All companies have to face up to ESG challenges now

Ancient Greek statesman and general Pericles said: “Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you.”

Companies taking a relaxed attitude to environmental, social and governance (ESG) issues should heed Pericles’ warning.

The number of legislative efforts concerning ESG that will come to fruition in 2024 is huge. This will be the year when ESG shifts firmly from voluntary to regulatory. Companies’ social and environmental contract to operate has, since the globalisation of the 1990s, been increasingly under scrutiny. Global social and environmental frameworks from the 1990s to today have laid out regulatory pathways at national level. If we look at the past 25 years, the way companies operate now is drastically different in terms of their social and environmental footprint.

The lack of awareness of the ESG regulatory tide that is coming in 2024 is concerning. Listed companies valued on the stock market have been the centre of attention in terms of sustainability, mainly due to the disclosure and transparency demands of investors and regulators. Seventy-two of the 122 stock exchanges tracked by the UN’s Sustainable Stock Exchanges (SEE) have published ESG reporting guidance for their listed companies.

The regulatory wave around supply change due diligence will force an increased effort — and eventually compliance — by companies of all sizes in supply chains.

The EU is at the legislative forefront. Its corporate sustainability reporting directive (CSRD) — operational from January — aims to ensure that EU companies disclose adequate information publicly about the sustainability risks and opportunities they face, as well as the effects they have on people and the environment.

Its corporate sustainability due-diligence directive (CSDDD) will require companies to exercise reasonable due diligence in their own business lines and in their

“value chains” to prevent or minimise human rights or environmental risks and violations. Thus 2025 is the likely date for the application of the directive.

Both regulatory frameworks have direct consequences for non-EU companies trading with EU market actors. By extending to businesses globally — through supply chain responsibility — and imposing obligations to ultimately prevent adverse human rights and environmental effects, the directive represents a paradigm shift in global ESG regulation.

The US Securities & Exchange Commission (SEC) is expected to adopt final rules requiring detailed disclosure by companies of climate-related risks and opportunities in 2024. Brazil will incorporate the International Sustainability Standards Board’s IFRS sustainability disclosure standards into the Brazilian regulatory framework from 2024.

The number of countries (from Chile to Thailand) with carbon taxes in place or on the way is nearing 40. The UK is the latest, and more will follow. The greenwashing regulatory environment is becoming more robust.

The forces driving companies towards sustainability are having an effect.

The scorecard for 2023 was quite encouraging. Bloomberg reported that more than $1trillion was spent on green technology (more investment than in fossil fuels) in 2023. COP28 placed fossil fuels firmly in the crosshairs for the first time, and the EU will ban sales of new internal combustion engine cars by 2035. China’s national oil company, Sinopec, has said the country has reached peak petrol demand (in part by radically increasing sales of electric vehicles [EVs]).

Chinese EV maker BYD will be the biggest seller of electrical vehicles in 2024, displacing Tesla. Some analysts believe China may have peaked in total carbon emissions already. These are monumental developments.

There will certainly be a backlash. In the US, ESG is still highly politicised and tagged as

“woke capitalism”.

Calls for banning the consideration of social or political interests when making investment decisions for state pension funds were a feature of discourse in 2023. However, this will not fundamentally alter the direction of travel.

Perhaps the name will change, but the course of history over the past 30 years confirms the longer-term trend.

Nobody will get traction with a call to treat workers worse, pollute the environment more and promote unethical company practices.

ESG is a legislative reality and increasingly one for all companies no matter their size or location