Are we exiting the ESG era? Hardly.
The recent news cycle may make it seem that way, though. Whether it’s ongoing political backlash against environmental, social and governance (ESG) initiatives or the recent withdrawal of a net $40 billion from ESG equity funds so far this year, the acronym that was once synonymous with virtue has become somewhat unfavorable in the corporate sphere.
For companies at the center of this trend, the timing could not be worse. The noise that surrounds the term ESG is drowning out the real facts that this is the exact moment when businesses need to start putting in the hard work to understand their compliance obligations related to a growing list of global sustainability regulations. Like it or not, the compliance deadlines are looming, and businesses have no choice but to start addressing any sustainability related vulnerabilities that may exist within their own operations and across their supply chains.
Companies Need to Focus on Transition Plans
What is it they say about summer beach bodies? They’re made in the winter. Once it starts to warm up, it’s already too late. When it comes to corporate sustainability, bathing suit weather is just around the corner, and many corporations are still sidling up to the buffet line. In fact, according to a recent survey conducted by KPMG, three-quarters of companies globally say they are not ready to comply with new ESG and sustainability reporting requirements being implemented in jurisdictions around the world.
These include the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive (CSDDD) in Europe, the U.S. Securities Exchange Commission’s (SEC) Climate Related Disclosure Standards and the global sustainability reporting standards introduced by the International Financial Reporting Standards’ International Sustainability Standards Board.
While each of these new directives has its own compliance timeline affecting different size companies operating in different jurisdictions in different ways, the reality for pretty much any reasonably large business with global customers and supply chains is that regulators, assessors and stakeholders are already gearing up to scrutinize reports, levels of compliance and transition plans.
This is a critical detail that was overlooked by many critics of the CSDDD who characterized the final version of the law as “watered down” when it was introduced in March. Despite some concessions made to lobbyists in the final agreed terms of the directive, the CSDDD contains specific language requiring companies to develop a detailed climate mitigation transition plan “to ensure, through best efforts, that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with Paris Agreement and the objective of achieving climate neutrality.”
Doing the Work
Getting back to our diet analogy, that means there is no magic pill or injection that will help companies take a shortcut to sustainability. They’ll need to put in the hard work – and, importantly, they’ll need to map out how they intend to meet their goals and show progress along the way.
In this way, the transition mandate in the CSDDD is a blessing in disguise for many firms because it will act as the impetus for a standard set of benchmarks for evaluating sustainability risk across supply chains and put some much-needed structure around data collection, reporting and actions. That will, in turn, provide better insights for investors and consumers to evaluate each company’s real stance on sustainability on an apples-to-apples basis. Ultimately, the companies that get the hard work done now during this implementation and transition phase will not only be in a stronger position to meet the rigors of global sustainability reporting requirements, they will also build more sustainable operations in the process.
Rising Above the Noise
This systematic, measured approach to sustainability will also have the added benefit of introducing concrete, quantifiable data behind corporate sustainability claims. Two big drivers of the recent backlash against ESG have been the reports of widespread greenwashing and inconsistent ESG grading systems, which have provided an opening for critics to question the validity of ESG as a meaningful business metric. Companies that can substantiate their sustainability strategies – and show all of the work, step-by-step, that went into the transformation – will be able to rise above the noise of the ESG backlash to focus on more important things, like running more sustainable businesses. Companies in it for the long haul will be pointing to the fact that longevity will bring its own luster.
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