In 2023, corporate sustainability will certainly change due to the continued energy crisis and increased global commitment to biodiversity conservation. As a result, ESG reframes markets and takes on a crucial role.  

However, in the past years, there had been concerns over greenwashing, energy security and geopolitics, which cast doubt on the effectiveness of ESG. Despite these concerns, ESG still proves to be an important tool in evaluating long-term risks and shifting market conditions. 

A general outlook on ESG this 2023 

Concern about climate change has overtaken interest in non-financial aspects and is the basis for many social demands taking voluntary frameworks and regulatory developments to focus on climate target disclosures, reduction emission targets for the achievement of the 2050 net zero goal or carbon credit funds.

On the other hand, the post-pandemic situation has set a challenging economic scenario increasing the cost of living, the need for a work-life balance, high demands on transparency of the supply changes and involvement of companies’ governance bodies in decisions related to the management of climate-related and social risks. 

Here are some socio-geographical and economic factors that set the agenda for 2023 on ESG:

• The escalation of response to the energy crisis – Since the summer of 2021, energy prices in the UK and Europe have been rising, with the biggest rises felt after Russia invaded Ukraine. According to the International Energy Agency (IEA), this has encouraged increased investments in renewable energy and energy efficiency. However, European countries have been frantically searching for substitute fossil fuel sources while prices have continued to grow to keep the heating and lights on in the future.

• The rising importance of carbon pricing in the energy transition – As governments incorporate carbon pricing mechanisms into policy to create more sustainable economies, their prevalence is anticipated to rise.

• Increased support for renewable energy helps achieve net zero objectives – As nations and major corporations throughout the world have committed to reducing their greenhouse gas emissions as close to zero as possible by 2050, net zero has become one of the talking points in sustainability. However, since Russia’s invasion of Ukraine, that far-off deadline has become more urgent, particularly in Europe.

Investors, regulators and the media are paying close attention to the performance of business activities related to ESG.  

This year, ESG factors continue to be crucial business concerns for both public and private firms. Early understanding and incorporation of significant ESG factors allow for better informed and strategic business decisions. However, less than half of private company boards evaluate the opportunities and risks related to ESG.  Given these various factors at play, what significant trends will dominate the ESG agenda in 2023?

Major focus on Sustainable Finance

The European Union has committed to becoming the first climate-neutral continent by 2050, within the framework of the Green Deal, establishing a plan to achieve this goal. Among these is the publication of the delegated act supplementing Article 8 of the Taxonomy Regulation which specifies the content, methodology and presentation of information to be disclosed by financial and non-financial companies on the proportion of environmentally sustainable economic activities in their business, investment or lending activities. There is also a proposal on social taxonomy and still working on other initiatives like the standards for using green bonds on capital markets.

EU is not the only one, countries like Hong Kong, Taiwan and Singapore, for example, have provided guidance to standardize disclosures on the integration of ESG factors in the investment-selection process. Also, India, the Philippines and Thailand, have norms setting standards for responsible investing. The People’s Bank of China, with other six Chinese regulators, are working on the development of a green financial system.

Increase of ESG regulation and standards

The European Union is leading the pathway of the ESG regulatory framework, demanding transparency and a long-term vision for companies through a real integration of ESG issues into company strategy, proper management of sustainability risks and redirecting capital flows to sustainable investments. This linked to the sustainable finance framework has driven the Sustainable Finance Disclosure Regulation and Taxonomy regulation, ensuring more uniform protection of end-investors by increasing the transparency of financial market participants.

Additionally, the EU has amended the reporting requirement of the Non-Financial reporting directive (NFDR) adopting the Corporate Sustainability Reporting Directive (CSRD) requiring companies to report using a double materiality perspective in compliance with European Sustainability Reporting Standards (ESRS) adopted by the European Commission as delegated acts and extend the scope of mandatory ESG reporting for companies. The reporting requirements will be phased in over time for different kinds of companies. Ongoing discussions in the Council and European Parliament about the Corporate Sustainability Due Diligence Directive (CSDDD) are proposing a framework to respect human rights and the environment in company operations and value chains.

