As countries around the world gradually recover from COVID-19, Europe facing energy issues derived from war, and the capital market under inflation, economy, environment, and social challenges, global leaders are beginning to adopt and act upon net-zero commitments, as well as confirming and acceleration Sustainability Transformations.

In 2022, governments published regulatory policies and brought issues including climate change and biodiversity, human rights, and fair trade and due diligence investigations to the table for discussion. At the same time, extreme climate has affected food, water, living conditions, and economic activities, prompting public opinion to urge stronger for change. In summary of the global events, positive results outweigh negative resistance. Based on global trend development and sustainability consulting professional service experiences, below are the 2023 Five Key Watch Out Points for leading sustainability companies.

1. ESG Backlash and Shareholder Activism: BoD will be the Center of the Storm for Management Rights

At the end of May 2022, Tesla was removed from the S&P 500 ESG Index. CEO Elon Musk immediately posted that “ESG is a scam”, which triggered a series of doubts and voices against ESG in the market.

In July, The Economist published a cover story titled “ESG: Three letters that won’t save the planet”, which pointed out that “ESG, which has a good starting point, currently has many gray areas that are unclear. Therefore, it is recommended to focus on the E (environmental) issue and require corporate organizations to improve the quality of information disclosure for the most critical carbon issue, which can help cope with climate change” and other comments.

Coincidentally, in August, Harvard Business Review also published an article titled “ESG Investing isn’t designed to save the planet”, which clearly pointed out that the various ESG fund investment projects that have been circulating in the capital market and have repeatedly set records for raising funds in a short period of time are committed to ensuring shareholder investment returns rather than generating positive and effective climate change impact. The sense of loss caused by the gap between this and the generally interpreted “capital realization of climate justice” also added fuel to the “anti-ESG” trend.

（Source: The Economist）

At the same time, the rise of shareholder activism has enabled shareholders who care about ESG issues to analytically exercise their rights and obligations, and exert influence through voting, advocating or other ways. According to a report by Reuters, about 235 shareholder rights movements took place globally in 2022 to promote corporate organizations’ asset and management changes. Multinational corporations including Exxon Mobil, bp plc., etc. have adjusted relevant board decisions under the influence of shareholder actions, overturning the myth that only major shareholders can influence corporate organizational decisions. This also demonstrated that corporates’ internal and external consensus on investment project choices are becoming more important.

The ESG dialogue, which escalated from capital market discussion to political struggles, is expected to become increasingly politicized and polarized in 2023 and 2024. As issues continue to brew, corporate organizations need to thoroughly plan a more resilient political governance structured BoD, dynamic practices better than current regulations, and close partnerships. Based on business development, investment strategies and sustainable development plans, wise commitments and decisions must be made to avoid BoD from getting caught up in the center of the ESG tug-of-war.

2. Complicated Environmental Conversations: Emerging Biodiversity and Energy Transition Issues

Sustainability issues have been receiving lots of attention in recent years; the global attention on climate issues has not diminished. As attention increases, biodiversity and energy transition issues have also emerged. At the same time, there have been more dialogue on the relevant review system, regulatory establishment, and disclosure framework and scope for these two issues. The overall cross-disciplinary communication and oblique work will become more complicated and there are concerns regarding the defocus of corporate organizational action plans.

Currently, GRI (Global Reporting Initiative) and the European Financial Reporting Advisory Group (EFRA), the most widely used reporting frameworks, are collaborating to draft disclosure standards for biodiversity and updating the content of the disclosure indicators in “GRI 304: 2016 Biodiversity”. Taskforce on Nature-related Financial Disclosures (TNFD), Carbon Disclosure Project (CDP) and the International Sustainability Standards Board (ISSB) also indicated that they will incorporate these issues into the frameworks, demonstrating that biodiversity issues are being taken seriously globally.

Most notably, ISSB has further made Scope 3 greenhouse gas emissions a required disclosure item. This undoubtedly clarifies the direction for corporate organizations to disclose indicators in the future and accelerates the pace for establishing government policies and decisions.

Capital was originally expected to focus on energy and infrastructure as key investment and credit loan projects for the energy transition issue. However, low-carbon energy investment reached US$1 trillion for the first time, indicating that energy machinery has not suppressed transformational investment. Considering the increased risk due to extreme climate, possibly causing damage to renewable or solar energy equipment such as large-scale wind power generators thereby increasing underwriting risks, it is estimated that renewable energy will show a “slowing down” or “negative growth” overall development trend.

Environmental issues have always been regarded as a risk item for corporate organizations and have developed relatively specific measurement and management methods, creating many leading advantages for current leading corporate organizations. Looking forward to 2023, environmental issues will extend to other sub-issues that need attention and social issues intertwined with management challenges. It is recommended that corporate organizations avoid focusing too much on a single aspect. Corporate organizations are suggested to anchor critical application points in their sustainable blueprint based on their core business development strategy and effectively allocate resources to face future challenges.

