How to Keep Up With the Changing ESG Landscape
Get practical tips for building a responsive ESG strategy.
As we approach the end of 2022, the SEC’s upcoming climate disclosure rule is getting attention from boards and C-suites as they plan for the rule’s emissions reporting, governance, and risk management mandates. In the legislative domain, the White House recently hosted ESG leaders from major companies to celebrate the passage of the Inflation Reduction Act. The IRA committed $369 billion to low-carbon technology and climate solutions and is projected to drive trillions of dollars of new economic activity across nearly every sector.
Taken together, the IRA and the SEC’s climate rule signal a new era for corporate climate action in the US – an era of stricter requirements and stakeholder expectations, but also stronger opportunities for growth and business model resilience.
Climate Action Momentum Runs Deeper Than You Think
Climate action is gaining ground, and new policies like the IRA and the SEC’s upcoming climate disclosure rule are just the tip of the iceberg. For instance, the US government – the world’s largest single buyer – shifted procurement to favor low-carbon goods and services. Here are a few other examples, announced in September and October alone:
- The Federal Reserve will pilot a climate risk analysis workshop with six of the largest US banks in 2023.
- The Treasury Department proposed a new rule to gather climate risk data from insurance providers. According to Treasury Secretary Janey Yellen, this will provide “an increased understanding of insurance market vulnerabilities” and help assess “how Americans are being affected by the increasing costs of climate change.”
- The Air Force rolled out a sweeping new Climate Action Plan, calling for deeper partnerships with contractors and suppliers to achieve GHG emissions reductions.
Big changes are happening at the state level, too. In August, California passed a suite of six new climate bills targeting emissions reduction, carbon capture, and more. This followed 2021, a historic year when half a dozen states passed major clean energy legislation.
And corporate momentum around climate action is at an all-time high. Globally, nearly 40% of the world’s largest 2,000 companies have committed to net zero and over 18,700 disclosed environmental performance data through CDP in 2022 alone.
Companies Must Look Beyond Climate
Even as your business faces pressure to reduce emissions, remember that this moment is about much more than climate change. Calls continue for transparency and commitments to racial justice following the national conversation around systemic racism that emerged in mid-2020.
Racial equity and DEI were top issues in the 2022 proxy season. In fact, DEI-related resolutions such as racial pay gap reporting passed, despite board opposition, at companies like Johnson & Johnson, Home Depot, Waste Management, and Apple. For corporate boards, Nasdaq’s new diversity rules started to take effect in August, and laws addressing board diversity are in force across at least 12 states.
In addition to racial equity and DEI, the 2022 proxy season featured a sharper focus on human rights and forced labor in the supply chain. This was partly fueled by the passing of the Uyghur Forced Labor Prevention Act, which took effect in late June. The act requires US companies to perform due diligence on all supply chains linked to Xinjiang, China, from cotton and pepper to beryllium.
Bottom line – pressure to address ESG holistically is mounting on all fronts. Whether it’s your investors encouraging you to take action on DEI or regulators demanding more accountability in the supply chain, ESG is no longer just about the ‘E’.
The Environment and Social Justice are Interconnected
The IRA exemplifies an emerging recognition that the “E” and “S” of ESG are inextricably linked. Despite the bill’s climate focus, it ties much of its new financing to labor policies and wage requirements and allocates $47.5 billion for environmental justice investments. The EU’s Corporate Sustainability Reporting Directive (CSRD) also covers ‘E’ and ‘S’ issues beyond climate including biodiversity, corporate governance, ethics and anti-corruption, racial equity, human rights, and labor conditions.
Perhaps the clearest illustration of this trend is the late 2021 update to the Global Reporting Initiative (GRI), the world’s most widely adopted sustainability reporting framework. GRI’s new Universal Standards boost the importance of human rights and social issues, mandating human rights-related disclosures for every reporting company. In GRI’s view, tackling environmental and social issues is key to long-term resilience – and you can’t solve one without the other.
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How to Keep Up with the Changing Times
We are entering a period of major change in ESG policy and market trends. Governments and financial institutions are investing billions, even trillions, in sustainable technology and energy. At the same time, investor, customer, and regulatory expectations around ESG issues like climate, human rights, and board oversight are skyrocketing. As these trends converge, your business will need to respond with a holistic, comprehensive ESG strategy.
Here are some recommendations for building an ESG strategy that’s responsive to the changing times:
Be Proactive rather than defensive.
ESG requirements are proliferating, so it’s crucial to act rather than wait. The pace of future change may be difficult to predict, but the magnitude will be significant. Anticipating and taking action now will ensure your business can capitalize on what’s coming and be seen as a leader.
View ESG risk as an interconnected system.
Many companies approach ESG as a set of unrelated issues, with responsibility spread across multiple functions and teams. However, climate change, human rights, governance, and many other ESG topics are interconnected - to make meaningful progress on any of these issues you need to manage them all in an integrated way.
Lead from the board.
Strong governance is critical for credible action on racial equity, human rights, biodiversity, and climate, and it starts with your Board! Having a Board that’s engaged on ESG issues will help you integrate your company’s risk management, financial planning, and strategy efforts.
Anticipate policy and regulatory change.
Most US states have legislative sessions planned for early 2023, and major markets (including the US and EU) are finalizing significant new policy requirements as we speak. It’s important to understand the patchwork of upcoming legislation and how it could affect your business so you can plan ahead.
Identify your most material ESG issues.
With new consumer behaviors and even new science, you’re likely facing a more complex set of ESG issues than ever before. Now is the perfect time to engage your stakeholders and conduct a fresh materiality assessment to understand which topics matter most.
Manage your entire value chain.
Whether it’s climate, human rights, or product circularity, your business is expected to manage impacts across the entire value chain – from your most distant suppliers to end-of-life disposal by your customers. This will require new data, deeper engagement with suppliers, and better visibility over your entire supply chain.
Next Steps
In the United States, the ESG tide is turning. Whether at the federal, state, or corporate level, action and investment has never been stronger. And while climate has been a major focus this year, the need for an integrated approach across a broader set of social and environmental issues is gaining traction. To manage shifting market trends, public policies, and stakeholder expectations, it’s time to make ESG a critical part of your company’s DNA.
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