Environmental, Social, And Governance Predictions For 2023

With 2022 coming to an end, Good.Lab’s ESG team has been thinking about the trends and technologies that will shape the coming year. Accordingly, we are pleased to share our 2023 ESG predictions. We expect to see a continued focus on corporate ESG and further mainstreaming of ESG reporting standards and metrics. Below, you will read about the eight trends we’ve identified along with recommended actions your company can take now to remain competitive and profitable in regard to ESG in the coming years.

Global investors will hold ESG assets of $20 trillion

ESG factors are increasingly becoming part of investment decision-making. We’re seeing a shift towards more sustainable investing practices and ESG-focused investment vehicles. While 2022 saw some ESG blowback, primarily against the lack of transparency around the criteria for inclusion in an ESG fund, eight out of ten investors still plan to increase their allocations to ESG products over the next two years. 

Undeniably there is a need for more transparent data on ESG investment products, but investors are still keen to have their portfolios reflect their values through those investments. Asset managers who recognize the importance of investment companies having a clear vision and strategy for ESG and communicating comparable, verified data metrics and actionable plans are positioned to win over the long-term in this new paradigm.

• For mid-market companies, increased ESG AUM underscores the importance of building a blueprint for collecting and calculating ESG metrics and setting transparent, achievable ESG targets. This is especially relevant for companies with plans to go public or seeking additional investment over the next 5 years.

The SEC will provide final ruling on climate-disclosure

ESG policies in the U.S. and around the globe are shaping the next decade of action for environmental and social objectives. Regulatory bodies have introduced rules requiring firms to disclose how they consider ESG factors when making investment decisions and to companies to disclose how they perform on ESG.

The U.S. Securities Exchange Commission (SEC) proposed legislation in 2022 to require climate-disclosures in the annual reports, prospectuses and registration statements of all public companies registered with the SEC. It is expected to finalize its ruling in 2023 which will mainstream climate and ESG disclosures.

It is important to note that private companies are also exposed to the pending regulations if they are in a supplier relationship with a public company requesting their ESG metrics. Investor expectations for disclosures will only continue to increase as a result of the ruling.

• Mid-market companies, both public and non-public filers, should aim to understand the pending regulation and its potential impacts. They should also assess any technology gaps and required tools for ESG measurement, management, and reporting. For more details on how to prepare for pending reporting requirements, check out our infographic: Navigating the SEC’s Climate Disclosure Proposal.

ISSB will become the global reporting standard

Governments of 38 of the largest 50 economies in the world have, or are developing, disclosure requirements for corporations covering ESG. In an effort to consolidate existing ESG standards bodies, the ISSB which was formed in late 2021, is broadly expected to become the global standard for ESG reporting.

In an attempt to further reduce fragmentation in sustainability reporting, an ISSB alliance with CDP was announced at COP27. This highlight the continued progress of the ISSB towards achieving a truly inclusive and global disclosure framework with final standards expected in 2023. The result will improve the consistency and comparability of climate-related and other ESG metrics for investors and stakeholders.

• Mid-market companies will benefit from a having a single, defined reporting standard. This will reduce their ESG reporting burden. Companies should consider ESG solutions and technology now that it is flexible enough to align to ISSB standards.

Increased downstream ESG expectations from S&P 500

Large companies are increasingly demanding greater transparency and accountability from their supply chains. Even without a comprehensive U.S. legal requirement, broad efforts are underway to evaluate suppliers and monitor their performance in relation to various ESG topics. The expectations from Fortune 500 leaders will only increase as they act to meet their own publicly set ESG targets.

Companies that voluntarily measure Scope 1 and 2 greenhouse gas emissions and are now being driven by market and regulatory pressures to take inventory of their Scope 3 emissions, e.g., those emissions that occur in the value chain from upstream and downstream business partners. Target and Costco recently set targets to cut emissions, while giants like Walmart and CVS have long had goals to reduce their own emissions and those from their supply chains. This is putting added pressure on the SMEs that make up these giants’ supply chains to accurately measure and report emissions data into their buyers.

Supplier equity and diversity are also taking center stage, as Nike makes a commitment to a $1 billion cumulative spend on diverse suppliers by 2025; Nordstrom aims to produce 90% of its Nordstrom Made products in factories that invest in women’s empowerment by 2025; and 3M has a mandate to advance economic equity by creating five million unique STEM and skilled trades learning experiences for underrepresented individuals by end of 2025. The reporting curve will be high for suppliers to respond to an increasing number of requests for their ESG data.

• Mid-market companies must be prepared to report ESG data into their buyer networks to maintain healthy standing with business partners. The ability to readily respond with accurate data on a host of ESG metrics goes from a nice-to-have to a must-have and will become a commercial differentiator.

IRA + CHIPS + Infrastructure Acts will create a renaissance for clean tech & decarbonization

The three acts together more than triple the federal government’s annual spending on climate technology and clean energy, amounting to a whopping $500 billion over the next decade. They are expected to reduce GHG emissions by 42% below 2005 levels, covering the most GHG intensive sectors in the U.S. economy. Together they will kick-start a range of technology transitions that could transform the economy to a clean energy future, and spur more and new companies to decarbonize, make operations energy efficient, and improve their ESG impact.

