From nature restoration to social equity: 7 top ESG trends to look out for in 2023
From the ongoing energy crisis to refreshed global commitment to act on biodiversity, it is clear that corporate sustainability will evolve again in 2023. Here, edie rounds up seven key themes that could dominate discussions for the year ahead.
The last 12 months have delivered a tumultuous and seismic shift in how the world views sustainability and climate action. The momentum garnered at COP26 soon fizzled out as climate sceptics looked to push back on green regulation, while the energy crisis saw many switch lanes from the long-term net-zero trajectory, to short-term economic security. Supply chain disruption, skills shortages, disrupted investment and energy security were all cited by climate deniers as reasons to pause action.
That’s not to say that 2022 was a step back on the climate agenda overall. Big breakthroughs on adaptation and mitigation at COP27 in Egypt, coupled with a new global treaty on biodiversity agreed at COP15 in Montreal have further intertwined the ways that businesses can respond to societal and planetary needs through decarbonisation and natural restoration.
These macro shifts have combined with smaller, yet important changes in the reporting landscape for business. With new requirements laid out for transition plans and climate disclosure and the continued crackdown on corporate greenwash, it is clear that the landscape has changed and sustainability professionals will need to respond accordingly.
With all this in mind, edie is gazing into its crystal ball to predict the big themes that could dominate the ESG landscape in 2023.
1) The escalation of the energy crisis response
Energy prices in the UK and Europe have been increasing since summer 2021, with the steepest increases felt following Russia’s invasion of Ukraine this February. This has, the International Energy Agency (IEA) has confirmed, spurred increased investments in energy efficiency and renewable generation capacity. But, to keep the heating and lights on in the near-term, European nations have been scrambling for alternative fossil fuel sources and costs have continued to rise.
While the Financial Times proclaimed in late October that the end of the price crisis could be “in sight”, this will not happen overnight. Price rebounds are likely to happen this winter, Aljazeera has stated, with pre-crisis prices not likely to be seen for at least two years.
Some businesses with the means to do so have responded to the energy price crisis by accelerating their energy efficiency and clean energy strategies. But others are struggling to even survive, especially smaller businesses, leaving little opportunity for investment in the energy transition and other environmental topics.
Our Net-Zero Business Barometer survey of energy and sustainability managers at 148 organisations, conducted this September and October online, found that one-fifth of respondents either agreed or strongly agreed that their organisation is being forced to de-prioritise work relating to the net-zero transition. Additionally, 11% said their organisation is more likely to miss its decarbonisation goals as a result of cost squeezes.
Yet 24% of respondents said their organisation is going further and faster to decarbonise due to the energy price crisis. Six in 10 said their organisation has “heightened” work on energy efficiency, while more than half (56%) said their employer is installing or exploring decentralized energy generation.
For businesses in the UK, the Government has advised that an update on how the Energy Bill Relief Scheme will be reshaped from April 2023 in the new year. This was awaited ahead of Christmas but, alas, has not materialized yet. The Scheme was first introduced in September, capping the price that businesses pay for electricity and gas. An update for April was then confirmed at the Autumn Statement in November.
2) Biodiversity disclosure will evolve quickly
Fresh off the back of the new landmark agreement delivered at COP15 in Montreal, many businesses will now be looking at their environmental footprint through the lens of biodiversity.
While disclosure in this area is still nascent, we are seeing new standards and guidance continue to evolve, and many businesses will wish to be proactive by engaging with these voluntary initiatives.
The flagship initiative is that of the Taskforce on Nature-related Financial Disclosures (TNFD), which recently issued the latest amendments to its beta framework to enhance corporate approaches to disclosing nature-related data for investors, ahead of an official launch this year.
The Taskforce claims the latest update includes significant enhancements based on feedback from businesses, financial institutions, governments, regulatory and standards-setting bodies, civil society organisations and Indigenous Peoples and Local Communities from around the world. The new beta proposes new disclosure recommendations related to supply chain traceability, based on the quality of stakeholder interactions and data. It also improves focus on engagement with rights-holders and attempts to better align nature with climate targets from corporations.
The next iteration of the framework, expected in March 2023, will feature progress on disclosure metrics, measurements of impact and risks across the supply chain and additional guidance for priority sectors —including agriculture and aquaculture, mining, energy, infrastructure and other sectors. The TNFD will also expand from 34 members currently to 40.
Another added layer of disclosure in this area comes from the Science Based Targets initiative (SBTi).
With support from WWF, the SBTi has developed the Forest, Land and Agriculture (FLAG) Guidance, which will enable companies within those sectors to set science-based targets that include land-based emissions and removals. This includes emissions associated with biomass and soil losses, deforestation and degradation, peatland burning and emissions from land management including fertiliser use and emissions from relevant machinery and manufacturing.
