What’s in store for ESG in 2023?

Grappling with the effects of the pandemic, a potential recession and navigating climate change has forced businesses to think beyond profits.

Here are five key ESG trends that will influence 2023 and beyond

Customers, investors and employees want to see businesses contribute to making society more sustainable, which means organisations are under greater scrutiny. Pursuing the 2050 carbon neutral goal laid out by the United Nations will further business thinking on this issue and put ESG initiatives at the top of the agenda.

ESG and sustainability will be at the heart of forward-thinking businesses in 2023. In fact, according to the edie.net Net Zero Business Barometer, while 25% of respondents are working toward the 2050 net zero deadline, 28% are working towards net zero by 2030, which only leaves seven years to advance their progress.

As ESG becomes a business and societal priority, accurately tracking a company’s commitment and progress here is key. This is where ESG reporting comes in, and getting it right is vital.

With the need for businesses to get to grips with the opportunities and challenges of the ever-evolving ESG landscape, below are five key trends that will influence 2023 and beyond.

1. Navigating ESG during a recession

Economic turmoil breeds uncertainty, which results in businesses adopting a fear-driven mentality involving tightening the purse strings and focusing on the fundamentals. CEOs and executives should be cautious about plans to cut ESG budgets as this could backfire when it comes to investors, customers, employees and other stakeholders holding companies accountable. So, how can businesses balance sustainability investments which, by nature, require a long-term view, during a short-term economic downturn?

Organisations should remember that ESG is really a series of business risks and opportunities, all of which still need to be considered, prioritised, managed and reported on, maybe more so, during an economic downturn. With the Corporate Sustainability Reporting Directive (CSRD) requiring large companies in the EU (and beyond) to report on ESG and the US Securities and Exchange Commission (SEC) climate disclosure proposal continuing to move forward, ESG can no longer be considered a “nice-to-have”: it’s business critical.

ESG is not only about managing reputation and complying with regulation. When done well, it has a measurable return on investment (ROI) through reducing costs or generating incremental revenue. Therefore, businesses need to prepare for these directives as cost effectively as possible today. After all, businesses that drive forward ESG commitments not only protect the bottom line but deliver meaningful change.

2. Transparency as a licence to operate

Despite increasing interest in ESG, ESG reporting is still in its infancy compared to financial reporting. Providing clear, consistent and comparable sustainability data to stakeholders is not simple, and getting the reporting wrong can have negative unintended consequences.

The CSRD regulation, Sustainability Accounting Standards Board (SASB) standards and the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations are being used as foundations to help companies ensure regulatory compliance. Depending on how the SEC climate disclosure proposal moves forward in the next 12 months, this will also play a major part in the ESG reporting conversation.

In 2023, investors will demand greater rigour, accountability and assurance that they can trust the data and insights provided to them. Given this importance in delivering transparent, consistent data to key stakeholders, there is a clear need for ESG reporting to be simplified through technology. Based on our research, roughly three quarters of ESG practitioners in the UK noted that technology was important for compiling and collaborating on ESG data (78%) as well as validating data for accuracy (74%). This rose to 89% when considering the role of technology in mapping disclosures to regulations and framework standards. Further, a recent Deloitte survey found that 99% of public companies plan to invest in ESG reporting technology and tools in the next 12 months. It’s clear that technology and ESG reporting go hand in hand.

3. Building a sustainable boardroom

PwC recently found fewer than two-thirds of directors feel their board understands the company’s climate risk, climate strategy or the internal processes and controls around data collection. Business leaders cannot forget the “G” in ESG and must more meaningfully consider how existing governance structures can be enabled to oversee ESG factors. After all, corporate governance helps guide the ethical pursuit of ESG and is essential to ensuring commitments translate to concrete action and systemic changes.

In accordance with this, more than half of FTSE 100 companies now have a board level committee focusing on ESG issues, according to Mattison Public Relations. While this is a great first step to ensuring businesses are prioritising sustainability, having a committee doesn’t guarantee progress. Instead, these committees need to understand how the organisation has conducted formal ESG stakeholder engagement as well as ESG materiality assessments. Our research has highlighted that in the UK, one third (34%) of companies conduct ESG stakeholder engagement or materiality assessments once every six months and 19% do so every three months – but it’s far from the norm to do this so regularly yet.

In 2023, boards must practise (and enforce) good governance as well as monitoring ESG risk to meet investor expectations regarding ESG disclosures, policies and practices.

4. The great energy transition

This is a pivotal moment for the energy industry. Legacy oil, gas and utility companies are reacting to volatility in commodities markets while proactively reinvigorating reputations with long-term strategies for a low-carbon future.

COP27 focused on how companies across the oil and gas industry can take concrete action to make progress towards their carbon reduction goals. Announced at the conference, the Transition Plan Taskforce (TPT) is proposing that companies should have to publish their net-zero transition plans towards the overall decarbonisation goal for the economy next year, before sharing an update in 2026. This is a vital piece in the regulation puzzle as it will help businesses to see what evidence is required to demonstrate reduction in their carbon footprint as they work toward their related goals.

Businesses have made bold pledges to date, and this next wave of ESG-related legislation isn’t asking for promises; it aims to result in detailed plans and firm actions from companies.

5. The “S” in ESG

In 2023, “social” will continue to be a focus. Companies and investors will look at how social factors are driving business and will push to make the “S” in ESG more measurable and quantifiable.

While companies must disclose more data on social factors as required by regulators, investors still need to rely on management for much of the information. After all, social goals can involve completely subjective and abstract factors, such as boosting employee morale or providing opportunities for growth. Undoubtedly this makes it difficult to compare companies that have different methods or use different metrics to track progress. Without a standardised measurement approach, the data becomes meaningless from an investor’s perspective – the next year and beyond will be pivotal in establishing this.

Preparing for 2023 and beyond

The combined push that comes from ESG regulations, mandates and stakeholders will result in the need for commitments to result in substantiated action. The next few years will see many organisations transform their business models and put ESG front and centre in their operations.

Having an intentional approach to deliver on sustainability promises will positively impact an organisation’s financial performance and ensure the business can stay one step ahead with their ESG reporting.