2023 was an eventful year for ESG and sustainability. The SEC was expected to propose a climate mandate then delayed; the topic of AI dominated conversations; anti-ESG rhetoric reached an all-time high; and social pressure for leaders to act made headlines all year long. Where do we go from here?
Based on our research and experience, these are our top five predictions for the coming year and how they’ll impact the field:
Increased Effort to Link Business and ESG
As we explored earlier this year, it’s never easy to address challenging issues in politicized times. Unfortunately, in a recent survey of more than 100 large US companies, nearly half said they have already experienced ESG backlash and 61% expect pressures to persist or intensify in the next two years. As a result, many companies (63%) say they are increasing their focus on the business case for ESG and how it connects with shareholder value. Investors are now expecting companies to present a coherent, cohesive narrative of their company’s strategy, inclusive of ESG—or, to have a business strategy that is sustainable, not just a separate sustainability strategy.
US Regulatory Frameworks Will Follow Europe’s Lead
What we’re watching here is the growing interest in double materiality. For those using GRI, double materiality is now required. Double materiality is also a key piece of the European Unions’ Corporate Sustainability Reporting Directive (CSRD) and Sustainability Reporting Standards (ESRS). For US companies who will be subject to the EU requirements, they will need to prepare to report on double materiality. The ESRS breaks double materiality into two categories: impact materiality (the “inside-out” perspective) and financial materiality (the “outside-in” perspective). While there has been long speculation if the forthcoming SEC climate mandate will follow the ESRS’ lead, companies should keep a watchful eye.
Companies Will be Cautious Communicating DEI
Employees and potential employees care about how a company navigates the DEI/diversity waters, so many are walking a fine line. There are growing uncertainties around litigation and the overarching unknown (see: the recent Supreme Court ruling on Affirmative Action). In response, we’ll likely see more companies connect their DEI efforts to their business success, talent retention, and happier employees, but likely won’t be amplifying their achievements externally much further. There may be fewer stand-along DEI Reports.
More Regulations on Greenwashing
Greenwashing regulations aren’t new for the EU, but there is a growing suspicion that those same regulations will be coming for the US soon. As commitments rise, transparency must too. Consumers, investors, employees, and regulators are becoming more alert to false or exaggerated ESG claims. A recent proposal in the EU provides a regulatory framework for consumers who are targeted by greenwashing claims to seek recourse. It also provides much needed guidelines for how companies should substantiate environmentally friendly claims. If you’re advertising your ESG efforts, ensure they’re science or data backed.
Baby Steps Bring AI Into Reporting
Though we’re seeing a rise in technological advancements, AI in the form of Large Language Models still isn’t ready for use in ESG report writing. There are uses today for data analysis. And, as the technology advances there will likely be more integration of AI in more aspects of the report including assessing content and making comparisons across reports and documents. But, even with that, we anticipate that companies will proceed with caution.
More to Think On
Other topics we have our eye on that may or may not make waves in 2024:
- Thought leaders and activists have a growing focus on biodiversity and the TNFD (the Taskforce on Nature-related Financial Disclosures). But will corporate reporters follow?
- “ESG” as we know it may experience a rebrand. ESG’s rough patch in 2023 may alter how businesses frame their successes for 2024 and beyond.
- Supply chain sustainability, and the ever controversial Scope 3, will come into full view. With new regulations making Scope 3 reporting mandatory, we see this as an area for more proactive communications from companies as stakeholders demand more transparency.
This space is dynamic and predictions, as always, are a mixed bag. But, one sure bet is that the world of ESG/Sustainability reporting will continue to evolve.
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