The FLAG guidance will be required for companies that are linked to land-intensive activities across their value chain. This includes forest and paper products, food and drink production and tobacco.
Want to know more about what the UN’s global biodiversity treaty will mean for the private sector? Read our contributed blog on the topic from Lloyds Banking Group’s director of environmental sustainability Dr Rebecca Heaton.
3) Climate transition plans are set to become more common
In November 2022, UK businesses finally got a first look at a draft of a new disclosure framework for forthcoming mandatory climate reporting.
The Transition Plan Taskforce (TPT) was launched by the Treasury last April. Then-Chancellor Rishi Sunak used his platform at COP26 to pledge that large businesses in high-emission sectors would be subjected to new net-zero disclosure requirements from 2023.
The requirement is around net-zero transition plans, which support long-term corporate emissions goals with interim milestones and outline the necessary steps to change business models and investment. Plans should also detail how workers will be supported and the need for upskilling and reskilling addressed.
Proposals are now out for a ‘gold standard’ for net-zero transition plans. The TPT is proposing that companies should have to publish one transition plan this year, then an update in 2026. In 2024 and 2025, information material to the plan should be included in financial reporting, it is recommending.
Regarding the content of a ‘gold standard’ plan, the TPT recommends that organisations should state high-level ambitions to mitigate emissions as well as top-line plans on climate adaptation. This information should be built upon with a list of actions to be taken in the short, medium and long-term and plans to finance these actions. Organisations should also clearly set out how their governance is set up for the net-zero transition.
Given that the G7 have pledged to follow the UK in mandating climate risk reporting from certain large businesses, the transition plan mandate may well go global.
Need some inspiration on what should be included in a transition plan? Check out this op-ed from Nicolette Bartlett, chief impact officer at CDP.
4) Sustainable and ethical marketing will be redefined
At the beginning of 2022, our senior reporter Sarah George penned an opinion piece on the growing backlash against marketing perceived as greenwashing, with shoppers becoming savvy, regulators and investors stepping in and, in some cases, lawsuits being filed.
The subsequent months have seen many greenwashing accusations against large businesses hitting the headlines. Sectors affected range from fashion and consumer goods, to transport, to finance. In February, Innocent Drinks was ordered to pull a TV advert urging shoppers to help it in “fixing up the planet”, with Plastics Rebellion alerting the regulator to its level of plastic production. KLM was sued by environmental campaigners in July for hyping up its offsetting offers, claiming they could pioneer a “sustainable future” for aviation.
In the second half of the year, HSBC had some of its adverts banned in the UK, with the regulator deeming a campaign to be missing important information about the overall impact of its investments and its involvement in fossil fuels. November saw H&M being hit with the second lawsuit relating to its ‘Conscious’ product labelling in less than a year. This is to name but a few examples.
In the UK, where edie is based, the Competition and Markets Authority (CMA) published its Green Claims Code guidelines last year. Early this year, it called on the Government to add more legal “teeth” to the implementation process. The EU is also firming up its own anti-greenwashing regulation.
Beyond environmental sustainability, the debate is heating up about what ethical advertising truly looks like during a recession. An alternative Christmas advert showing a bereaved father telling his young son that Santa is sick, because he cannot afford heating or food – let alone presents – has gone viral in recent weeks. The closing message is that “Christmas is made, not bought”, with the filmmakers stating that they wanted to counter narratives of consumption that some retailers are continuing to push.
5) Expect more of a focus on the ‘E’ in DE&I
At the start of the Covid-19 pandemic in 2020, many companies responded by increasing their services to the community. Some perfume and beverage producers pivoted to hand sanitiser production. Some food businesses maximized their redistribution efforts or offered free, contact-free deliveries to the most vulnerable. There was increased discourse around what it truly means to be a ‘purpose-led’ business and why generating shareholder profits was no longer enough of a reason to have a social licence to operate. Businesses accused of not providing PPE for staff or adhering to distancing and isolation rules were hammered in the press.
The early stages of the pandemic coincided with protests over the killings of George Floyd and Breonna Taylor by police in the US, sparking new Black Lives Matter protests in North America and across the world. The Stop Asian Hate movement was also extremely active in response to the violence and discrimination levelled against Asian people and communities in response to Covid-19. Responding to this, many large businesses pledged to update their diversity, equity and inclusion (DEI) policies and processes, with some setting strategies relating to this topic beyond compliance levels for the first time and many hiring DEI professionals. The number of DEI-related job postings in the US more than doubled between May and September 2020.
