2023 Environmental & Social Governance Paul Walsh BA LLM (UWA)
ESG Management Law Division
The year 2023 marks a significant milestone as the preparation for the Corporate Sustainability Reporting Directive (CSRD) begins in earnest. With the approval of the European Council, the CSRD ushers in a new era in non-financial reporting. Irish businesses are now required to align with mandatory and regulated sustainability reporting as early as 2024.
The CSRD represents a substantial expansion of reporting requirements compared to the current Non-Financial Reporting Directive (NFRD). While approximately 11,000 companies across Europe are covered by the NFRD, the CSRD will extend its scope to include around 50,000 companies. This expansion introduces a comprehensive set of accounting standards that will profoundly impact corporate reporting requirements. Companies may face up to 30 new standards to report on, encompassing both quantitative metrics and qualitative disclosure reporting requirements. Furthermore, these reports will be subject to mandatory assurance, emphasizing the importance of accurate and reliable reporting.
In light of these changes, it is crucial for Irish businesses to proactively prepare for the CSRD. They should familiarize themselves with the proposed reporting requirements and identify the specific ESG (Environmental, Social, and Governance) matters that are material to their business. Undertaking exercises to map out these ESG matters will enable companies to gain a comprehensive understanding of their reporting obligations. By doing so, businesses can ensure they are well-prepared to meet the disclosure requirements and publicly disclose their sustainability performance on a statutory basis.
The CSRD presents a significant shift in the corporate reporting landscape, requiring companies to provide a broader range of information than ever before. Many entities will need to report on areas they have never addressed previously, necessitating a thorough understanding of the new reporting standards. By starting the preparation process in earnest in 2023, Irish businesses can position themselves to navigate the challenges and seize the opportunities presented by the CSRD. This proactive approach will not only ensure compliance but also enable companies to enhance their sustainability performance and meet the growing expectations of stakeholders and regulators.
What is ESG?
Environmental, Social, and Governance (ESG) refers to a set of criteria or standards used to assess a company's performance and practices related to environmental sustainability, social responsibility, and corporate governance. It is a framework that evaluates how a company manages its impact on the environment, its relationships with stakeholders, and the effectiveness of its governance structure.
Overview of each component of ESG:
Environmental: The environmental aspect of ESG focuses on a company's impact on the natural environment. It involves assessing factors such as carbon emissions, resource consumption, waste management, pollution prevention, climate change mitigation, and conservation efforts.
Social: The social component of ESG examines a company's interactions and relationships with various stakeholders, including employees, customers, communities, suppliers, and society at large. It encompasses aspects such as labour rights, employee well-being, diversity and inclusion, human rights, community engagement, product safety, and social impact initiatives.
Governance: The governance aspect of ESG pertains to the systems, structures, and processes that govern a company's operations and decision-making. It includes the composition and effectiveness of the board of directors, executive compensation, transparency and accountability, risk management practices, ethical business conduct, and adherence to legal and regulatory frameworks.
The ESG framework helps investors, stakeholders, and regulators assess a company's overall sustainability and ethical performance. It recognizes that long-term business success is closely tied to responsible and sustainable practices that consider environmental impacts, social considerations, and strong governance structures. Integrating ESG considerations into business strategies can lead to improved risk management, increased stakeholder trust, better financial performance, and long-term value creation.
ESG Ireland
ESG (Environmental, Social, and Governance) is a highly relevant and significant issue for businesses, driven by new regulations, consumer demands, and investor requirements. There is a notable shift from theoretical discussions to concrete actions at the corporate level, and this trend is expected to intensify further.
ESG is no longer treated as an optional consideration but is increasingly viewed as a critical issue for businesses. They face growing ESG requirements that need to be integrated into their organizational processes. It is imperative for these businesses to ensure that their ESG reporting and disclosures are accurate, meet investor demands, and mitigate reputational risks, particularly the risk of Greenwashing, which refers to misleading or exaggerated claims of environmental or social responsibility.
