a bold step to combat climate change, there’s a good chance that other countries will follow suit.
- New ESG Agenda requirements may apply
As governments, investors, and the general public continue to demand ESG considerations to be integrated across organizations, companies are expected to show proof of actions that back up their claims. To do this, companies are now expected to comply with new requirements on ESG reporting. One of them is the new ISSB reporting framework.
The International Sustainability Standards Board (ISSB) was unveiled at COP26 with the aim of providing a universal gold standard for corporate sustainability reporting. The ISSB reporting framework is expected to accommodate requirements that are jurisdiction-specific on how companies report their environmental performance.
Although the ISSB was announced in 2021, the board officially hit the ground running in 2022. As part of its preliminary work, the ISSB voted to require company disclosures on Scope 1, Scope 2, and Scope 3 GHG emissions.
The final framework, which is potentially capable of fundamentally changing the ESG Agenda reporting landscape, is expected to be issued in 2023 or latest 2024. Once released, companies will be expected to comply to demonstrate their commitment to sustainability. Before then, conversations around a globally accepted framework will pick up next year.
- Classification Systems to aid sustainability
As part of its efforts to meet its climate change and energy targets, the European Union introduced a classification system known as the EU taxonomy. It is essentially a way of classifying different parts of the economy so activities that are environmentally sustainable can be identified. It is a tool to help investors make better decisions.
The goal of the system is to point out sustainable projects to which huge sums of money can be directed to fight climate change. Activities that meet the environmental criteria are awarded a green label, indicating that investors can invest in them. Not only does this help in ensuring a resilient economy, but it also protects investors and the general public from greenwashing.
In 2023, we may see more systems of classifications spring up in different companies to encourage green activities. While this system does not ban investments in activities that are not green, it makes green activities easier to identify and more attractive to investors.
Drawing from the momentum of discussions and actions relating to ESG in 2022, it’s expected that 2023 will be a time for accelerated global efforts in addressing critical environmental, social, and governance concerns. Companies that keep an eye on ESG Agenda issues and integrate them into their strategies will be favorably positioned in the eyes of investors and the general public.