The past year has been a busy one with three UK Prime Ministers, two different COPs and TCFD mandate for businesses. It has also been a a challenging one for companies with regards to ESG. From an energy and cost-of-living crisis that emerged at the start of the year to key climate and biodiversity summits in recent weeks, 2022 has reinforced the need to tackle the climate crisis head-on.
With the rapid trajectory of sustainability and ESG investing, as well as the rising importance of increased transparency, we wanted to look ahead to 2023 and consider what the next year could look like for industry, and beyond.
Further clarity around ESG Ratings
One trend that seems to be at the forefront of ESG is the need for further clarity around ESG ratings. With a prevailing lack of ratings standardisation, and an exposé on greenwashing tactics, there is a need for a real industry push to regulate ratings.
Regulatory transparency is also accelerating. Switzerland announced it will mandate climate disclosures for large companies starting in 2024 (thus the need for those standards). And the U.S. Securities and Exchange Commission proposed new reporting requirements as well. Companies will need to measure and publish their carbon emissions, both Scope 1 (onsite emissions) and Scope 2 (emissions from electricity bought from the grid). Soon to come, the SEC says, is Scope 3 (the supply chain and customer emissions).
Here in the UK, new regulations are edging closer with the government this month committed to updating a Green Finance Strategy in early 2023 and to hold talks about ESG ratings providers into regulations. Working on the problem, most notably, is the International Sustainability Standards Board (ISSB), with standards already proliferating, and this year, many countries (including China, Nigeria, and the UK) officially adopted them; that means they become mandatory for large companies.
The rise of biodiversity and Nature-based Solutions
With two different COPs this year, there was an emerging theme of nature capital and the need to prioritise the preservation of biodiversity. The outcome of COP15 should make financial regulators sit up and listen, with the “30 by 30” pledge outlining countries' agreement to protecting 30% of land and water by 2030. There have also been comments from global leaders describing the agreement as a “Paris moment” for biodiversity, implying a new level of ambition.
Something with the most direct implications for businesses is the Task Force for Nature-related Disclosures (TNFD), which is positioned as an extension of the Taskforce on Climate-related Financial Disclosures (TCFD), the climate equivalent which has worked its way into regulators’ plans around the world.
Natural capital plays a vital role in our economy and society. Every economy and industry is directly or indirectly dependent on nature and its services. No business can afford to ignore its value. It looks very likely that businesses will need to plan for nature-related disclosures in the coming years.
Crackdown on greenwashing
COP 27 saw multiple discussions about greenwashing or the new trend of greenhushing. Experts advised on rules to improve integrity and transparency in net zero commitments by industry, regions and cities after widespread concern about greenwashing, including claims by major fossil fuel companies that they were aiming for net zero emissions by 2050 while backing new coal, oil and gas developments and relying heavily on offsets.
In a bid to clamp down on greenwashing, the Financial Conduct Authority (FCA) proposed a package of new measures in October this year, including investment product sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used. While in the US, the Securities and Exchange Commission (SEC) has been cracking down on misleading ESG claims, including a $4 million fine for Goldman Sachs and $1.5 million penalty for BNY Mellon.
As policy makers raise the standards in 2023 around ESG disclosure across the UK, EU and US, companies will be required to have a greater understanding of their Scope 3 emissions.
More companies will aim for net zero — and beyond
In recent years, the phrase net zero has rapidly come to the forefront of climate change discussions. A growing list of companies (and countries, like Finland) put forward “net zero” targets for carbon by 2050 or sooner, and some include their supply chains. By midyear, 700 large public companies had set net zero goals, a 68% increase from two years earlier. Definitions of what “zero” means vary depending on whether a company will use carbon offsets or not however companies kept setting goals and taking action.
Clear guidance is continuously being developed and changed making it difficult for organisations to understand where to begin. To keep businesses, investors, and other organisations on track and accountable, accurate and verifiable carbon reporting is absolutely necessary. We believe that net zero strategies, carbon reporting, and target setting need to be as straightforward as possible.
How do you begin your ESG Journey?
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