In Ireland, the following ESG trends, developments, and initiatives are currently impactful:
EU Corporate Sustainability Reporting Directive (CSRD): The implementation of the CSRD, which expands sustainability reporting requirements, has significant implications for businesses in Ireland.
Additional new ESG regulation: Besides the CSRD, there are other emerging ESG regulations in Ireland that shape ESG practices and disclosures.
Greenwashing and Green Finance: Addressing the issue of Greenwashing is crucial, and there is an increasing focus on Green Finance, which aims to promote investments with positive environmental impacts.
Greater focus on the "Social" component of ESG: While environmental and governance aspects have traditionally received more attention, there is a growing emphasis on the social dimension of ESG, including topics such as diversity, employee welfare, and community engagement.
As capital and funding sources align more closely with demonstrative ESG metrics, access to capital markets will depend on the quality of a company's ESG disclosure. Those failing to satisfy regulatory obligations may face an increased cost of capital.
These ESG trends and initiatives reflect the growing importance of ESG considerations in Ireland. Businesses must actively embrace and integrate ESG practices into their strategies and operations to meet evolving regulatory requirements, investor expectations, and consumer demands.
Corporate Biodiversity
Driven by the success achieved at COP15, the protection and conservation of biodiversity are expected to gain significant importance on the corporate agenda in Ireland. In mid-December, governments worldwide convened in Montreal to reach a consensus on global goals and targets aimed at halting and reversing the loss of nature. Among the key outcomes of the meeting was an agreement to safeguard 30% of the Earth's natural areas by 2030. This commitment received accolades from environmental organizations and government officials.
Simultaneously, the Citizens' Assembly on Biodiversity Loss took place in Ireland. Encouragingly, the assembly comprised a representative sample of Irish citizens who overwhelmingly supported recommending a constitutional referendum to enhance biodiversity protection. The proposed constitutional amendment seeks to acknowledge nature as a legal entity with rights akin to those afforded to companies or individuals.
This convergence of global negotiations and grassroots citizen engagement in Ireland demonstrates a growing recognition of the urgency to address biodiversity loss. As a result, businesses operating in Ireland are likely to face increasing pressure to prioritize biodiversity conservation in their operations. They may be expected to adopt sustainable practices, implement biodiversity management plans, and actively contribute to nature protection efforts.
Companies that demonstrate a commitment to biodiversity preservation will not only align themselves with international and local objectives but also enhance their reputation and contribute to the long-term sustainability of ecosystems. By integrating biodiversity considerations into their strategies, organizations can play a vital role in conserving natural resources and safeguarding Ireland's unique biodiversity for future generations.
National Biodiversity Targets
In 2023, several developments related to biodiversity will have relevance to companies in Ireland:
Adoption of Global Biodiversity Framework: The national adoption and implementation of the Kunming-Montreal Global Biodiversity Framework will commence in 2023. This means that the global goals and targets on biodiversity agreed upon in international forums will be translated into national-level goals and targets. Companies will have the opportunity to participate in dialogues and contribute to the development of national plans.
Closing the Biodiversity Finance Gap: The need to address the "biodiversity finance gap" and increase investments in biodiversity conservation and restoration is gaining recognition across the public and private sectors. Additionally, the forthcoming Task Force on Nature-related Financial Disclosures (TNFD) framework will guide corporates and financial institutions in assessing, disclosing, and managing nature-related risks and opportunities.
Interdependence of Climate and Biodiversity: The interrelationship between climate and biodiversity is a recurring theme. Achieving net-zero emissions will require companies to adopt a nature-positive approach. Understanding this connection at both the sector and company level will enable organizations to respond more effectively and strategically to stakeholder expectations and regulatory requirements across the entire ESG (Environmental, Social, and Governance) spectrum.
Companies in Ireland can anticipate active participation in the development of national biodiversity plans, an increased focus on biodiversity finance and investment, and a deeper understanding of the link between climate and biodiversity. By aligning their strategies with these developments, businesses can demonstrate their commitment to biodiversity conservation and contribute to a more sustainable future.
