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ESG trends in 2023

Investor attention is once again returning to longer-term issues after concentrating nearly entirely on COVID-19's effects over the previous two years. According to Jana Jevcakova, Head of International ESG at Morrow Sodali, the ESG focus will continue to be on "governance" in 2023, but it will shift from how directors have managed COVID-19 to how they monitor the "E" and "S": climate change and social issues.

ESG's The 'E' Investors will continue to pay attention to how big businesses implement the Task Force on Climate-Related Financial Disclosures (TCFD), but according to Jevcakova, the key point of attention will be on how much money businesses are investing in the switch to renewable energy and mitigating climate change risks. She notes that the capital allocation issue is one of the major drivers for Climate Action 100+, an investor-led movement aimed at ensuring that the world's greatest corporate greenhouse gas emitters take action on climate change, and claims that it hasn't been highlighted much yet.

Simply Transition Jevcakova, a renowned authority on corporate governance and proxy research in the Asia-Pacific, predicts that "Just Transition" will gain in popularity as well. It recognises the potential for job and community disruption brought on by global efforts to combat climate change, as well as the necessity for coordinated initiatives and financial support for people left behind. According to Jevcakova, investors will start bringing up Just Transition much more frequently now that there have been some advances in Europe and other areas of the world since we first heard about it last year.

Biodiversity According to Jevcakova, in 2023 there will be more inquiries about how boards and organisations handle the environment and biodiversity. The Taskforce on Nature-related Financial Disclosures (TNFD), which strives to assist businesses and financial institutions in incorporating nature into their decision-making, is mentioned by the speaker in this context. In September 2023, the report's final recommendations will be released. She explains: "Content-wise, what's currently being discussed is 30% restoration of nature by 2030 as a key aim. Structurally, it's comparable to the TCFD. The best way to measure this is a topic of intense debate. According to Jevcakova, 1.5°C of temperature increase is now considered the acceptable upper limit for preventing climate change. "We then established goals and realised we needed to make the move to net zero. But there's still a question mark with nature," she adds. "I believe the year 2023 will be decisive. We will have better visibility into what businesses must measure and how they must handle the issue of biodiversity and other environmental concerns.

According to Jevcakova, the TNFD is still in its infancy everywhere. Although some large mining corporations have begun to address some of its problems, she thinks it will take some time before they fully get what this framework entails.

Huge Possibilities According to Jevcakova, many businesses that think they are unaffected by climate change may not be pursuing its enormous prospects, which their investors will increasingly recognise. "Active fund managers have already taken a look at this and are doubting some tactical choices. The key is to understand your investors and what, in their eyes, makes you a better company to invest in than another one, she says, adding that they are also giving feedback. From a business standpoint, this makes sense, according to Jevcakova. According to the notion, a business should fare better financially if it effectively handles climate-related concerns and seizes the chances presented by the shift to a net-zero society. "In the end, it's all about making money."

ESG's initials "S" In terms of society, Jevcakova thinks that human capital management—that is, finding, keeping, and rewarding employees—will be crucial in 2023. She claims that "gender, culture, and corporate ethics are all very strongly related to this." "New generations are beginning to enter the workforce. Beyond compensation, they are interested in the values held by the company they want to work for. Has it a diverse population and a positive culture? Will they fit in well and will they have an influence where they are? “ Therefore, it's important to comprehend that not just investors but also other stakeholders' perspectives are shifting. The goal is to look beyond purely financial results in the short term.

Additionally, Jevcakova thinks that in 2023, it will be vital to have a better understanding of your clients and suppliers. "As they enter the workforce, future generations will have different purchasing power. Their parents won't be making decisions for them anymore, she says. "We must comprehend client preferences, particularly for B2C organisations. B2B companies are somewhat protected, but even they run the risk of losing their goodwill if they don't successfully manage their ESG risks. Jevcakova claims that vendors that underpay workers or act unethically could damage a company's brand.

While many businesses are in compliance with the law on modern slavery statements, she thinks they will need to go beyond compliance when looking at their supply chains. She explains that some investors perceive benefits in knowing about supply chains because they can undoubtedly have a big impact on company valuations. "Some investors are quite interested in visiting the suppliers' factories and sites in person to inspect their working conditions, particularly when these locations are in underdeveloped nations. Companies will be obliged to interact with their suppliers and inform them about sustainable business practises, particularly if those suppliers are located in nations with lax regulatory frameworks.

It actually comes down to comprehending each company's function in your value chain, says Jevcakova. If I had to summarise it, we are moving away from the thinking of the 1980s or 1990s, when the primary goal of a firm was to maximise profits for shareholders, and toward becoming a profitable organisation that can continue to operate sustainably. That is a shift. It involves being aware of the preferences of all of your stakeholders and how your actions affect them, as well as how those same stakeholders affect you. A two-way roadway exists.

(Source - Lexology)
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