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2023 is coming to an end, and we want to take stock of the progress in the areas of ESG and business sustainability. We are glad to witness the evolution of the field this year, which represents the outcome of many decades of consistently growing voice on the effect of the activities on the environment and physical world, and the need for accountability and transparency of these activities particularly by businesses. We think that progress in the following four areas are particularly important in helping to make sustainability concepts more distinctive and encourage (or require) companies to take steps to match their actions to the commitments that they have been making for several years. As we dive deeper into action, tracking and measurement, we also find that many gaps remain in the most basic foundations, like consistency and comparability of data relating to the measure of carbon or other key metrics.
For our last blog of this year, we highlight some of our thoughts in each of the four areas. We wish all of our readers a wonderful holiday and a very happy new year.
ESG is an acronym from the finance sector. It is a concept that seeks to expand the reasoning of financial decision making beyond the traditional metrics of income and costs by incorporating information on Environment, Social and Governance into financial decision making. The challenge, however, is the foundation of such decision making, the objectivity that is provided by the availability of consistent and comparable data, is lacking. This created space for financial actors to market investment products that promote the idea of ESG, but actually has little to do with ESG or sustainable investing. The prevalent “greenwashing” by investment funds led to a “credibility crisis” for sustainable finance following ESG principles. In many financial centers around the world, regulations are now in place to restrict the naming conventions of funds claiming links to ESG or sustainable finance, and to clearly categorize funds based on their levels of sustainability focus.
To ensure that financial and business decision making regarding sustainability is based on a sound foundation, regulations in the EU are also now in place for corporate sustainability disclosures. Foremost amongst the disclosures are Scope 1, Scope 2 and Scope 3 emissions while other environmental, social and governance data are also requested through the Corporate Sustainability Reporting Directive (CSRD). Our previous article discussed the importance of materiality assessment for reaching compliance with CSRD, which is the first, crucial step in sustainability reporting that sets the scope of the data and information to be collected and reported. This requirement for companies large and small to start to conduct analyses on the material effect of their activities on the environment, in addition to understanding the effect of the environment and other factors (particularly as risks) on their business, in our view, should force many companies to reflect on the broader impact of societal expectations on their business operations.
Climate is the focus of 2023, and it has been the global focus for some decades with many COP meetings and global agreements to tackle this problem. The need to control global warming and stem the excessive activities accelerating the warming of the planet is well recognized and many countries and businesses have committed to take action in this area. While the excitement around these verbal commitments from global political and business leaders is palpable, the activities that lead to real impact continue to be elusive.
Just a few statistics highlight the large gap between the will to commit, and the path to impact. Based on data from Science Based Targets, while over 6,000 companies globally have committed to setting a science-based target for emissions reduction, in North America, less than 1,000 companies have signalled that they will commit, and of these companies, only about 50% have actually set targets. Over 1,000 cities report carbon emissions through the Carbon Disclosure Project (CDP), but less than 15% actually report values. Herein lies the multi-faceted problem of commitment, action and reporting. Reporting cannot take place until commitment and action takes place. While it may be relatively easier to commit, even with a science-based targeting method, actual implementation can be unpredictable, and this difficulty is compounded by the lack of fundamentally sound, agreed-upon, consistent and comparable data to track progress and outcomes. Thus, on the path to limiting global warming to 1.5℃, or to 2℃, many obstacles still remain.
Nature is both physical and abstract, and nature has a healing effect on our well-being. It seems intuitive that as we talk about climate and carbon emissions, we shouldn’t exclude other natural elements that co-exist on the planet, like biodiversity, forests and land use, water, and pollution. Without protection and preservation of these other aspects of nature, our approach to avoiding a planetary catastrophe based only on climate action seems to be that of isolating only a specific aspect of the problem while ignoring its many spillover effects. Thus, it is befitting that in 2023, we welcomed the draft recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD).
We find encouraging in this recommendation by the taskforce the attempt to syntheize many strands of related research developed over the past decades, and to develop a common vocabulary for discussing the relationship between nature and society, in which business is embedded. Concepts such as nature and its realms, dependencies and impacts, and natural services are novel to businesses, and becoming adept at handling this new vocabulary helps to facilitate conversations and enhance mutual understanding of the relationship between nature and businesses across stakeholders. We expect that more companies will adopt nature-related financial disclosures over time, while many engaging, fruitful and delightful conversations around nature and its regenerative services for businesses take place.
Another major development in 2023 is the consolidation of standard issuing bodies in the ESG space that significantly reduced the chaos of the previous years, in which many standards were issued by many organizations with a lack of coordination, leading to the “aggregate confusion” of ESG standards. GRI remains the leading voice of “double materiality,” advocating “impact materiality” in addition to “financial materiality.” ISSB, two years after its formation, developed and issued its general requirements and climate-related requirements, the first two of its package of standards with a focus on “financial materiality” to support financial decision making. EU continues to issue regulations on corporate reporting, incorporating the ESRS (European Sustainability Reporting Standards) into its CSRD (Corporate Sustainability Reporting Directive). The development and evolution of these three major standards places strong emphasis on “interoperability”, meaning that conflicts and inconsistencies across standards are taken into consideration and resolved in the final drafts, and the organizations are committed to support reporting organizations referencing all three standards to deliver streamlined reporting. Compared to the previous “alphabet soup” of sustainability standards, this represents a major step forward in clarifying the sustainability reporting requirements for business organizations.
To us, 2023 is a new beginning. It is the first year of The ESG App, with which we are attempting to build a digital library related to sustainability in business. In this field, many steps are being taken to strengthen the structure and integrity of the sustainability agenda. Regulations should serve to require companies to analyze and take more action on sustainability commitments while coherent standards and guidances should help companies move forward in making tangible impact. We look forward to what 2024 may bring.