Why ESG Will be Key for 2023? The EU Policy.
Scientists around the globe are not talking about “climate change” anymore; instead, they are now widely using the term “climate crisis”, upgrading their concerns. They have moved away from the climate change as a theory to the climate crisis as a fact which we are experiencing in several parts of the world nowadays.
In an attempt to tackle the catastrophic temperature increase, reducing emissions in every possible way, has been deemed an absolute necessity.
Environmental, social, and governance-related issues have dropped down many investors' and firms' priority lists as a result of surging inflation, several bear markets, and geopolitical unrest in both Europe and Asia. However, when the markets start to feel more stable in 2023 and capital preservation becomes less of a priority, the inexorable rise of ESG will undoubtedly pick up speed. Furthermore, despite the fact that more than 70% of surveyed retail investors said that ESG scores were a crucial consideration in their investment decisions, many consumers are still unsure of what this latest buzzword actually means.
Therefore ESG factors have been increasingly essential in recent years and are anticipated to remain crucial in 2023 (and beyond) for a number of reasons:
Raising awareness: Concern over the environmental and social issues we confront, such as climate change, social inequality, and corporate governance problems, has grown among investors, businesses, and the general public. Due to this growing awareness, there is a greater need for businesses to show their commitment to sustainable practises.
Investor preference: A growing number of investors are including ESG factors in their investing choices. They understand that organisations with strong governance and a focus on sustainability can perform better financially over the long run and are more risk-resistant. Companies with excellent ESG reputations thus tend to draw greater investment resources.
Governments and regulatory organisations around the world are putting more emphasis on ESG issues and enacting stronger legislation to solve them. Companies are obligated to publish their ESG performance and risks in various nations. In 2023, new reporting requirements and standards are anticipated to further change the regulatory landscape.
Expectations from consumers: Consumers are becoming increasingly aware of how their purchases affect the environment and society. They are favouring goods and services from businesses that exhibit ethical and sustainable business practises more and more. Businesses with a competitive edge are those that reflect customer values and effectively convey their ESG efforts.
Risk management: ESG considerations and risk management are interconnected. Businesses that ignore environmental and social issues risk losing customers, being sued, and possibly even going bankrupt. Businesses can proactively manage risks and spot fresh chances for innovation and growth by incorporating ESG factors into their operations.
Pressure from stakeholders: A range of parties, including staff members, clients, communities, and NGOs, are exerting pressure on businesses to adopt more environmentally and socially conscious practises. Public campaigns, boycotts, and legal action are all examples of ways to apply pressure. Companies must give ESG problems top priority if they want to maintain good relationships with stakeholders.
Sustainability over the long term: ESG practises are essential to a company's long-term viability and resilience. Significant problems for businesses are posed by climate change, resource constraint, and shifting societal expectations. Organisations may future-proof their operations, adjust to changing market situations, and develop a positive reputation by embracing ESG principles.
The EU Policy on ESG
ESG and CSR have mostly been opt-in for the majority of its relatively brief history, consisting primarily of programmes that firms have chosen to conduct for improved image or PR capital. But this time will be remembered as a turning point since legislation to formalise corporate accountability is now being introduced in an increasing number of nations. For instance, the EU is extending its 2020 Taxonomy categorization to force impacted businesses to report on how well their economic activity aligns with each of the six sustainability objectives of the Taxonomy. With the passage of its Supply Chain Due Diligence Act, which may be the first of many laws of its like in Europe and the rest of the globe, the German government has moved past environmental concerns.
All companies doing business in the fourth-largest economy in the world will be required under the new rule to ensure that there are no environmental or human rights abuses along their entire supply chain. This is significant because it means that businesses can no longer claim ignorance of what occurs in the supply chain above them. Instead, they must now confirm that everything they source was produced ethically.
And as far as strict ESG regulation is concerned, this is just the beginning. A number of other jurisdictions are expected to quickly follow suit after the EU Parliament passed the highly sensible Corporate Sustainability Reporting Directive (CSRD) and the UK FSA passed the corresponding Sustainability Disclosure Requirements (SDR) this year. Because of this, it will soon be nearly difficult for any significant organisation to exist without first putting into place a good ESG strategy to comply with the expanding body of legislation.
It would also be wise for businesses to act now to stay ahead of regulation and win over the hearts and minds of their customers and future stockholders, given the growing demand from institutional investors and regular consumers for higher ESG scores. In the meanwhile, reducing their environmental effect and emissions will go a long way towards preserving a healthy bottom line in the foreseeable future, especially with pay-to-pollute carbon credits on the horizon. For the long-term viability of less environmentally friendly industries like oil and gas or chemicals, for example, this will be especially crucial.
As a result of rising knowledge, investor preference, regulatory attention, consumer expectations, risk management considerations, stakeholder pressure, and the need for long-term sustainability, ESG will be crucial in 2023. Businesses that prioritise ESG concerns are more likely to succeed in this evolving business environment.
(Research and edit by: The Decision Maker – Finance and ESG editors. Angelos Tsigkopoulos has contributed on this article)