• The CHIPS and Science Act (2022) is a $54 billion investment in climate-related efforts in materials science such as developing new battery chemistry and more efficient solar panels.
• The Bipartisan Infrastructure Investment Act (2021) is a $98 billion investment in the commercialization of energy related innovations and aims to strengthen supply chains by making improvements to U.S. ports, airports, rails, and roads.
• The Inflation Reduction Act (2022) includes $386 billion in tax credits, incentives, and funding to retool, repower, repurpose, and replace energy infrastructure that has ceased operations, and enable operating energy infrastructure to avoid, reduce, utilize, or sequester air pollutants or anthropogenic emissions of greenhouse gases.

• Mid-market companies should leverage this opportunity to decarbonize their businesses and start adopting climate/ESG disclosures. The first step is by using an GHG Emissions Calculator to quantify corporate emissions. With an accurate measurement, you can gauge the impact of climate on your company, and knowledgeably implement plans for emissions reduction that include taking advantage of energy/climate strategies with tax credits or incentives in mind.

Business externalities will continue to grow in number and complexity

There is a common misunderstanding that ESG is concerned only with the internal operations of a company, i.e., how that company performs internally on ESG and then reports those metrics externally. ESG also, however, addresses how prepared a company is to respond to the business externalities that affect it from the outside in. ESG in this sense looks at how well a business is positioned to respond to externalities.

As our world becomes more complicated, and at an accelerating pace, business externalities will only continue to grow in number and complexity. Every business today must reckon with a growing climate crisis, limited resources, rising expectations around human capital, fast changing regulations, heightening customer expectations, geopolitical risk, and supply chain disruptions. As these externalities increase, they will hurt the businesses that fail to plan and adapt.

• Mid-market companies should act now to build resilience. While there are no easy solutions, companies should closely examine their operations, measure their current performance across ESG domains, implement risk mitigation plans, and explore avenues for growth, such as transitioning to renewable energy sources and developing sustainable products and services, among other forward-looking strategies for competition in a low carbon future.

Companies that fall behind on ESG will lose the war for talent

According to a recent IBM study, 70% of employees find sustainability programs make employers more appealing, and 80% want to help their company reach climate or ESG goals. This is especially true with millennials who are set to become the largest employee demographic in the coming years and are increasingly taking on leadership roles. The 21st century workforce is taking a new form influenced by millennials approach to business. According to Nielsen, 40% of millennials said that they’ve chosen a job in the past because the company performed better on sustainability than the alternative. Less than a quarter of gen X respondents said the same, and only 17% of baby boomers.

With an employee pool that has higher expectations around ESG, securing talent will require creating a workplace that younger generations favor. As much as ESG strategy is about making sure an organization can survive the threat of climate change, it’s also part of convincing employees to take (and keep) the jobs that need to be filled.

• Mid-market companies need to keep pace on ESG and not fall behind in the war for talent – the products and services sold, the workplace environment, authentic DEI initiatives, and overall company vision must be transparently communicated to employees to retain them and maintain reputation.

The CFO becomes the de facto ESG leader

Finance leaders’ work has expanded in recent years to include everything from digital transformation to workforce management, and sustainable transformation. The finance role is ideally positioned to help organizations carry out ESG reporting and weave it into strategy and operations. As a profession that is hyper quantitative, the CFO is the right role to provide ESG metrics that are comparable and verifiable. Increasingly finance leaders are assuming responsibility for ESG strategy, data management and collection, and implementation.

Long an inspirational ESG leader, Etsy moved the responsibility for ESG into the CFO office early on. “Embedding ESG roles into traditional business functions has helped drive greater accountability and improve the adoption of sustainability practices throughout our company. We moved our ESG reporting and Sustainable Cloud Computing roles from the Sustainability Team to the Accounting and Engineering teams,” shared Rachel Glaser, Chief Financial Officer for Etsy. For ESG to transform from a vague, qualitative idea to quantifiable data and a plan for action, CFOs are best positioned to take the lead.

• Mid-market companies should start preparing their finance leaders for upcoming ESG reporting requirements and revisit ESG target setting and incentivizing progress toward stated goals. 

Managing ESG moving in 2023

Overall, the future of ESG is likely to involve continued focus on responding to business externalities, like climate change and expanding the scope of ESG factors. We will also see greater integration of ESG into investment decisions and enhanced disclosure and reporting requirements. Good.Lab can help mid-market companies wherever they are in their ESG journey to begin laying the groundwork now for a world-class ESG program. Through a combination of ESG performance software and expert guidance, our solutions empower companies to:

• Conduct an ESG materiality and risk assessment to better understand their ESG exposure
• Measure a GHG emissions baseline to know where they stand today and plan for a low-carbon future
• Set achievable and realistic ESG targets and build actionable plans to become a top ESG performer

While we are yet to see what the new year brings, one certainty is that ESG is here to stay, and businesses need to adapt and evolve if they intend to compete long beyond 2023.