Fit For 55
The year 2023 continues the relentless march of new EU ESG (Environmental, Social, and Governance) regulations, demonstrating no signs of abating. The European Union remains committed to its goal of reducing greenhouse gas (GHG) emissions by at least 55% by 2030, and as a result, it continues to revise existing laws and introduce new ones to achieve this target.
One significant development in 2023 is the "Fit for 55" package, which encompasses 14 legislative proposals presented by the European Commission in July 2021. This package aims to further discussions and agreements on various measures to support the EU's emission reduction goals. It includes initiatives such as the Carbon Border Adjustment Mechanism (CBAM), the revision and extension of the EU Emissions Trading System (ETS), and the establishment of the Social Climate Fund (SCF). These proposals highlight the EU's commitment to tackling climate change and driving sustainable practices across various sectors.
In December 2022, a provisional political agreement was reached on the introduction of the CBAM, which is set to become the world's first mechanism of its kind. The CBAM aims to address the issue of carbon leakage by imposing carbon costs on certain imported goods, ensuring a level playing field for EU industries. This mechanism will have significant implications for businesses engaged in international trade and will further incentivize companies to reduce their carbon footprint.
Additionally, the revision and extension of the EU ETS, a key pillar of the EU's climate policy, will contribute to the reduction of GHG emissions. The EU ETS sets a cap on the total amount of emissions allowed from certain sectors and enables companies to trade emission allowances. The revised system will likely introduce stricter targets and expand the sectors covered, placing greater emphasis on emissions reduction and carbon pricing.
Furthermore, the establishment of the Social Climate Fund (SCF) aims to provide funding to member states for measures and investments in energy efficiency, decarbonization of buildings, and improved access to low-emission mobility and transport. The SCF focuses on benefiting vulnerable households, micro-enterprises, and transport users, aligning with the EU's commitment to a just transition towards a sustainable future.
Overall, the relentless march of new EU ESG regulations in 2023 demonstrates the EU's determination to address climate change and promote sustainable practices. These regulations will have far-reaching implications for businesses operating within the EU, requiring them to adapt and align with the evolving sustainability
The Climate Action Plan
The Climate Action Plan 2023 is set to make a significant impact across various sectors, signalling a strong commitment to addressing climate change in Ireland. Released as a broad platform for serious climate action, the plan encompasses a range of measures and initiatives aimed at reducing emissions and driving sustainable practices.
One key aspect of the Climate Action Plan 2023 is its focus on system change. Recognizing the importance of transforming the systems that shape our lives, such as how we live, build, work, get around, shop, and produce food, the plan emphasizes the need for change in the local government, public sector, industries, and key economic sectors. This recognition highlights the comprehensive approach required to achieve meaningful climate action.
The actions outlined within the Climate Action Plan 2023 support this system change approach. They encompass a wide range of areas, including energy efficiency, renewable energy, transport, agriculture, waste management, and more. The plan sets ambitious targets and provides a roadmap for achieving them, with a focus on reducing emissions, increasing resilience, and transitioning to a low-carbon economy.
Accountability for the delivery of the Climate Action Plan 2023 is crucial, as highlighted by the Climate Change Advisory Council in its annual reports. The plan acknowledges the need for determination and implementation to bridge the gap between ambitious climate goals and practical actions. It calls for collaboration, leadership, and engagement from various stakeholders, including businesses, government bodies, and communities.
The Climate Action Plan 2023 presents both challenges and opportunities for organizations across sectors. It requires businesses to assess their operations, identify areas for improvement, and implement measures to reduce their carbon footprint. This may involve adopting energy-efficient technologies, transitioning to renewable energy sources, implementing sustainable practices, and engaging in circular economy initiatives. By aligning with the plan's objectives, organizations can contribute to Ireland's climate goals while also benefiting from the potential for innovation, cost savings, and enhanced reputation.
