Moving into 2023, businesses are facing one of the most exciting — if uncertain — times for corporate sustainability and environmental, social, and governance (ESG). As ESG moves from the fringes to the forefront of many business, policy, and investor discussions, it’s more important than ever for organizations to prepare for impending change.
While ESG has faced its fair share of debates and controversies, important stakeholders such as investors, employees, customers, and suppliers continue to demand companies demonstrate how they are managing social and environmental risks and opportunities. ESG is here to stay, and smart companies are actively looking to up their game in the New Year. Here are four trends thinkPARALLAX thinks companies should keep an eye on in 2023:
#1 Climate regulation is coming
While climate policy discussions in the United States have been brewing for years, 2023 is the year it will come to a froth. Proposed SEC and EU regulations make it clear that companies will need to include disclosures on Scope 1 and Scope 2 greenhouse gas (GHG) emissions, with many companies required to report on Scope 3 emissions as soon as 2024 (for EU regulations).
To prepare, companies must ensure the validity and completeness of Scopes 1 and 2 data. If you’re not currently measuring Scope 3 emissions, now is the time to begin understanding and assessing your most significant Scope 3 impacts (e.g., business travel or supplier spend). If you’re wondering how to approach climate risk and opportunities, Taskforce for Climate-related Financial Disclosures (TCFD) currently is the de-facto universal standard. Prioritizing this framework are institutional investors, governments and looming international disclosure requirements — such as those to be issued by the International Sustainability Standards Board.
Biodiversity and deforestation also are on the policy docket for 2023. In December 2022, COP 15 in Montreal, Canada ended with a draft of a global biodiversity framework to set a course for reversing biodiversity loss. Major reporting frameworks, such as CDP and the Global Reporting Initiative (GRI), are also increasing their biodiversity disclosure requirements. The European Union continues to lead in regulating climate disclosures, with proposals for ending deforestation and becoming zero waste in the pipeline.
While existing requirements apply primarily to publicly traded companies, as new regulations become industry standards stakeholders will expect all companies to document their progress on key climate-related goals. Even if your company is not currently covered by national or international regulations, you should assume they are coming. Now is the time to get started.
#2 Reporting frameworks are raising the bar on human rights and supply chain disclosure
ESG reporting frameworks and rankers are prioritizing human rights in their disclosures and assessments, with focus on the supply chain. GRI, for example, is requiring all reports published on or after January 1, 2023 to adhere to updated standards, which increase disclosure requirements for human rights — with three mandatory disclosures added to address human rights, the incorporation of potential human rights violations into all material issue impacts, and a revitalization of the human rights topical disclosure (still in progress). With possible regulation on the horizon in the U.S., Canada, EU, and Australia, companies must ensure that they have comprehensive policies on human rights, such as child labor or forced labor, and increase the scope and metrics of supplier human rights assessments.
Whether it is potential human rights abuses, sustainability, or issues stemming from geopolitical conflicts, in 2023 and beyond expect stakeholders to ask more questions about the supply chain. It is not only potential Scope 3 emissions requirements, but also waste and energy use throughout the supply chain. In 2023, you may be asked to provide specifics about sourcing, reuse, repair, emissions or social and environmental supplier assessments. Given forthcoming legislation and existing enforcement on greenwashing, companies should ensure that their supply chain data is rigorous, and increase transparency around policies and supply chain assessments. Companies like IFF are prioritizing supplier assessments and certifications and using blockchain technology in partnership with farmers and suppliers to trace ingredients.
#3 DEI and talent management takes center stage
Nearly three years after the murders of Breonna Taylor, George Floyd, and Ahmaud Arbury ignited a renewed movement for racial equality, and less than a year after the Dobbs decision overturned Roe v. Wade, the “S” continues to rise in importance in ESG. Amid re-ignited movements for racial and gender justice, companies pledged billions to address social inequality and diversity, equity, and inclusion in their organizations.
While the expectation to disclose employee diversity metrics continues (don’t forget, the SEC approval of Nasdaq’s board diversity requirements), we’ve moved from what to why, how, and targets. Employees and other key stakeholders want to know what companies are doing, why it matters, how it brings value to the business and society, and what progress is being made. One major trend is increased transparency, including setting goals, tracking progress and releasing their EEO-1 Reports, as WM documents on their ESG Resource Hub. To meet increasing stakeholder expectations, focus on one or two key metrics that you can track to show progress overtime and be honest about the challenges you are facing to demonstrate to stakeholders that you are committed to doing the work to make our society more equitable.
Beyond DEI, many companies are realizing that building culture and recruiting and retaining top talent are core to business viability. The SEC adopted new talent management requirements in 2020 and have hinted that further human capital management regulations may be on the horizon.
#4 Customer privacy and data security gain prominence
Policy regulation from the SEC and EU (alongside increasing frequency of high profile data breaches) also continues to elevate customer privacy and data security as a core ESG issue in 2023.
To get ahead of the curve, ensure that you have comprehensive policies in place and that any recent changes or challenges are disclosed. Few companies currently are disclosing data; however, as regulations and directives take shape, companies may decide (or be required) to disclose metrics.
Tackling these ESG trends in 2023 will be no small feat for sustainability professionals. If you are just getting started on your sustainability journey or need a refresher on how to create an ESG strategy, check out the first installment of our ESG Field Manual series, From Scratch to Strategy.