Global Association for ESG
6 Apr 2023
Dr Matt Bell, Global Climate Change & Sustainability Services Leader at EY, examines new sustainability trends and how businesses can adapt.
The topic for 2023 is already determined. If 2022 was the year of corporate sustainability pledges, this is the year when promises turn into proposals, mission statements turn into metrics, and goals turn into actions. Thus far, so fine. But what are the main drivers, roadblocks, and unintended consequences to look out for?
1. Strict regulation with no wiggle area
The first reason, impending regulation, comes as no surprise. But it's not just the amount that matters; it's also the quality. Regulators have broadened their scope while also sharpening details, filling the gaps that enabled some businesses to exploit ambiguity.
The EU's landmark Corporate Sustainability Reporting Directive (CSRD), for example, mandates nearly 50,000 European companies to report on a variety of sustainability-related issues. The paradigm changer here is that businesses will have to report on sustainability in the same controlled manner that they do their financials. Meanwhile, the Securities and Exchange Commission (SEC) in the United States is proposing regulation changes on climate-related disclosures, despite delays. This is important because China is one of the world's largest economies and the second-largest carbon emitter, and it demonstrates that Washington is playing catch-up on regulation.
2. There will be more pushback
In recent weeks, 18 states in the United States have joined forces to oppose Joe Biden's plans for the "Environmental, Social, and Governance (ESG) Agenda." Those SEC proposals have also received a high number of responses, with a number of them being negative. There is some "culture conflict" at work here, which sometimes pits green thinking against traditional ideals. That may appear to be the dinosaur's final thrash, but it has serious consequences. These can include investments made without regard for environmental or social risks, which could have an effect on the share price or cause a backlash against carbon markets. It's also worth noting how any event, from a pandemic to the Ukraine War, can be used against green targets.
So, don't underestimate the impact of pushback and plan appropriately. They could emerge from unexpected places. For example, some ESG-focused investors are buckling under pressure if their investee businesses' short-term results fall short of expectations, regardless of how strong their long-term green strategy is. To remain strong, businesses should concentrate on a solid support for sustainability from key stakeholders:
99% of investors use ESG disclosures from businesses as part of their investment decision-making process.
To reduce their negative environmental effect, 57% of consumers are ready to change their purchasing habits.
70% of employees in the United Kingdom anticipate their employer to take action on societal issues.
Companies with $4 trillion in purchasing power are requesting ESG data from suppliers all over the globe.
3. The CFO as a hero of the environment
With sustainability data now demanding disclosure levels comparable to financial results, CFOs must have complete confidence in their reporting, which means getting much more hands-on. With the CFO on board, sustainability data can finally compete with financial data at the core of a company's decision-making process.
The advantages will be far-reaching. Businesses can look beyond compliance to understand the role of sustainability in driving business performance and generating long-term value with the right metrics and management buy-in. The link between sustainability and strategy is likely to become obvious, and with investors and customers increasingly interested in green businesses and products, stronger ESG metrics can also become a powerful competitive advantage.
4. You can only be as green as your weakest connection
Companies will increasingly need to look beyond their own walls once they have established a strong foundation for their data and strategy. The EU's proposed Corporate Sustainability Due Diligence Directive (CSDDDD) requires businesses to concentrate more carefully on their supply chains, looking at everything from human rights to environmental standards. Employees, customers, and investors are also putting pressure on businesses to be more conscious of how their products are made and used. Taking a whole value chain approach will disclose even more about each organisation's real sustainability, so businesses should properly prepare for this new level of transparency.
5. Beyond carbon, nature calls
The climate change debate has rightly heated up in recent years, with the public starting to see its effects and a slew of new regulations aimed at addressing it. The next five years will be important for wildlife as well. That entails going beyond conservation and asking fundamental questions about what value you derive from the natural world and how you mitigate your effect on it. This will go far beyond high-impact industries such as forestry and mining. According to the World Economic Forum (WEF), nature accounts for more than half of the worldwide GDP.
How to Look Good in Direct Light
To summarize, there will be few locations to hide over the next five years. Even those who are hesitant to accept sustainability will have few options. Transparency, accountability, and visibility are poised to replace greenwashing. A journey to the green gym may be necessary to ensure your readiness for action.