ESG Intentions for 2023
The crossover into a new year is always paved with good intentions, yet we only talk of ‘resolutions’. Perhaps it would be better to stick with good intentions. Why? Because a resolution tends to be set in stone, a task or milestone that simply must either be successfully attained, or we experience ‘failure’.
An intention, however, is less binary. It aligns with a sense of self-development, evolution, and change, something we can continue to visualise and work on. And change, at its core, is what ESG is all about. Yes, we have a growing set of operational frameworks that help guide business processes, but these rarely cover all the bases of what is important to your particular business environment, brand, or situation. ESG works when you define how it is relevant to your organisation.
All ESG implementation, on whatever level, is a beneficial step in the transition to sustainability and beyond. Yet with so much potential change, clear regulatory assistance is helpful to start navigating our ESG choices. As an organisation, your 2023 sustainability planning should be adequately informed and prepared, first informationally and then as part of your working culture. Within the European Union (EU) Action Plan on Sustainable Finance, several mechanisms have been developed to leverage market power to meet emissions reductions targets, and within this Plan we can find a helpful roadmap for 2023 planning.
Here are the key areas within the Plan that can assist your business E, S, and G intentions over the coming year:
E - Classifying sustainability
The EU Taxonomy Regulation was developed first and foremost to classify economic activities, to then determine which of those activities are environmentally sustainable. We can expect further variations on this taxonomic theme to appear as a rollout from other national governments, major corporations, or regional entities, but for now the Taxonomy provides a blueprint for progress.
In brief, the Taxonomy outlines six environmental objectives:
Climate change mitigation;
Climate change adaptation;
Sustainable use and protection of water and marine resources;
Transition to a circular economy;
Pollution prevention and control;
Protection and restoration of biodiversity and ecosystems.
The definition of a ‘sustainable economic activity’, what you are doing operationally, is based on whether it, a. contributes to any of the above objectives, and if, b. that activity also does no significant harm (DNSH) to any of the objectives. Activities can be cited for voluntary disclosures to determine the relevant levels of capital expenditure (CapEx) and operating expenditure (OpEx) across sustainability projects, and as such can help companies to develop more attractive portfolios for possible investors.
A helpful guide for EU-based companies can be found here.
S - Human capital management
Until we can fundamentally talk about how people not only matter, but are the core factor of a company or brand’s success, economists will prefer to discuss workforce wellbeing in terms of ‘human capital’.
While the EU has made more tangible progress in human capital management, it is perhaps more telling to note the sea change evident in the US where, like it or not, ‘human capital management disclosure’ is the index by which we can see the shift in value that companies are starting to place on their ‘intangible assets’, i.e., the workforce. As that asset value grows in both business culture and balance sheet terms, thus does the need for companies to disclose that value.
A Harvard Law School paper on ESG-related considerations for 2023 notes that, “As…with climate-related disclosure, we are categorically against an increased disclosure mandate, but can easily envision a regulatory scenario where it is required”. The needle moves slowly, perhaps, but it moves nonetheless. This is an institutional nod to the acceptance of the value of the ‘S’ in ESG, of social sustainability as a key metric that underpins bottom-line success.
Placing human capital at the very centre of your business practice, ethos, and decision-making is the point where fundamental respect is built that will inform the potential success of your other ESG aims (environmental and governance). As a pragmatic bottom-line, thinking people first will ultimately pay dividends in terms of investor interest.
The World Economic Forum (WEF) has published an excellent paper on ‘Human Capital as an Asset”, available here.
G - Increased regulatory
In some ways, the final acceptance of the inequities of climate justice during COP27 in the form of a ‘loss and damage’ finance fund shone the spotlight on the overall international attitude to climate change in general. Ideally, 2022 may have been the watershed year in which, with such visibility of anthropogenic climate change-induced adverse weather events, our thoughts also turned to ongoing greenwashing tactics of some of the major corporations and how standards must be adopted to develop a fair regulatory playing field for sustainable finance.
The EU Sustainable Finance Disclosure Regulation (SFDR) was rolled out in 2021 to do just that, to standardise sustainability disclosures and thus standardise transparency across financial institutions, sustainable finance, and ESG investments. The SFDR essentially aims to provide reliable information to investors.
And, while the SFDR rollout has experienced certain hurdles to implementation, it will pay to be fully aware of the opportunity for disclosure and the tools to report effectively, since further value can be captured via SFDR results used for ESG ratings and reporting.
The finalised draft ‘Regulatory Technical Standards’ of the SFDR are available here.
While the above areas are brief, they each open the door to further reading and consideration in terms of how you can envisage your ESG (read: business) intentions for the coming year. While the overarching media coverage of international cooperation mechanisms on climate, such as with COP26 and COP27, have been mostly critical, both voluntary and mandatory reporting legislation has been either drafted or implemented, and the road to transparency and further sustainability has been paved with openly available resources for businesses to access and incorporate.
In short, time is running out. COP27 provided an admission and acceptance of sorts, something that revealed more of the truth on climate. There is a greater sense of urgency, for certain, but one that must only be driven by actions. You may think then, that a ‘firm resolution’ for 2023 is the order of the day. However, when we are looking to implement systemic, durable change, we need to have firmer intentions to fundamentally analyse how we do business, where that is remiss, and what we can do to culturally shift, permanently, and for the better. With intent.
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