Tim Mohin: 2023 in Review and 2024’s Emerging Trends
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And we are back! Here’s hoping you had a joyous and restful holiday break.
To kick off the year, we reflect on some of the biggest ESG and Climate News stories from 2023 and forecast the trends for 2024.
2023’s Top 5 ESG and Climate Stories
Hottest Year Ever
The image for this edition is the “warming stripes” – where each stripe indicates the annual global average temperature. The creator of this image, Ed Hawkins, said, “Another dark red stripe gets added, though I think I need a new color.”
2023 was the hottest year since records began and possibly the warmest in the last 125,000 years. By some accounts, 2023’s global average temperatures breached the 1.5°C goal set in the Paris Accord.
With the increased heat came wildfires in Canada that blanketed North America in an orange-hued toxic smog. Climate-change-fueled weather anomalies in 2023 added up to the most $billion+ disasters the US has ever seen (25 as of December 8th), putting the real-life costs of a warming planet into perspective.
COP28 Recognizes Fossil Fuel Transition
Marking a global turning point, COP28 produced a final agreement to transition away from fossil fuels. COP28 also resulted in agreements to reduce methane, fund loss and damage from climate change developing countries, triple renewable energy generation, and a host of other positive deals. However, as with every COP meeting, some were disappointed with what they saw as a lack of progress.
A Flurry of New Regulations and Standards
A host of new regulations and standards in 2023 marked a turning point for global climate and ESG reporting. Here is a rundown of some of the main releases:
- International Sustainability Standard Board’s (ISSB) IFRS S1 & S2: The ISSB released their first two sustainability reporting standards in mid-2023, S1 General Requirements for Disclosure of Sustainability-related Financial Information Sustainability Reporting and S2 for Climate-related Disclosure. The two standards received global support, and multiple countries have aligned their sustainability disclosure mandates with them. Eventually, the ISSB standards could be used by as many as 130,000 companies.
- EU’s Corporate Sustainability Reporting Directive (CSRD): The CSRD entered into force on January 5th, 2023. Analysts predict that 50,000 companies – including 10,000 non-EU companies, ~4,000 based in the US and Canada, will have to report.
- European Sustainability Reporting Standards (ESRS): The EU Parliament approved the final version of the ESRS in July. The standards are what companies must use to report under the CSRD. Companies will have to start reporting using the ESRS beginning in 2024. All told, more than 1,100 individual KPIs are included in the standards.
- California’s Climate Accountability Laws: California passed the US’s first mandatory climate reporting laws, which will require up to 10,000 US companies to report their carbon footprint and climate risks beginning in 2026.
- Corporate Sustainability Due Diligence Directive (CSDDD): The CSDDD will require companies to identify and mitigate negative human rights and environmental impacts in their value chains. The EU Parliament and Council agreed to a provisional deal on the CSDDD ahead of its final approval next year. The directive is expected to affect 12,800 EU and 4,000 non-EU companies, and compliance will begin to be phased in in 2026.
- Carbon Border Adjustment Mechanism (CBAM): The EU finalized the world’s first carbon border tax. The tax will mean that certain carbon-intensive materials imported into Europe will fall under the EU’s Emissions Trading Scheme. Currently, in its 1st phase, affected companies have to report the “embedded carbon emissions” – i.e., the carbon associated with the manufacturing of the covered product – by the end of this month (Jan 31st, 2024).
- Inflation Reduction Act (IRA): The US’ largest-ever climate law gained a lot of traction in 2023 with huge investments in domestic renewables, manufacturing, electric vehicles, and a host of others which are cataloged in this article. The investments created around 200,000 jobs, with the majority in red states.
- Taskforce on Nature-Related Financial Disclosures (TNFD): In September, the TNFD released its final recommendations for disclosures on nature-related dependencies, impacts, risks, and opportunities. Companies can start using the standards in 2024. The TNFD was built to be interoperable with all other current global sustainability disclosure standards.
The Year of Interoperability
With so many new regulations and standards being released, you would be forgiven for thinking this would make reporting more confusing. Last summer, we dubbed 2023 the “year of interoperability” as nearly all the global reporting standards setters collaborated to make their approaches “interoperable.” Whether these efforts relieved the confusion and reporting burden is yet to be seen.
The ISSB helped clarify the alphabet soup when they took over the Task Force on Climate-Related Financial Disclosure (TCFD) responsibilities in late 2023. In addition, the CDP questionnaire – used by ~23,000 companies, will now align with the ISSB climate standard.
