Companies increasingly recognize that integrating sustainability into their strategies and operations can lead to long-term value creation, risk mitigation, and enhanced reputation. The risk of litigation related to environmental, social, and governance (ESG) matters, including sustainability disclosure, continues to increase, which is resulting in companies and investors facing a growing challenge. Addressing ESG risks may involve improving supply chain transparency, reducing carbon emissions, or ensuring compliance with labour and human rights standards.
What are the key sustainability trends that will drive corporate decision-making in 2023?
- Sustainability Disclosure Standards: New sustainability disclosure standards are being proposed and adopted by regulatory bodies globally, aiming to enhance transparency and consistency in reporting sustainability-related issues. Companies will have to adapt to these new complex disclosure standards.
The introduction of new compliance structures and frameworks in sustainability reporting increases the stakes significantly, moving away from voluntary reporting. Non-compliance, such as with the CSRD, could lead to consequences ranging from public shaming to fines. The current lack of harmonization in standards adds complexity and uncertainty for companies, making it challenging to allocate resources for sustainability initiatives. As a result, projects delivering tangible environmental and social benefits may suffer, impacting sustainability efforts.
- ESG-Related Litigation: The increasing risk of litigation related to ESG matters, including sustainability actions or lack thereof, will put pressure on companies and investors to demonstrate their sustainability commitments and actions.
Public companies, particularly those in environmentally sensitive industries, should be cautious and take measures to reduce the increasing liability risks associated with ESG-related disclosures and practices. This includes providing transparent and potentially unflattering information, updating previous disclosures, aligning public statements with environmental data, and establishing a cross-functional team to effectively manage and analyze ESG data sources.
- Reconsideration of Climate Strategies: The global energy landscape’s shift and challenges in meeting climate goals will force companies and countries to reevaluate their climate strategies, considering energy security, affordability, and the energy transition.
The 1.5°C Business Playbook offers a framework for companies to take climate action, focusing on four pillars for climate leadership: reducing own emissions, reducing value chain emissions, integrating climate into business strategy, and influencing climate action in society. By following these pillars, companies can become climate leaders, foster innovation, and drive business growth while contributing to global climate goals.
- Adapting Employment Practices: Employee expectations have evolved due to the pandemic and talent competition, but economic uncertainty may test the durability of progressive workplace practices. Creating a progressive workplace is essential. However, it raises the question of what elements should be implemented to establish such a workplace environment.
- Due-diligence Management: To effectively evaluate and monitor third-party risk in today’s complex global networks, organizations must implement a comprehensive due diligence strategy. The process includes understanding compliance concerns, aligning due diligence with corporate objectives, gathering critical information about third parties, conducting watchlist and PEP screenings, and performing risk assessments based on factors like country of origin, sector-specific risks, and internal financial aspects. Verifying collected information is essential, with low-risk third parties requiring basic screenings, while high-risk ones demand a more rigorous enhanced due diligence process. Organizations should maintain comprehensive records, establish ongoing monitoring, and periodically review and update their due diligence process to adapt to changing business needs.
- Global Sustainable Bond Market: The sustainable bond market is expected to grow in 2023, but credibility challenges and market uncertainty may continue to impact green, social, and sustainability-linked bonds.
In 2023, corporate decision-making is being shaped by several key trends. Notably, regulators’ new disclosure rules have created urgency for companies to manage climate-related data from their supply chains. The U.S. SEC’s plans to standardize climate-related disclosures have driven awareness of ESG issues among public companies. To comply with the rules, companies must disclose direct and indirect greenhouse gas emissions, prompting them to prioritize transparency. However, challenges arise from unstandardized ESG data and differing approaches to compliance. Forward-thinking companies are adopting technology and proactive strategies to manage data effectively and prepare for forthcoming regulations. Emphasis on granular and scalable data and early preparation highlights the importance of addressing ESG concerns in corporate strategies.
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