Dr. Matt Bell, Head of Global Climate Change and Sustainability Services at EY (Ernst & Young Global Limited), a multinational professional services firm based in London, England, discusses in ESG Today the emerging trends in sustainability and how companies can adapt to them.
“The theme for 2023 is already set. If 2022 was the year of corporate commitments to sustainability, this is the year when pledges become proposals, mission statements become metrics and targets become actions.
So far, so good. But what are the key drivers, blockers and potential unintended consequences ahead?
1. Regulation with No Room for Maneuver
It’s not hard to guess the first factor: impending regulation. But it’s not just about quantity, it’s also about quality. Regulators have broadened their scope and fine-tuned the details, closing loopholes that allowed some companies to take advantage of ambiguity.
One example is the European Union’s landmark Corporate Sustainability Reporting Directive (CSRD), which requires nearly 50,000 European companies to report on a wide range of sustainability issues.
What is new is that companies will have to report on sustainability in as controlled a manner as they do with their financial data. Meanwhile, in the United States, despite delays, the Securities and Exchange Commission (SEC) is proposing changes to climate-related disclosure rules. As one of the world’s largest economies and second largest carbon emitter, this is significant and is further evidence that Washington is playing catch-up on regulation.
2. Resistance will Persist
In recent weeks, 18 U.S. states have formed an alliance to push back against Joe Biden’s plans on the “Environmental, Social and Governance (ESG) Agenda.” The proposals put forward by the SEC have also received a record number of responses, some of which are not favorable.
There is an element of “culture conflict” at play, which sometimes places green thinking in opposition to traditional values. This may simply seem like the last coattail of the dinosaur, but it has serious implications.
For example, investments blind to environmental or social risks that could impact share prices or a backlash against carbon markets. It is also interesting to note how all events, from the pandemic to the war in Ukraine, can be used against ecological objectives.
So don’t underestimate the power of backlashes and prepare accordingly. They can come from surprising places. For example, we are seeing some ESG-focused investors bow to pressure if the short-term performance of their investee companies does not match expectations, regardless of how strong their long-term green strategy is.
To remain strong, companies must focus on strong sustainability support from key stakeholders:
- 99% of investors use companies’ ESG information as part of their investment decision-making process.
- 57% of consumers are willing to change their purchasing habits to reduce negative environmental impact.
- 70% of UK employees expect their company to take action on social issues.
Companies with $4 trillion in purchasing power request ESG information from their suppliers worldwide.
3. CFO as Sustainability Hero
Now that sustainability reporting requires similar levels of disclosure as financial results, Chief Financial Officers (CFO) are required to have full confidence in their reporting, which means being much more involved.
And with the CFO on board, sustainability reporting can, at last, take its place alongside financial data at the heart of a company’s decision-making process.
The benefits will be far-reaching. With the right metrics and management buy-in, companies can go beyond regulatory compliance and understand the role of sustainability in driving business performance and creating long-term value.
The connection between sustainability and strategy is likely to become apparent and, given the growing appetite of investors and customers for green companies and products, stronger ESG metrics can also become a powerful competitive advantage.
You can also be interested | CDP: Nearly 60% of companies fail to disclose supply chain emissions as new reporting regulations approach
4. As Green as Your Weakest Link
Having looked inward to put their data and strategy on a solid footing, companies will increasingly have to look beyond their own walls.
The proposed EU Directive on sustainability due diligence requires companies to pay more attention to their supply chains, from human rights to environmental standards.
There are also pressures from employees, customers and investors for companies to be more aware of how products are made and how they are used.
Taking a whole value chain approach will reveal even more about the true sustainability of each organization, so companies must adequately prepare for this new level of transparency.
5. Beyond Carbon: Biodiversity Beckons
The debate on climate change has rightly intensified in recent years: the public has begun to realize its impact and new regulations have been passed to address the issue.
The next five years will also revolve around biodiversity. This means going far beyond conservation and asking fundamental questions about the value that is extracted from nature and how its impact is mitigated. This will extend well beyond high-impact areas such as timber and mining.
According to the World Economic Forum (WEF), more than half of the world’s gross domestic product depends on nature.
How to look good in the bright light
In short, there will be few hiding places in the next five years. Even the sustainability averse will have few options.
Transparency, accountability and visibility will replace “greenwashing,” “green wishful thinking” and “green sneaking.” You may have to hit the green gym to make sure you are ready for action.”
Published in ESG Today, written by Dr. Matt Bell, Director, Global Climate Change and Sustainability Services, EY