This is not only happening in Europe, the U.S. Securities and Exchange Commission proposed new reporting requirements regarding climate disclosures, and countries like Brazil and Chile are also working on requirements for companies about Management and Disclosure of Social, Environmental and Climate Risks.

Adaptation and mitigation to the climate 

In 2023, climate change will once more be a major ESG subject as global climate regulation advances, disclosures like the CDP and the Task Force on Climate-related Financial Disclosures become more standardised (and in some places, mandated) and the attention of the investors on the climate increases. The European Sustainability Reporting Standards (ESRS), proposed by the European Financial Reporting Advisory Group (EFRAG), prepared a working paper titled ‘Climate standard prototype’ and is the first set of draft standards on ESG topics. It also provides a very extensive section on environmental matters. For this reason, business models of companies from all industries and stages should incorporate thoughtful responses to climate change.

Rapid evolution in biodiversity disclosure 

Biodiversity has been a relevant topic when evaluating a company’s environmental performance. Standards and guidelines are constantly emerging, and many organisations will want to take a proactive approach by participating in these voluntary initiatives.  

The main initiative is that of the Taskforce on Nature-related Financial Disclosures (TNFD), which recently released the most recent revisions to its beta framework to improve corporate approaches to disclosing investors with nature-related information. The TNFD is set to officially launch this year. 

Management of human capital and DEI  

Diversity, equity and inclusion (DEI) and human capital management are anticipated to be more significant factors for businesses, investors and regulators in 2023. Considering the current state of the labour market, many businesses have increased their focus on employee satisfaction, productivity and retention. As it explores developing disclosure standards for data on performance and valuation in human capital management, the SEC in the US has raised its emphasis on these matters.  

Many large businesses agreed to update their DEI policies and procedures in response to the latest Black Lives Matter protests and the Stop Asian Hate movement. Some of these companies also set strategies for this subject beyond compliance levels for the first time and hire DEI specialists. 

More transparency on supply chain management

All types of materials and products have knock-on impacts that are being felt in global supply chains due to Covid-19. Another issue is the increasing cost of energy and materials, as well as the ongoing conflict in Ukraine, which has hampered the supplies of commodities.  

To be more resilient, these challenges have pushed many large businesses to reconsider their approach to supplier engagement and the overall structure of their supply chains. In addition, the supply chain is becoming a more important frontier for organisations as they look to implement their sustainability strategies. 

Countries such as Germany and the United Kingdom have published regulations to address environmental and social risks in supply chains, and the European Union is working on its legislative proposal on environmental and human rights due diligence.

ESG integration into Private Equity  

In recent years, ESG and sustainability in private equity have advanced significantly. ESG offers an effective framework for bringing about growth and change in portfolio companies and it can be used to create value. ESG integration is progressing more quickly than it has in the past due to increased levels of peer pressure and collaboration within private equity. 

Furthermore, private equity firms must take ESG factors into account to reduce operational, reputational and legal risk while making investment decisions and managing their portfolio companies strategically.  

In the past, negative filters were used to exclude companies from certain sectors for moral or ethical reasons. Now, due to pressure from investors, regulators and the press, a real integration of all ESG issues is being sought. The focus is currently on environmental issues, but it is important to consider the interconnection with other governance and social issues.

Private equity companies find challenges in identifying and measuring these aspects. However, new regulations such as the SFDR are intended to resolve these difficulties, but there is still a long way to go. The first step is to establish an ESG strategy accompanied by an external framework to guide and understand the requirements of the new regulations.

In summary 

At this point, the major trends influencing the ESG investing industry are well known. These trends include the risk posed by climate change and the transition to a net-zero economy and identify the financial aspects of environmental and social risks and how the company board should address them and manage and disclose correct data to meet regulatory reporting requirements, as well as the demands of investors and society.

How can Bolder Group assist? 

Since the ESG landscape is always changing, private companies that proactively deal with their significant ESG concerns will be more prepared and capable to handle the shifting expectations of the market.  

At Bolder Group, we offer strategic corporate governance advisory services to assist businesses in communicating and monitoring relevant ESG trends.  

Ready to discuss ESG compliance? Contact us today.