Lower Thresholds
ESG (Environmental, Social, and Governance) reporting in Ireland is poised to expand beyond the largest corporates and extend its reach to medium and smaller enterprises. This expansion is driven by several factors, including regulatory changes, investor pressure, and market maturity. As a result, ESG reporting is becoming increasingly important for businesses of all sizes.
One significant development contributing to this expansion is the introduction of the Corporate Sustainability Reporting Directive (CSRD). The CSRD lowers the reporting threshold, making ESG reporting applicable to a broader range of companies. While the previous Non-Financial Reporting Directive (NFRD) applied to listed companies with more than 500 employees, the CSRD includes all EU companies, listed or not, that meet certain criteria such as having more than 250 employees, a net turnover exceeding EUR 40 million, and assets exceeding EUR 20 million. This change significantly increases the number of companies affected by ESG reporting, including medium and smaller enterprises.
Moreover, there is growing investor pressure for companies to disclose their ESG performance. Investors are increasingly considering ESG factors in their investment decisions, recognizing the potential impact of environmental and social issues on financial performance. As a result, companies, regardless of their size, are facing demands for transparency and accountability in their ESG practices. This pressure extends beyond the largest corporates to medium and smaller enterprises, as investors seek comprehensive ESG information to inform their investment strategies.
Additionally, market maturity plays a role in the expansion of ESG reporting. As sustainability practices become more mainstream and stakeholders increasingly expect companies to demonstrate their commitment to ESG issues, businesses of all sizes are recognizing the importance of ESG reporting. Medium and smaller enterprises are realizing that ESG reporting can enhance their reputation, attract investors, and strengthen their relationships with customers, suppliers, and other stakeholders. This growing awareness and understanding of the benefits of ESG reporting are driving its expansion into these sectors.
The Financial Sector
The ESG (Environmental, Social, and Governance) data journey is intensifying for the financial sector in 2023. Financial companies are facing increasing disclosure requirements and regulations aimed at promoting transparency, comparability, and accountability in ESG reporting. This intensification is driven by the need to prevent greenwashing, enhance data comparability, and meet the growing demand for sustainable investment products.
One significant regulation impacting the financial sector is the Sustainable Finance Disclosure Regulation (SFDR). The SFDR aims to prevent greenwashing and ensure data comparability by introducing enhanced standardized transparency on sustainability within the financial markets. It requires fund managers to provide information about the ESG performance across mandatory Principal Adverse Impact (PAI) data points and optional metrics. This regulation raises the bar for investment products, particularly those promoting ESG characteristics and objectives, by setting a strict minimum-disclosure standard for Article 8 and Article 9 funds. Investment funds that do not qualify for exemption will be required to report PAIs, leading to an intensified focus on obtaining comprehensive data coverage across environmental, social, and governance factors.
The intensification of the ESG data journey also stems from the increasing demand for sustainable investment products. Investors are increasingly seeking ESG information to make informed investment decisions aligned with their values and sustainability goals. Financial companies, including asset managers, banks, and insurance companies, are recognizing the importance of providing reliable and comprehensive ESG data to meet this demand. They are investing in data collection, analysis, and reporting capabilities to ensure the accuracy and reliability of their ESG disclosures.
Furthermore, the financial sector is witnessing the emergence of industry initiatives and collaborations aimed at improving ESG data quality and standardization. These initiatives seek to address challenges such as data availability, consistency, and comparability. Market participants are working together to develop frameworks, methodologies, and best practices for ESG data collection, analysis, and reporting. These efforts aim to enhance the reliability and usefulness of ESG data, enabling financial companies to make informed decisions and meet regulatory requirements.
The ESG data journey is intensifying for the financial sector in 2023. The SFDR and the demand for sustainable investment products are driving increased disclosure requirements and data comparability. Financial companies are investing in data capabilities and participating in industry initiatives to improve ESG data quality and standardization. This intensification reflects the sector's commitment to transparency, accountability, and sustainability in the pursuit of a more responsible and resilient financial system.
