4 Trends Shaping the Future of ESG Programs

Managing climate change policy developments-which are intrinsically linked with net zero and decarbonization goals-is the number one priority for firms. Of primary importance for firms is driving toward net zero. From a corporate perspective, more firms are especially eager to be recognized for playing an active role in decarbonizing the economy.

According to SAI360’s 2021 global corporate survey, when 400 heads of ESG sustainability were asked what the biggest drivers were concerning their firms, engagement with ESG issues-specifically, climate change policy developments-ranked highest. Indeed, climate change policy was the strongest driver of sustainability spend in 2022, Most surveyed-83 percent-said so, with 32 percent saying this is most significant and 51 percent saying it is very significant.

Climate change policy developments are important for firms to focus on due to associated risks and opportunities and increasing stakeholder pressure to address ESG issues. 

For example, investors are increasingly considering ESG factors when making investment decisions. Climate change is one of the most significant ESG risks that investors face. Indeed, investors are urging companies to take action to reduce their carbon footprint and demonstrate their commitment to sustainability. 

Therefore, firms face increasing pressure from both stakeholders and regulatory demands, especially as the importance of net zero is something becoming increasingly embedded in regulations over time. Nonetheless, EH&S teams must understand how they can support this initiative.

The Task Force on Climate-related Financial Disclosures (TCFD) is a framework for companies to disclose climate-related financial risks and opportunities. TCFD is a system of recommendations designed to be incorporated into regulation and legislation so investors can better understand what their risk exposure looks like. Following TCFD recommendations allows companies to provide better information to assess climate risks and opportunities, making more informed decisions.  

Additionally, TCFD provides a consistent approach to reporting on climate risks and opportunities. This includes four main pillars: governance, strategy, risk management, and metrics and targets.  

Here are a few components of these four pillars:  

1. Governance includes describing the Board’s oversight of climate-related risks and opportunities and identifying the organization’s governance involving challenges and potential wins. And identifying how management can assess and address climate-related wins and losses.
2. Strategy involves identifying how resilient an organization’s strategy is while taking various climate-related situations into account. And figuring out which actual and plausible climate risks and opportunities may impact a business’s financial future.
3. Risk management involves highlighting how an organization is working to manage climate- related risks. And figuring out how to identify, manage, and assess climate-related risks.
4. Metrics and targets include disclosing Scope 1, Scope 2, and Scope 3 if relevant to Green House Gas Protocol (GHC) emissions and associated risks.

These four pillars cover a broad range of actions. Therefore, TCFD remains a pressing regulatory issue for C-suite members and is rapidly being integrated into global legislation.  

For example, in the United Kingdom in 2024, firms of a certain size will need to begin reporting ESG information. In Europe, the EU Non-Financial Reporting Directive requires certain large companies to disclose non-financial information, including climate-related disclosures, in their annual reports. The UK has also introduced similar requirements through its Streamlined Energy and Carbon Reporting (SECR) regulations. 

For other global regions, this reporting must be conducted even sooner. Nonetheless, across the C-suite, TCFD remains a top priority as the most pressing regulatory issue. Fundamentally good governance is key to avoiding compliance issues and ensuring ESG initiatives are deployed effectively and efficiently.

The Science Based Targets initiative (SBTi) is a global partnership between several organizations that helps companies set science-based targets to reduce greenhouse gas emissions and limit global warming to well-below 2°C/35.6°F above pre-industrial levels.  

This voluntary initiative provides a framework for companies to set targets based on climate science. By setting science-based targets, companies can contribute to the global effort to address climate change.  

Additionally, SBTi serves as a good indicator of what firms are doing ESG-wise and what their key priorities are.  

Of the top ten industries with SBTi commitments and targets, the top three are:  

1. Professional services
2. Food and beverage
3. Apparel

Ultimately, SBTi is a good indicator of firms’ priorities in addressing climate change. Companies that have committed to SBTi targets are demonstrating their commitment to sustainability and their willingness to take action on climate change.

The Corporate Sustainability Reporting Directive (CSRD) is a new European Union (EU) regulation that will require large companies to report on their sustainability performance. The CSRD will go into effect in 2023 and will require companies to fully report in the year 2024. 

Companies must begin preparing for CSRD now to ensure compliance. Here are some specific things that companies need to do to prepare for CSRD: 

• Identify which sustainability issues are relevant to their business 
• Collect data on their sustainability performance 
• Develop a sustainability reporting framework 

By taking these steps, companies can ensure they are compliant with the CSRD and they can demonstrate their commitment to sustainability to stakeholders.