ESG’s momentum continues into the new year. Here’s where it’s potentially headed.
Welcome to 2023. It’s a new year, although perhaps not so new when it comes to the themes associated with ESG. While some ESG topics may see more attention and grow in profile this year, many of the points below may already be familiar.
Here’s a roundup of 10 ESG-related themes which analysts see rising in prominence this year.
1. ESG funds coming under regulator scrutiny
Investment research firm MSCI is watching for an increase in regulatory interest in fund names, funds’ classification, and disclosure obligations on a global scale. The EU’s Sustainable Finance Disclosure Regulation (SFDR) imposes requirements on more transparent reporting for ESG funds, and MSCI sees other major market regulators following suit and holding managers to stricter account.
2. Market restrictions on environmental degradation, specifically deforestation
2022 was a dire year for deforestation, with 1500 square miles of Amazon rainforest destroyed in the first six months alone. In response to the accelerating destruction of global forests, European Parliament recently introduced legislation requiring products sold in the EU to be deforestation-free. As such, MSCI will be "watching which companies exposed to deforestation can improve due diligence and supply-chain monitoring as they seek to maintain access to key markets."
3. Biodiversity disclosure becoming a big deal
Edie.net sees biodiversity disclosure evolving quickly in 2023. Built on a model developed by the Taskforce on Climate-Related Financial Disclosures (TCFD), the Taskforce on Nature-Related Financial Disclosures (TNFD) is progressing rapidly, with the next iteration of its framework expected in March 2023. Last year’s COP15 event also saw the creation of a new global biodiversity framework aimed at halting land and water deterioration, the Kunming-Montreal Global Biodiversity Framework (GBF).
With the creation of these types of agreements, the writing is on the wall in terms of the increased disclosure required for companies that are linked to land-intensive activities such as forest and paper products, food and drink production, and tobacco.
4. The European energy crisis either accelerating or slowing decarbonization, depending on circumstances
The UK and European energy crisis has both accelerated and delayed decarbonization and clean energy initiatives depending on individual company circumstances according to Edie.net. For some it has accelerated their transition as they attempt to wean themselves off fossil fuels as fast as possible, while other companies have been forced to cut and divert funding for their decarbonization projects due to their soaring energy costs.
5. More attention on Social (the ‘S’) in ESG
Thomson Reuters mentions that social issues such as workers’ well-being, executive pay increasingly being tied to diversity, equity & inclusion goals, and pay equity and transparency are all getting increasing amounts of exposure, and expects this trend to carry on in 2023 as business becomes more human-centered, and the ‘S’ in ESG continues to gain relevance.
6. An ever-growing role in finance
The financial appetite for ESG-linked assets has grown exponentially in recent years and this looks set to continue in 2023. Bloomberg estimates that ESG assets could hit $53 trillion by 2025, and Nasdaq.com reports that "Green bonds, social bonds, sustainability-linked loans and related products provide excellent ways for companies to put their money where their mouth is, while accessing a more diverse investor base and even less expensive capital."
It adds that younger investors overwhelmingly describe themselves as very concerned about environmental issues, and that each year these younger generations become a larger portion of the investor community, indicating that this market may be set to continue growing well into the future.
7. The need for supply chain human rights disclosures
Investment management firm, Wellington Management, highlights supply chain resiliency and human rights as a key ESG area for 2023. In the same way in which supply chain disclosure for biodiversity is becoming more prominent, so regulations such as Europe’s SFDR are increasingly requiring investors to report on the human rights and labor standards of the companies in which they invest.
It's indicative of the need for companies to be increasingly aware of, and to meet evolving modern slavery and ethical labor regulations.
8. Corporate governance aspects getting increased attention
Companies are facing more complexity and increased scrutiny from investors and the broader public in today's modern business environment. Wellington Management believes that this makes corporate governance issues — like oversight, independent and diverse boards (by background and by skill set), and succession planning — vital considerations and key areas of potential value add. Expect these corporate governance factors to play an increasingly prominent role in business investment in 2023.
9. Pressure for ESG-related information and disclosures from business partners
According to the Harvard Law School Forum on Corporate Governance, more than one-third of the world’s largest publicly traded companies now have net zero targets, and this will lead to public companies strongly pressuring their private company partners for ESG data points and policies.
The online resource claims that this process has already begun, saying that it has already worked with several private companies who have "initiated and/or expedited ESG-related disclosures due to larger public partners, customers, and vendors mandating such data and information within their respective procurement processes."
10. Increased focus on the value of water metrics
Climate change and global warming are putting pressure on water resources throughout the world, increasing the risk of droughts, and prolonging such events in already dry areas. Not only does this affect the store of drinking water in reservoirs for human populations, it also affects agriculture and hydro-powered energy resources by limiting the amount of water available for these activities.
As such the Harvard Law School Forum on Corporate Governance is observing the broader stakeholder community, including investors, increasing their focus on water stewardship and demand for water metrics disclosure. Expect this to continue as climate change continues to drive extreme weather events.