ESG data insights: Top trends for 2023
The top 5 ESG data trends for 2023
As we reached the end of 2022, we made some predictions for the top 5 ESG data trends for 2023.
Over the past couple of years, we have seen companies being called to account on ESG disclosure, driven by investor and consumer sentiment. This seems to have contributed to a marked increase in corporate sustainability reporting - a trend we are encouraged to see.
A 2021 report from the Governance & Accountability Institute found that 92% of the S&P 500 companies published a sustainability report in 2020, showing that corporate sustainability reporting has been adopted as best practice by some of the largest publicly listed companies in the U.S.
Similarly here in Asia, around 89% of companies undertook ESG reporting last year, and this is continuing to gain momentum, particularly with Singapore, Hong Kong, and Thailand setting mandatory disclosure or providing incentives for companies to do so.
The consensus on the need for ESG reporting and disclosure is clear.
Last year we made our predictions for what this year would bring. (See how we did in our 2022 predictions here.) Now we’re taking a forward look at the top 5 ESG data trends for 2023.
Our predictions for the top 5 ESG data trends in 2023:
ESG reporting frameworks will become more aligned
Double materiality and financial materiality relating to ESG risks
Greening the entire economy, not just growing the green economy
Sustainable supply chains to combat greenwashing
We’re in great company in the ESG fintech space in Singapore
1. ESG reporting frameworks will become more aligned and with greater transparency
One of the greatest challenges faced by organisations when it comes to sustainability is the difficulty understanding, reporting to, and complying with the myriad of reporting frameworks.
In an effort to “drive globally consistent, comparable, and reliable sustainability reporting…”, the ISSB standards are on track to be delivered in Q1 2023. Whilst the finer details may differ between regions, the ISSB sets an important baseline for global alignment of frameworks, which will form the necessary foundation for stakeholders to easily compare organisations. Organisations such as the WEF, TCFD, GRI, and SASB are contributing to these standards, reflecting the importance of connectivity with financial reporting.
ESGTech monitors the framework changes so our software is ready for the evolving ESG landscape.
Our platforms ESGDisclose and ESGManage both ingest global indicators within international standards and frameworks into our database to prepare businesses for ISSB and other reporting needs.
What we expect to see more of in 2023 is a continued move towards digitisation of ESG reporting and machine-readable reporting. This incorporates high quality data to enable data mobility in regulatory disclosure, allowing for more accessible and transparent data, an area that certainly needs improvement.
Earlier this year, the SEC published a rule proposing that public companies be required to report certain climate-related disclosures in XBRL (eXtensible Business Reporting Language) format. XBRL is an open, non-proprietary data standard that is being adopted by public companies, banks, and public utilities in the US to report financial data to regulators, and indeed globally.
Currently, without a requirement for mandatory ESG disclosures, companies can decide on the level of disclosures they share, making it difficult for investors and regulators to easily compare disclosures. Companies adopting the digitisation of SASB standards-based reporting in XBRL, like Etsy and Moody’s, are leading the way to more accessible and transparent data.
Greater data accessibility and transparency is an area we will be following closely in 2023.
2. Double materiality and financial materiality relating to ESG risks
If you’ve taken steps on your ESG reporting journey, you will no doubt be aware of the term “materiality”. This relates to identifying ESG-related issues that are critical to your organisation and have the potential to threaten a company’s targets or goals. Undertaking a process of determining materiality leads to credible ESG disclosures. Single materiality, however, doesn’t indicate how sustainable a company’s practices impact the environment and society.
“Double materiality” weighs two components: how sustainability issues affect company performance (“outside-in”) and how the company itself impacts people and the environment (“inside-out”). The European Council’s approval on the Corporate Sustainability Reporting Directive (CSRD) sets reporting requirements for around 50,000 companies operating in the EU from 2026, with double materiality a cornerstone in the proposal.
Financially material ESG risks and opportunities could have an impact on enterprise value.
Law firm Hampleton Partners says that companies, “… need to ensure their decisions about why, where, and how to manage ESG risks, which can have a material effect on business and share-price performance, are robust.”
The ESG movement has changed the way investors and companies hold their portfolios and view the risks associated with traditional business models.
“By considering ESG factors, investors gain a more holistic view of the companies they back, which can help mitigate risk and identify opportunities for growth and improvement,” according to Gobyinc.