It has been noted by thought leaders in the field that the ‘E’ in DE&I is “relatively new to the corporate equation” compared to D and I, in terms of strategy development and effective implementation. Equity describes going beyond treating everyone equally, assessing what needs to be done to overcome specific historical and sociopolitical barriers to opportunities for specific people and groups.
The world is almost certain to enter a recession in 2023. This will doubtless widen social inequalities in some cases. Just as we witnessed backwards progress on some of the UN Sustainable Development Goals in 2020 and 2021, we can expect the same again in the new year. As noted above, there is debate around whether the private sector has truly grasped what the increasing cost of living means for their staff and those working across its value chain – and responded accordingly. Expect actions (and inaction) to be called into question even more frequently next year.
6) Supply chain management will continue being a key focus
Lockdown restrictions may have lifted in the UK, but Covid-19 is far from over globally. Knock-on effects are being felt across multinational supply chains for all kinds of materials and products. Semiconductor supply chain issues are expected to carry on until at least late 2023, and disruption affects other technologies commonly made in China such as solar panels, to give one example.
Rising energy and materials costs are another concern, as is the ongoing war in Ukraine, which has disrupted supplies of sunflower oil and fertilizer among other commodities. Climate-related impacts are also being felt, through moves as India’s rice and wheat impact restrictions, imposed after unseasonably early and intense heatwaves.
These disruptions have prompted many large businesses to rethink their approach to supplier engagement – and, in some cases, the shape of their supply chains as a whole, in the name of resilience.
The current landscape presents both challenges and opportunities relating to engaging suppliers on environmental issues. On the one hand, businesses may feel there are more pressing issues to engage with suppliers on. As a counterpoint, the channels of communication are being opened, and businesses are increasingly seeing the supply chain as a necessary frontier for meeting their sustainability strategies.
CDP estimates that the average large multinational business will generate 11.4 times more emissions through its supply chain than in its operations. Climate strategies excluding these emissions are, therefore, widely regarded as weak by investors. Setting strong targets to reduce indirect emissions, including supplier emissions, is becoming a prerequisite for setting climate targets via the science-based Targets Initiative (SBTi).
Failure to decarbonise the supply chain is not just a reputational risk but a potential physical risk, too. CDP estimates that, when climate, forest and water-related risks in global supply chains are accounted for, businesses are under-estimating up to $120bn of costs through to 2026.
We may well see in 2023 that the continued focus on decarbonisation in supply chains happens in tandem with increased action to end supply chain deforestation and promote strong water stewardship. CDP has always seen many more firms reporting on climate than on water and forests, but legislation implemented in the UK and the EU will force increased forests disclosure – as will the need to deliver the post-2020 biodiversity treaty. Water risks have already bitten for many companies this year amid drought in geographies including China, Northern Europe, Mexico and the Horn of Africa, bringing home the need to credibly strategies here. As with nature, science-based water frameworks are emerging and 2023 could be a landmark year.
7) Environmental adaptation and resilience may (finally) become mainstream considerations
Climate scientists have repeatedly emphasised that, even if emissions were to decrease sharply and rapidly enough to meet the Paris Agreement, some physical climate impacts are already ‘baked in’, and we need to adapt to them. The greater the level of warming and the more severe changes in weather patterns are, the greater the need to adapt becomes, and the more challenging and expensive.
Adaptation, however, has historically been ignored by businesses and governments. Late last year, the UN warned that at least a fivefold increase is needed in adaptation finance to developing nations to secure a climate-resilient future for their populations.
In what is a very slim silver lining, adaptation was the major breakthrough at an otherwise disappointing COP27 in Egypt. The Egypt COP27 Presidency has launched the Sharm-El-Sheikh Adaptation Agenda in partnership with the UN Climate Change High-Level Champions, and the Marrakech Partnership.
The Agenda, launched during the World Leaders Summit at COP27, is a comprehensive global to-do list to help improve the resiliency of more than four billion people against climate-related risks. It outlines 30 “Adaptation Outcomes” to help protect those living in the most climate-vulnerable communities by 2030.
Actions are divided across five “impact systems” that include food and agriculture, water and nature, coastal and oceans, human settlements, and infrastructure, and including enabling solutions for planning and finance.
This, combined with the breakthrough funding agreement on loss and damage, will see many national governments and investors turn their attention to funding and supporting loss and damage and adaptation initiatives. Businesses may also wish to focus on these initiatives, co-creating solutions with on-the-ground suppliers or the communities that they rely on in order to build climate resiliency into their value chains. The Race to Zero initiative’s Race to Resilience spin-off is the biggest global platform for collaboration in this area, convening more than 2,000 organisations across 100 countries.
Do you agree with our predictions? Do you have another topic to add to the mix? Let us know in the comments below.
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