With 2023 already in full swing, the Greenstone team looks back at the past year in relation to ESG, sustainability and supply chain reporting. There is no doubt that it was a significant year for business and ESG and we anticipate that 2023 will be no different, with greater demand for transparency and accountability. Below we have highlighted five key ESG reporting trends to look out for in 2023.
1. Regulation
For businesses, mandatory regulation on ESG reporting is coming in thick and fast, both in the EU and in the United States.
In the EU, the Corporate Sustainability Reporting Directive (CSRD) is the latest EU Regulation regarding ESG and non-financial reporting, aiming to speed up EU progress on reaching Net-Zero. It is a step up from the current EU Regulation the Non-Financial Reporting Directive (NFRD), expanding the number of mandatory reporting companies from 11,600 to around 49,000.
The US is poised for regulation too. The Securities and Exchange Commission’s (SEC) proposed mandatory climate-risk disclosure rule will launch in 2023 if approved. In March 2022, the SEC released a new proposal for public companies to begin reporting their carbon emissions and reductions progress alongside their financial results. It requires all filers to disclose Scope 1 and Scope 2 greenhouse gas emissions that occur onsite and are controlled by the company.
2. Accountability and new corporate board demographics
As ESG performance becomes a greater focus in the boardroom, companies are having to consider how best to hold themselves accountable. One way to accomplish this is to tie leaders’ compensation to positive ESG outcomes. Companies are increasingly including ESG metrics of some type in their incentive compensation schemes for top executives.
In some companies, ESG and sustainability responsibility lies with the full board. Others assign diversity, equity, and inclusion (DE&I) and human capital management issues to the human resources committee and sustainability oversight to audit or governance committees. The exact assignments will vary with each company’s specific needs and culture, but it is becoming critical to assign accountability and ensure sufficient governance oversight within a board.
Corporate board demographics are changing too. Companies are now looking to assemble boards for ‘tomorrow’, today. For example, recruiting ESG expertise on the board has become critical and hiring has a DE&I lens now more than ever.
3. Natural capital and biodiversity
At the Conference of the Parties of the UNFCCC (COP) in 2022, there was an emerging theme of natural capital and the need to prioritise the preservation of biodiversity. The risks resulting from a loss of nature and changes to natural capital have the potential to disrupt society and the stability of the global economy. Whilst most research on financial risks related to natural capital has historically focused on climate change, there is a growing awareness of the risks associated with other aspects of natural capital, such as water stresses, resource scarcity and the loss of biodiversity.
Biodiversity-related corporate reporting is a fast-moving, developing area, and there is ongoing work to create harmonisation, particularly related to measurement and disclosure. Companies should not wait for globally agreed frameworks or perfect tools to be available to approach the topic of biodiversity and nature. Companies should begin to understand and manage biodiversity and nature-related risk and opportunities and to prepare to respond to the introduction of frameworks such as the Taskforce on Nature-related Financial Disclosures (TNFD).
4. The growth of ESG data quality and analytics - new frontiers in measurement and transparency
With more regulation and investor pressure, there is no doubt that companies will need a process to produce high quality, defensible ESG data that is more aligned with financial reporting requirements.
For investors, a company’s ESG performance is only as good as its data quality. Bad quality data can result in inaccurate reporting, lack of transparency, and potential backlash from stakeholders if your efforts are deemed as unreliable. Demanding data transparency is the way investors can ensure that the ESG information provided is accurate and not misleading.
Advances in technology and software solutions to enable in-depth ESG data analysis are increasing the expectations for ESG data quality and transparency. Once good quality primary data is collected, software solutions enable ESG performance data to be aggregated, compared and benchmarked across various global metrics, KPIs and frameworks.
5. Reporting on Scope 3 emissions
The reporting of Scope 3 emissions (GHG emissions that are not produced directly from the reporting company but from the activities of its value chain), will continue to rise, and will continue to be a challenging area for many. Communication, collaboration and shared-goals are key to achieving successful Scope 3 disclosure. However, even if you have a high level of buy-in both up and down the value chain, there are still complexities around the data itself and the methodologies used to calculate emissions.
Leveraging Scope 3 resources to understand where your material impacts lie, where to start with data collection and how to focus on data quality and coverage over time, will ensure that a journey to reliable Scope 3 data is followed.
In summary, what does this mean for businesses and ESG-focused investors? For both groups, requirements to collect, assess and report quality primary ESG data will continue to grow in 2023 and beyond so now is the time to ensure you have future-proof data management processes in place. As the ESG and sustainability reporting landscape grows in complexity and becomes increasingly mainstream, there is a real opportunity for business to improve transparency and demonstrate leadership. Those who don’t address ESG performance – whether it’s across their own operations, their supply chains or their investment portfolio - face getting left behind.