3. Social Issues become Major Building Blocks: Balanced ESG Ecosystem Development

Based on global regulatory and advocacy trend observations, issues related to people, including human rights and due diligence investigations, have been gaining attention in recent years. ESG development will also shift focus from environmental issues to social construction, promoting governments and corporate organizations to improve the development of the entire sustainable ecosystem in the future.

As business operations, products, and services hold management risks, due diligence will help organizations effectively prevent and reduce negative impacts. This will ensure organizations actively contribute positivity to the society, improve value chain relationships and protect their own reputation.

Predictive management will be initiated by various organizations in 2023 to identify relevant issues at all operational levels. The issues will be prioritized based on each organization’s management priorities. Then, regulations will be dynamically adjusted or formulated to help organizations overcome challenges. Organizations are recommended to take into account the interests of internal and external stakeholders when positioning and managing issues, initiate dialogue or negotiation to reach win-win relationships, and ensure the disclosure of qualitative and quantitative information. Through the improvement of information transparency, the phased goals of long-term sustainable management can be achieved.

4. Concretized Regulatory Disclosure Mechanisms: ESG Investment Cools, Eliminating Greenwashing becomes Top Priority

ESG-related regulations in Europe and the United States have changed from voluntary to mandatory. With different regulatory and legal systems throughout the world, it is foreseeable that global ESG disclosure will create potential conflicts of interest and become more complex.

For instance, the Corporate Sustainability Reporting Directive (CSRD) passed in November 2022 will affect companies outside the region. Non-EU companies with at least one subsidiary or branch located in the EU and revenue over 150 million euros must disclose relevant regulatory information according to CSRD by 2029. On the other hand, ISSB has been proposed for adoption by multiple regions under judicial jurisdiction, becoming a mandatory basic for information disclosure. The official trial run for the Carbon Border Adjustment Mechanism (CBAM) will also take place in 2023.

In terms of the capital market, ESG investment has grown too fast in the past few years and is expected to enter a correction phase. Due to rising interest rates, balance sheet reduction, tight monetary policies, ESG investment doubts, greenwashing incidents, etc., financial regulatory institutions have established a set of management methods. Unfortunately, although the definition of greenwashing was first explained in the United Nations’ first anti-greenwashing report at COP27 in 2022, which drew a “red line” for greenwashing and explained four key anti-greenwashing aspects, there are still different interpretations in the market. Thus, there are still many challenges to overcome before reaching a clearly defined greenwashing definition for cross-regional jurisdictions.

Careful analysis of relevant emerging ESG regulations reveals that common requirements such as scope and boundaries, data accuracy, and value chain management are emphasized. Therefore, establishing a globally universal standard for future regional integration is still promising. In summary, it is expected that the speed of regulatory construction will accelerate in the future. Corporate organizations need to accelerate the formulation of plans to cope with complex and often conflicting legal and financial disclosure requirements between multiple cross-regional areas.

5. Secretes under the Sustainability Wave: High Demand for Sustainability Positions but Organizations Aren’t Ready Yet

For the longest time, promoting sustainability within corporate organizations have been a tug-of-war between inadequate organizational management system and talent capability. Even with senior executives’ support, responsible employees lack relevant planning and execution ability. Or, senior executives don’t recognize certain issues pushed by employees due to insufficient external pressure. Fortunately, these situations changed fundamentally in 2022. The tightening of global regional regulation, national government-level net-zero emissions commitments, establishment of cross-departmental committees in corporate organizations, and management pressure on supply chains have created a situation where demand for sustainability talent is now greater than supply.

The uncertainty of global economic development caused some corporate organizations to lay off large numbers of employees or stop recruiting people. However, organizational management does not stop operating due to temporary conditions. Whether the human resources department or related development units are prepared to screen or cultivate a system and talents capable of undertaking emerging management strategies and issues is a very thought-provoking debate.

Sustainability green-collar jobs are interdisciplinary professional jobs. For example, private equity professionals will now need to understand and be able to evaluate the positive and negative impacts and effects of clean technology, biodiversity, and human rights. Whether or not corporate organizations can quickly bridge the gap, establish internal education and training plans so that employees can develop their professional skills along the learning curve, or recruit professionals who can assist corporate organizations in developing sustainable planning more smoothly in 2023 is critical for sustainability transformation in the upcoming two years.

While countries and corporate organizations make commitments to future sustainability visions, the risks of inaction are also increasing rapidly. Based on the COP 27 conference results observation, although ESG and sustainable development commitments show bubble-burst signs, the current emission reduction slowdown is understandable from the diverse global issues, geopolitical and economic impacts perspective.

At the same time, under macroeconomic, political, and legal background, ESG issues have become increasingly subtle and complex. The rapid change of issues has not slowed down. It is still recommended that corporate organizations prepare themselves for a sustainability transformation in 2023. To ensure organizational competitive for the next stage, corporate organizations must create organizational resilience, strengthen cross-departmental integration and extensive external cooperation.

 

Sub-editing: SC. (Tracy) Ni/senior editor

 

Source: CSRone
Photo credit to: Possessed Photography