Greenwashing
Anti-greenwashing campaigns are intensifying in 2023, reflecting the growing concern over misleading or unsubstantiated sustainability claims. Greenwashing refers to the practice of making exaggerated or false claims about a company's environmental or social performance, products, or services. It is a form of marketing deception that can mislead consumers, investors, and other stakeholders. As sustainability becomes more mainstream, the risk of greenwashing increases, leading to intensified scrutiny and campaigns to combat it.
One significant development in anti-greenwashing campaigns is the increasing focus on ESG data quality and standardization. As the demand for ESG information grows, so does the need for reliable and comparable data. Anti-greenwashing campaigns are calling for greater transparency and accountability in ESG reporting, emphasizing the importance of accurate and verifiable data. This focus on data quality and standardization aims to prevent companies from making misleading or unsubstantiated sustainability claims, ensuring that ESG information is reliable and useful for decision-making.
Moreover, regulatory bodies are taking action to combat greenwashing. The European Securities and Markets Authority (ESMA) has issued guidelines on disclosure requirements under the SFDR, emphasizing the need for transparency and accuracy in ESG reporting. The guidelines aim to prevent greenwashing by providing clear and consistent standards for ESG disclosures. Similarly, the Central Bank of Ireland has announced a thematic review of funds domiciled in Ireland to identify greenwashing activities, including the classification of Article 6 funds versus Article 8 funds to identify misrepresentations. These regulatory actions demonstrate the commitment to combatting greenwashing and promoting transparency in ESG reporting.
In addition, investors and consumers are becoming more aware of greenwashing and are taking action to hold companies accountable. Investors are increasingly considering ESG factors in their investment decisions, and they are demanding reliable and accurate ESG information. Consumers are also becoming more conscious of sustainability issues and are scrutinizing companies' sustainability claims. Social media and other digital platforms have made it easier for consumers to share information and call out greenwashing, leading to intensified pressure on companies to demonstrate their sustainability performance.
Anti-greenwashing campaigns are intensifying in 2023, reflecting the growing concern over misleading or unsubstantiated sustainability claims. The focus on ESG data quality and standardization, regulatory actions, and investor and consumer pressure are driving this intensification. As sustainability becomes more mainstream, the importance of transparency, accountability, and reliability in ESG reporting will continue.
Due Diligence
ESG (Environmental, Social, and Governance) due diligence is set to become an integral part of the due diligence process in 2023. Due diligence is a critical process that enables investors and companies to assess the risks and opportunities associated with a potential investment or transaction. ESG due diligence involves evaluating the environmental, social, and governance risks and opportunities associated with a target company or asset. As sustainability becomes more mainstream, ESG due diligence is becoming increasingly important for investors and companies.
One significant driver of the integration of ESG due diligence is the growing demand for sustainable investment products. Investors are increasingly seeking to align their investments with their values and sustainability goals, and they are demanding reliable and comprehensive ESG information to inform their investment decisions. ESG due diligence enables investors to assess the sustainability performance of a target company or asset, identify potential risks and opportunities, and make informed investment decisions.
Moreover, regulatory bodies are taking action to promote ESG due diligence. The SFDR requires financial companies to disclose how they integrate sustainability risks into their investment decision-making process and to provide information on the sustainability characteristics and objectives of their investment products. This regulation emphasizes the importance of ESG due diligence in the investment process and encourages investors to consider sustainability factors in their investment decisions.
Additionally, companies are recognizing the importance of ESG due diligence in managing their sustainability risks and opportunities. ESG due diligence enables companies to identify potential ESG risks and opportunities associated with a transaction or investment, assess their sustainability performance, and develop strategies to mitigate risks and capitalize on opportunities. By integrating ESG due diligence into their decision-making processes, companies can enhance their sustainability performance, meet stakeholder expectations, and contribute to a more sustainable future.
