Today sustainable investments are aiding businesses to cope with the ongoing disruption, economic uncertainty, and escalating conflict for energy costs. While the crisis is compelling businesses to reexamine their expenditure, the focus is shifting to essentialism. With the increasing stakeholder desire to witness progress on environmental, social, and governance (ESG) goals, organizations are exploring new opportunities to mitigate their cost and risks.
The three pillars of ESG—environmental, social, and governance—are receiving prominent consideration in company strategy. However, the ambitions, delivery, and reporting framework of an organization can vary, making ESG a challenging goal. The ongoing challenging market conditions, global crisis, and geopolitical uncertainty are overshadowing the commitments of organizations, raising immediate concerns about existing practices.
How to Spot Greenwashing?
To identify whether an organization is “green,” as it says, it is important to identify the firm’s dedication to sustainability practices. When an organization spends more on advertising its green initiatives than it spends on sustainable activities, it can be labeled as “greenwashing.” In the meantime, it is also vital to check a firm’s disclosures on operations ESG risk and how they manage the risks. There should be a set criterion for the allotted funds within the organization that encloses sustainable policies that are to be included or excluded in line with their investment.
A recent Gartner survey identified that almost 87% of business leaders are expecting a rise in sustainability investment in the next two years. With the increase in consumer interest and new regulations being implemented, corporate greenwashing issues are garnering the spotlight.
How to Crack Down on Corporate Greenwashing?
With greenwashing scandals still making the headlines, many corporations are being accused of over-emphasizing their sustainable products and services. Business leaders today perceive sustainability as an investment that protects them from disruption. Additionally, the integrated sustainability programs and activities help in creating short- and long-term value for their organization. It is, therefore, vital for businesses to integrate standard frameworks and policies that will enable them to tackle the misleading ESG claims made against them. While they cannot change the misleading environmental claims, they can prioritize the delivery of ESG pledges and regulations in play.
Regulators are also taking an interest in monitoring Scope 3 emissions as well. The US, EU, and New Zealand proposed a mandatory requirement for companies to disclose their Scope 3 emissions. While further improvements in standardized methodology will be essential at present, businesses are planning to continue their commitment to achieving net zero by 2050.
ESG Investing Trends in 2023
The ESG landscape will be experiencing a rise in prominence during 2023. While customers will be the primary stakeholders creating the pressure, the investments will be targeted at protecting the organization and assisting them in optimizing their energy consumption and acting on sustainability issues. Sustainable investing trends are expected to impact stakeholders, investors, workers, regulators, and policymakers.
Companies and investors will adopt Sustainability Disclosure Standards
While in 2022, the European Financial Reporting Advisory Group (EFRAG), the U.S. Securities and Exchange Commission (SEC), and the newly assembled International Sustainability Standards Board (ISSB) drafted proposals for disclosure standards relating to sustainability, the final drafts will be adopted in 2023. These new disclosure standards will assist organizations in enhancing transparency and consistency in sustainability-related issues while mitigating the risk of misrepresentation, sensed as greenwashing.
New Regulations will help gain ESG Clarity
With regulators introducing stricter sustainability regulations, organizations will be able to navigate the risk of litigation in their sustainability actions and gain more clarity. The efforts to integrate ESG regulations into corporate policies and investment faced diverging pressures in 2022. However, in 2023, companies and investors will function to strengthen their sustainability commitments and priorities. In light of the growing risk of ESG-related litigation, investors will increasingly check if corporations are backing their words with actions.
Global Sustainable Bond Market Will Return to Growth
With credibility challenges and market uncertainty on the rise, the global sustainability market in 2022 was not able to not reach the highs set. With the rising interest rates and the risk of recession, in 2023, the market conditions will influence growth. Investors are facing ongoing questions about the effectiveness of sustainable debt. This has compelled organizations to reach their sustainability goals in the relatively new and growing sustainability bond segment. While the inflation risks remain and global growth reaches a stagnant stage, macroeconomic and market conditions are constraining the appetite of investors. The global sustainable bond market is set to grow between $900 billion and $1 trillion in 2023, when compared with $850 billion in 2022.
Key Takeaways
In 2023, persistent inflation and economic uncertainty could test sustainability initiatives across organizations. However, organizations continue to believe that the sustainable debt market will assist in advancing sustainability goals, despite these headwinds.
Climate crisis and associated topics like water scarcity and biodiversity loss are dominating stakeholder discussions as organizations are reevaluating long-term climate goals to address emergencies. The growing risk of environmental, social, and governance (ESG)-related litigation is creating new challenges for companies and investors to navigate. ESG investing enables organizations to invest their money in social issues that matter. However, it requires due diligence to avoid greenwashing.
Final Thoughts
Today, the broadened scope of sustainable investment mandates more focus and time commitment from board members in order to meet fiduciary duties. And in 2023, the pressure on industry leaders to shore up their ESG credentials, as well as sustainable investment, is set to grow as investors are demanding better accountability with a focus on sustainability.
By 2026, 20% of organizations will be shifting their focus to eliminate plastics and reduce the carbon footprint of their packaging, according to Gartner’s research. This transition is leaving organizations with unmet commitments vulnerable to greenwashing backlash.
In the last few years, greenwashing went from being a bad marketing practice to becoming a massive legal risk for organizations. With the rising clout around greenwashing on the rise, organizations are being accused of misleading their investors by exaggerating the sustainability attributes of their investments.
While ESG investing is nuanced and mandates due diligence, investors are taking into account new parameters to judge the investment portfolio options rather than just investing in a simple low-fee fund. ESG investments vary from investor to investor, and in 2023, investors will integrate new measures in investment decisions.
Organizations are exploring alternative sustainability metrics to address and reduce their contribution to greenhouse gas emissions and climate change. With the continued geopolitical turmoil, inflation, looming recession, and worsening physical impacts of climate change still on the horizon, 2023 is set to belong along new uncertainties that will involve managing near-term risks and creating meaningful progress in order to achieve longer-term sustainability goals.
Navigating the ESG investment market is likely to remain a challenge in 2023, and greenwashing accusations can intensify. Due to this, regulators are now trying to address these crises, initiating a new transition in 2023. These misleading ESG claims will enable investors to restore their trust as there is a lot of building cynicism about ESG products.
