Let us introduce you to some major trends in Sustainability, we anticipate for the year.
§ Managing ESG in a new business reality: Whilst many more companies of all sizes being introduced to Environmental, Social and Governance in 2022, they are now faced with the broader challenge of the macro- economic and political climate. The challenge of constructing a sound ESG agenda against the background of an anticipated global recession will remain a C-Suite priority in 2023.
§ Increase in analytics of ESG data: Investors adopting new analytical models to stay aligned with long-term decarbonization pathways and to help them understand changes to their financed emissions in a volatile market. These models provide an alternative source of reference to rating agencies offering a subjective view on data, and help investors make decisions about where to allocate capital. To inform those models with accurate ESG data, portfolio clients and companies are increasingly being asked to share their ESG credentials publicly and proactively, with investors and their preferred banking partner.
§ Digital reporting as the new norm: With an increase in reporting requirements, effective management of ESG data is becoming ever more relevant for large companies and Small and Mid-cap Enterprises (SMEs) alike. Digital reporting helps companies, stakeholders and investors with analytical and assurance advantages with the advent of new technologies enabling faster and innovative ways to collect and report their environmental, social and governance performance. According to a Deloitte survey, 99% of public companies expect to invest in ESG reporting Tech & Tools in 2023.
§ An increase in the importance of transparency of ESG data, ratings and assurance:
The new EU regulation and SEC in the US, expect companies to have their sustainability and climate data assured within the next 3-5 years depending on the size of the business. EU’s Sustainable Finance Disclosure Regulation (SFDR) imposes requirements on more transparent reporting for ESG funds. As a result, investors are placing greater emphasis on the quality of data being reported. Accurate and reliable data maintains investor confidence. ESG scores and ratings increase the authenticity and assurance of data. In anticipation of this requirement, we are observing an acceleration of companies seeking assurance for emissions data first, with the aim of expanding assurance to the full reporting scope.
§ Target setting and scenario planning for and beyond climate: Over the past year, we observed increasing number of companies set sustainability and climate targets. Yet, a confusion remains around terms such as carbon-neutral, net-zero and carbon positive. The question also remains on which targets on climate are achievable and companies will be asked to publicly release their climate-risk scenarios, in line with TCFD recommendations.
We see companies expand their targets beyond climate to social factors. Diversity, employee satisfaction scores, reduction incidence in health and safety, minimizing environmental impacts with special emphasis on training executives and the full workforce on code of conduct and relevant policies, activation of whistleblowing programs and new enforcement mechanisms in governance. Scope of targets now starts expanding beyond the immediate corporate boundaries to include contractors and supply chain partners.
§ Regulatory frameworks mandating Scope 3 disclosure: According to the Paris Climate Agreement, the world has only 29 years left to reach global net-zero GHG (greenhouse gas) emissions. In 2022, the major climate disclosure standards, such as the International Sustainability Standards Board (ISSB), the European Financial Reporting Advisory Group (EFRAG) and the U.S. Securities and Exchange Commission (SEC), all presented their proposed drafts. The European Sustainability Reporting Standards (ESRS), proposed by the EFRAG, appeared to be the most detailed. Whether these climate target disclosure frameworks build towards greater consistency or gets further fragmented is yet to be seen.
What has stood out however, is the increasing expectation for companies to report on Scope 3 emissions, which not presents a significant portion of the overall emissions for most companies. Addressing data gaps specific to Scope 3 emissions will be critical for setting more accurate emissions reduction targets, inform climate-related transition plans and help banks understand the full picture of climate-risk exposure.
How do you see your organization’s sustainability goals changing or impacted by these trends?
Book a call with our sustainability and advisory professionals to see how Diginex can help with your organization and its stakeholders’ ESG goals in 2023.