ESGTech platforms allow companies to ensure clarity in reporting and visibility of their ESG data, allowing financial institutions and capital providers to be assured of the data presented and to track portfolios - a need we have no doubt will continue well beyond 2023.
3. Greening the entire economy, not just growing the green economy
Enabling sustainable finance and data remain top priorities for 2023, according to ESMA. Financial institutions will continue to consider the ESG credentials of organisations when considering re/financing options, especially in line with KPI-linked financial products, like green and sustainable bonds.
According to the Monetary Authority of Singapore (MAS), effective transition to net-zero by 2050 is not just about growing the green economy, but instead greening the entire economy. The global financial industry has started to make headway in harnessing green finance. In 2021, green and sustainable bond issuance delivered a ten-fold increase from 2015, up to US$800 billion.
As the MAS shares, investing in green technologies and renewable energy is important, but such activities are estimated to make up less than 8% of the global economy.
“Green finance alone is not enough. The world, and Asia in particular, need transition finance.”
Effective transition finance needs close partnerships among the public, private, and people sectors, making use of this blended finance approach to mobilise financing for sustainable development projects. Blended finance is not a new approach but bringing it to scale will require adopting an expansive view.
According to McKinsey, we are more than 35% short of the annual investment required to achieve net-zero by 2050 (currently US$5.7trillion vs a need of US$9.2trillion). So, the scaling of this blended finance approach is essential to reach the net-zero target.
As financial institutions look to adopt a more systematic and coordinated approach to mainstream blended finance, ESG disclosure tools that support verification and auditability, will become even more valuable.
4. Greater clarity and accountability to combat greenwashing
Companies that pay attention to material ESG issues can deliver better social, environmental, and financial outcomes, according to the Harvard Business Review. They are also rewarded with lower costs of capital based on their ability to manage risk.
A PwC survey found that companies risk losing investors if they fail to act on ESG issues. A large majority, 79%, stated that the way a company manages ESG risks and opportunities is an important factor in their investment decision-making.
However, for a while there, it seemed that companies could greenwash their products and services without any ramifications. Now, it is clear that greater accountability is coming.
In the US, the Securities and Exchange Commission (SEC) has set up a special ESG enforcement task force to hold to account banks and money managers engaging in greenwashing – making misleading claims to make their funds or strategies to appear to be ESG-compliant.
Being caught in the act of greenwashing can be damaging not only to reputation, which can be lost in a social media minute, but we can see that more accountability is coming down the line in the form of legal action. We have recently seen this in the SEC charging Goldman Sachs Asset Management for failing to follow its procedures regarding ESG investments.
2023 is on target for an ambitious focus on sustainable supply chains by way of Scope 3 disclosures. The EU is looking likely to require nearly 150 top European banks to start disclosing Scope 3 emissions with new regulations from the EBA coming into play. Under these new regulations, organisations will also need to disclose their exposure to carbon-intensive activities and assets that may experience risks resulting from climate change. The SEC has also announced requirements for registrants to include certain climate-related disclosures in periodic reports, including Scope 1, 2 and 3 emissions.
The work of several companies leading the way on Scope 3 can provide a roadmap for how this can be done effectively.
Organisations not already doing so will need to adopt data-driven insights to deliver more efficient ways of working across the whole supply chain. Verifiable data from robust and credible ESG management platforms will be essential.
5. We’re in great company in the ESG fintech space in Singapore
Lastly, we’ve been encouraged by the increasing support we are seeing for ESG fintechs, especially here in Singapore.
The ESGTech team recently attended the Singapore FinTech Festival (SFF) as part of the MAS’s Project Greenprint Community, and we were encouraged to see the myriad ESG technology companies in attendance, covering everything from carbon accounting and tracking, through to offsetting and more. It was heartening to engage in discussions with other forward-thinking companies, and to see the value of collaboration between like-minded businesses.
With the increasing demand from regulators and investors for more robust and transparent reporting, M&A in the ESG technology sector are accelerating. “As pressure continues to accelerate globally, expect the investment trend to continue,” says SG voice.
With ESGTech’s unique offering of robust and auditable first-party data collection and management, we are confident that this positions us to make a real impact for organisations in 2023.
Your company’s ESG journey
ESG reporting is often the first step in an organisation’s journey towards becoming climate positive, and it is an imperative one.
ESGTech can support your business to move the needle on your climate impact by measuring and monitoring verifiable and auditable data. To find out more, contact us today.