ESG due diligence is set to become an integral part of the due diligence process in 2023. The growing demand for sustainable investment products, regulatory actions, and companies' recognition of the importance of ESG due diligence are driving this integration. By integrating ESG due diligence into their decision-making processes, investors and companies can assess the sustainability risks and opportunities associated with a potential investment or transaction, make informed decisions, and contribute to a more sustainable future.
The Energy Crisis
The energy crisis in 2023 is accelerating the shift to renewables, with corporates looking to hedge prices through Corporate Power Purchase Agreements (PPAs), while governments are seeking to reduce import dependency. The energy crisis has highlighted the vulnerability of traditional energy sources and the need for more resilient and sustainable energy systems. As a result, the demand for renewable energy has increased, and the shift towards renewables has accelerated.
Corporate PPAs are becoming increasingly popular as a way for companies to secure long-term, fixed-price renewable energy supply agreements. These agreements enable companies to hedge against volatile energy prices, reduce their carbon footprint, and demonstrate their commitment to sustainability. The energy crisis has further incentivized companies to enter into Corporate PPAs, as they seek to secure reliable and affordable renewable energy supply.
Moreover, governments are recognizing the importance of reducing import dependency and promoting domestic renewable energy production. The energy crisis has highlighted the risks associated with relying on imported energy sources, particularly in times of supply disruption or price volatility. Governments are seeking to reduce these risks by promoting domestic renewable energy production, such as wind, solar, and biomass. This shift towards renewables not only enhances energy security but also contributes to the transition to a low-carbon economy.
The energy crisis has also highlighted the need for energy efficiency and demand-side management. Governments and companies are recognizing the importance of reducing energy consumption and optimizing energy use. This approach can help to reduce energy costs, enhance energy security, and contribute to sustainability goals. Energy efficiency measures, such as building retrofits, energy-efficient appliances, and smart grids, can help to reduce energy consumption and enhance energy resilience.
The energy crisis in 2023 is accelerating the shift to renewables, with corporates looking to hedge prices through Corporate PPAs, while governments are seeking to reduce import dependency. The crisis has highlighted the need for resilient and sustainable energy systems, and the shift towards renewables is becoming increasingly important. By promoting renewable energy production, enhancing energy efficiency, and optimizing energy use, governments and companies can enhance energy security, reduce costs, and contribute to sustainability goals.
Supply Chain
The supply chain and ESG (Environmental, Social, and Governance) are becoming increasingly interconnected in 2023. The supply chain refers to the network of companies, organizations, and individuals involved in the creation and delivery of a product or service. ESG refers to the environmental, social, and governance factors that can impact a company's sustainability performance. As sustainability becomes more mainstream, the importance of ESG considerations in the supply chain is increasing.
One significant development in the supply chain and ESG is the growing demand for sustainable and responsible sourcing. Consumers and investors are increasingly seeking products and services that are produced in an environmentally and socially responsible manner. This demand is driving companies to adopt sustainable and responsible sourcing practices, such as sourcing from suppliers that meet certain ESG criteria. By integrating ESG considerations into their supply chain, companies can enhance their sustainability performance, meet stakeholder expectations, and contribute to a more sustainable future.
Moreover, regulatory bodies are taking action to promote ESG considerations in the supply chain. The EU Sustainable Corporate Governance Directive, for example, requires companies to identify and address ESG risks and opportunities in their supply chain. This regulation emphasizes the importance of responsible sourcing and encourages companies to adopt sustainable and responsible sourcing practices.
Additionally, companies are recognizing the importance of ESG considerations in managing their supply chain risks and opportunities. ESG considerations can help companies to identify potential risks and opportunities associated with their suppliers, assess their sustainability performance, and develop strategies to mitigate risks and capitalize on opportunities. By integrating ESG considerations into their supply chain management, companies can enhance their sustainability performance, meet stakeholder expectations, and contribute to a more sustainable future.
Paul Walsh BA LLM (UWA)