The ESG Backlash
2023 was a year where a Republican backlash painted ESG as pushing a “woke agenda.” The backlash saw 18 states led by Florida’s Ron De Santis prohibit state funds from going to ESG-focused investments. The knock-on effect of this was that some companies distanced themselves from using the term, and investments coming into ESG-labeled funds saw a precipitous drop. Despite firms using the ESG term less, it did not stop them from embarking on sustainability initiatives, although more quietly.
Five Things to Expect in 2024
The Year of Implementation
2024 will be the year of implementation. The requirements and deadlines are known, and companies are now in various stages of preparation for compliance. While implementation takes center stage, here are a few policies worth watching:
- SEC’s Climate Rule: The long-awaited climate disclosure rule from the SEC – first proposed in March 2022 – is set to be finalized in spring 2024. Recent signals point to the rule being scaled back, but whatever the final form, it will be litigated, which will further delay its implementation.
- Clean Competition Act: A Republican-backed climate bill, the Clean Competition Act is the US version of a carbon border tax. If approved in 2024, the bill will mean that certain carbon-intensive raw materials will be subject to a carbon adjustment import tax.
- CSRD Implementation: EU Member States are required to implement the CSRD into their national laws by 6 July 2024. This process bears watching because member states can always make the requirements more stringent. The European Financial Reporting Action Group (EFRAG) released three guides to help companies implement the ESRS to comply with the CSRD.
- Sustainable Finance Reporting Directive (SFDR): After suffering criticism in 2023, SFDR will likely be reformed in 2024, leading to possible changes in how funds are labeled.
- ISSB: Companies can begin using the ISSB Standards to report on their sustainability starting this year. The ISSB’s climate-related standard (S2) will also be integrated into the CDP questionnaire, which companies can begin using from April this year when the CDP reporting portal opens up. Some countries will also begin to adopt the ISSB as a baseline for their disclosure regulations in 2024.
- ISSA 5000: The International Auditing and Assurance Standards Board (IAASB) proposals for the International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, a global standard for ESG auditing, closed its comment period in December. Expect the new standard in 2024 to guide assurance of ESG information prepared under any reporting framework, including the ISSB, ESRS, and others.
ESG Backlash Intensifies
With 2024 being an election year for over two billion people in 40 countries, ESG has become a hot-button topic for leadership hopefuls to varying degrees around the world. In the US, Republican presidential candidates are amplifying the ESG backlash.
State-level anti-ESG lawsuits are becoming more sophisticated. Late in 2023, Tennessee sued the world’s largest investment firm, BlackRock, for apparently misleading customers by pushing ESG principles across their portfolio. The 73-page lawsuit alleges BlackRock overstated the financial performance of ESG factors.
The Elephant in the Room
The current Republican frontrunner, Donald Trump, promised to gut President Biden’s climate agenda, including the IRA and would reinvest in fossil fuels. US auto companies warned that cutting the IRA could destroy the US EV market.
While immaterial in US politics, a recent Yale study found that 71% of voters, regardless of party allegiance, support the IRA when informed what it is. Not surprisingly, most voters are not aware of the IRA, which is why Biden is putting it at the center of his election campaign. As Bill McKibben said, “Biden still has to win that second term, (or all climate action) will evaporate when Trump (or for that matter Nikki Haley) take over in a year.”
Climate Risks and Greenwashing Scrutiny
2024 is set to be just as hot or hotter than 2023. With another El Niño year ahead and 2023 producing the most emissions ever, we can expect a sad litany of climate disasters similar to 2023.
The drumbeat of legal action against companies overstating their ESG credentials will continue in 2024. While the financial service sector led the 70% jump in greenwashing incidents in 2023, these issues can affect any company in any sector.
RELATED ARTICLE: Tim Mohin – COP28: Beginning of the End of the Fossil Fuel Era?
Looking Beyond Climate
Climate will continue to dominate the agenda in 2024, but light will be shed on other issues, such as biodiversity, social matters, and the circular economy. With the release of the TNFD and attempts to give nature and animals legal rights, many believe that 2024 will be the year biodiversity enters the political mainstream. Social issues will get a boost from new regulations. The EU’s new due diligence directive (CSDDD) and the German Supply Chain Due Diligence Act (which will expand in 2024) force companies to identify and mitigate human rights abuses in their supply chains. Other new EU policies, such as the Batteries Rule and the Deforestation Regulation, will reshape how companies design products, source commodities, and produce materials.
This Smart Read article is contributed by Tim Mohin, Global Sustainability Leader, BCG. Every week ESG News delivers smart commentary from ESG practitioners and experts to unpack issues of the week. Submit your ESG Smart Read to [email protected]
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