ESG Trends in 2023

While the past two years have almost exclusively focused on the impacts of COVID-19, investors’ attention is once again shifting back towards more long-term issues. The ESG focus will remain on the ‘G’ – ‘governance’ – in 2023 but will move on from how directors have managed COVID-19 to how they oversee the ‘E’ and ‘S’: climate change and social issues, according to Jana Jevcakova, Head of International ESG at Morrow Sodali.

The ‘E’ In ESG
While investors will continue to watch how large companies embrace the Task Force on Climate-Related Financial Disclosures (TCFD), Jevcakova says the focus will hone in on how much companies are investing in their transition to renewables and managing climate change risks. “That’s largely not been discussed yet,” she says, noting that the capital allocation question is one of the key identifiers for Climate Action 100+, an investor-led initiative aimed at ensuring that the world’s largest corporate greenhouse gas emitters act on climate change.

The ‘S’ in ESG
On the social side, Jevcakova believes human capital management – attracting, retaining and incentivising employees – will be key in 2023. “This very closely relates to gender, culture and business ethics,” she says. “We’re starting to see new generations coming into the workforce. They’re looking beyond pay to what the organisation they want to work for stands for. Does it have diversity and a good culture? Will they be a good fit and is it a place where they can make an impact? “So, it’s about understanding that not only investors’, but other stakeholders’, views are changing. Looking beyond pure short-term financial outcomes is key.”

Jevcakova also believes better understanding customers and suppliers will be crucial in 2023. “New generations are coming into the workforce and will have new purchasing powers. Their parents will no longer be making their decisions,” she says. “We need to understand their customer preferences, especially in B2C businesses. B2B businesses are spared a bit, but even they face reputational risks if they don’t manage their ESG risks effectively.” For example, Jevcakova says companies’ reputations could be tarnished by suppliers who don’t pay employees properly or aren’t ethical.

And, while many companies are across their legal requirements around modern slavery statements, she believes they will have to move beyond compliance when examining their supply chains. “Some investors see advantages in having information about supply chains because that can definitely be very significant in their valuations,” she says. “Some investors are very interested in seeing with their own eyes the suppliers’ factories and sites, especially where these are located in developing world, to check on their practices. “Companies will be expected to engage with suppliers and educate them on sustainable practices, especially if they are based in countries with weak regulatory environments.

Jevcakova adds: “It’s really about understanding each company’s role in your value chain. If I had to summarise it, we are getting out of this maybe 1980s or 1990s mindset where the key objective of a company was to maximise returns for shareholders to now being a profitable business sustainably. That’s a change. It’s about understanding all your stakeholders’ preferences and your impact on them while also being aware of the impact they have on you. It’s a two-way street.”

Just Transition
Jevcakova, one of Asia-Pacific’s leading experts in corporate governance and proxy research, believes “Just Transition" will also become more of a hot topic. It acknowledges the disruption in jobs and communities that could happen as the world takes action against climate change and the need for coordinated plans and investment to help those left behind. “We started hearing about Just Transition last year, but now with some developments in Europe and in other parts of the world, I believe investors will start bringing it up much more frequently,” says Jevcakova.

Biodiversity
Jevcakova also believes questions on how boards and organisations deal with nature and biodiversity will increase in 2023. Here, she points to the Taskforce on Nature-related Financial Disclosures (TNFD) which aims to help companies and financial institutions integrate nature into their decision-making. Its final recommendations will be published in September 2023. She says: “Structurally, it’s similar to the TCFD, but content-wise, what’s currently being discussed is 30 per cent restoration of nature by 2030 as a key goal. There are also massive discussions about how we should measure this.” When it comes to climate change, Jevcakova says 1.5°C became the acceptable limit to rising temperatures. “We then set targets and recognised that we need to transition to net zero. But with nature, there’s still a question mark,” she says. “I think that 2023 will be telling. It will give us better visibility over what companies need to measure and how they need to manage the question of biodiversity and nature-related issues.”

Jevcakova says the TNFD is at an infant stage worldwide. Some mining or large companies have started addressing some of its issues, but she believes it will take time before they better understand what this framework actually looks like.

Massive Opportunities
Jevcakova says many companies that believe they are not affected by climate change may not be exploring its massive opportunities – something that will increasingly be noticed by their investors. “Active fund managers are already looking at this and are questioning certain strategic decisions. They are also providing feedback,” she says, adding that it all comes down to understanding your investors and what, in their view, makes you a better company to invest in than another one. According to Jevcakova, this makes sense from a business perspective. The theory is that a company should perform better financially if it manages climate issues well and takes advantage of the opportunities from transitioning to a net zero world. “It's all about making money in the end.”

Preparing for 2023?
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