Looking Forward and Looking Back: Successfully Preparing for Emerging ESG Trends

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Author: Tauni Lanier

In 2024, businesses are set to shift focus to implementation. The evolving risk landscape brings to the forefront sustainability-related risks and opportunities. For businesses, this will mean assessing their operations and its impacts, new compliance obligations, addressing greenwashing risk and opportunities to leverage AI to build resilience. This article considers sustainability and ESG progress to date, what this will mean for businesses and key trends to look forward to in 2024.

Year in review

2023 in Numbers[1]

  • International Disaster Database (EMDAT) recorded a 60% rise in the number of deaths from landslides, 278% increase in deaths from wildfires, and 340% increase in deaths from storms, when observing 240 climate-related events in 2023.
  • Extreme weather, such as heatwaves experienced around the world have cost an estimated 0.6% of GDP in 2023, ranging from 0.1% of GDP in France to 1.2% in China.

The World Economic Forum’s (WEF) Global Risks Report 2023 ranked risks over a 2-year (priorities) and 10-year period (issues). Over a 2-year period, risks included natural disasters and extreme weather events; failure to mitigate climate change; large-scale environmental damage incidents; failure of climate change adaptation; natural resources crises, and widespread cybercrime and cyber insecurity. These risks moved up the rank order when considering risks over a 10-year period with a notable inclusion of biodiversity loss and ecosystem collapse[2]. Governments have responded to these risks by reaching agreement on the Kunming-Montreal Global Biodiversity Framework (COP15) and on the collective global effort to transition away from fossil fuels at COP28.

I. Progress

In practice, policymakers have responded by introducing stronger non-financial disclosure regimes and standards that are taking effect or expected take effect in the coming years. In Europe, the adoption of European Sustainability Reporting Standards (ESRS) which will form the basis of Corporate Sustainability Reporting Directive (CSRD), requiring companies subject to the Non-Financial Reporting Directive (NFRD) to measure their non-financial impact in 2024. In the UK, the Transition Plan Taskforce published guidance to assist corporates in creating ambitious and credible transition plans, with first transition plans required in 2026.

The Taskforce for Climate-Related Financial Disclosure (TCFD) closed its doors, with International Sustainability Standards Board (ISSB) assuming the responsibility to oversee TCFD reporting and eventually paving the way for IFRS S1 and S2 disclosures. During its tenure, TCFD oversaw the increase in non-financial disclosure, with 50% of companies disclosing in line with at least five of the eleven recommended disclosures in FY2022 – up from 18% in 2020.[3]

In the field of Artificial Intelligence (AI), the UK government announced the launch of the UK AI Safety Institute. The Institute will initially perform three core functions: Develop and conduct evaluations on advanced AI systems, drive foundational AI safety research and facilitate information exchange. As part of international coordination, countries represented at the Summit agreed to the development of a "State of Science" report on the capabilities and risks of advanced AI.

II. Challenges

In recent months, the sustainability and ESG landscape faced challenge. For example, the Autumn Statement cooling which saw the UK withdraw from some of its net zero commitments. The SEC also watered down its incoming climate rule and delayed to 2024, while the European Corporate Sustainability Due Diligence Directive has seen similar watering down by limiting financial institution’s due diligence scope. Although TCFD made significant progress, only 4% of companies disclosed in line with all eleven recommendations.

Sustainability and ESG Trends to Watch in 2024

This is just a list of queries that one should be asking oneself at the beginning of the year. What will 2024 bring to the mid-market and how can BDO help as a trusted advisor. The list is not exhaustive, but will explore a summary of what is to come, with an expectation that in-depth pieces, outlining the challenges and the calls to action.

  1. Legislation and regulation coming into force (and for whom): Do you know your CSRD from the ESRS? From your SDS to your TNFD? Are you impacted and should you care? How and what should you do to set yourself up for success? How are legislative bodies working to address Greenwashing.
  2. The increasing use of GenAI: Is this the tool that will change the face of ESG and sustainability disclosure? How can the mid-market use GenAI to work and disclose ‘smarter’ not ‘harder’? How can AI be built into ESG strategy and help guard against greenwashing? Learn more.
  3. The interest of ESG and sustainability data gathering and aggregating from the large tech companies: Now that Microsoft, Google and IBM are in the game of data gathering, does it make sense for ESG and sustainability aware companies to use any other platform? Or is the race toward alignment and standardisation giving rise to missed opportunities, will the imbedded AI help? Will the aggregation of data platforms delivered from the large tech companies help or hinder all types of greenwashing?
  4. Nature-based solutions: Can one address climate change; targets and risks without addressing nature based issues? Can the mid-market take a more proactive stance around nature based, as it requires nimble thinking and dynamic, creative solutions. These are areas that the mid-market excels. Disclosure around nature-based can be, on the face, helped by the use of GenAI and Machine Learning, but does some of the downsides to the technology (use of energy, hallucinations) lead to less trust in the outcomes achieved?
  5. Tightening the screw on greenwashing: The pervasiveness of greenwashing throughout all issues associated with ESG and sustainability. Indeed, the last bastion of ‘best practice,' Net Zero Targets are being highlighted as one of Achilles heels of disclosure. The targets as seen as highly vulnerable to greenwashing and as simple 'window dressing' without doing the necessary hard work. Is GenAI something that can help?

These issues should be on the radar of mid-market and SMEs, as they will have a demonstrable impact on how a company communicates its' commitment to ESG and sustainability, and at what level. It is important to note that in some cases these issues are not mutually exclusive, but are interconnected, and work in tandem, magnifying the impacts and requirements. The red-thread through all of these issues is the burgeoning use of GenAI and machine learning as well as the spectre of greenwashing (in all its guises).

BDO is in the business of being a trusted advisor to our clients and audited entities. Being a trusted advisor requires that BDO keeps abreast of changes and developments, to be shared and communicated in a transparent and timely manner. Building a universe of trust is key if some of the more acute issues of sustainability are to be addressed. BDO can help clients understand the roadmap, when to use AI and how to avoid Greenwashing, as to support and facilitate an environment of trust and clarity in ESG and sustainability disclosures.

The Sustainability and ESG HUB of BDO will be producing a series of blogs to inform on elements of GenAI, Machine Learning and Greenwashing. This series will aid in understanding what can help, what to look out for, and how to set up for success using innovative technology.

[1] Green Central Banking – The Economic Costs of 2023’s Extreme Weather… So Far

[2] World Economic Forum – Global Risks Report 2023

[3] Financial Stability Board – 2023 TCFD Status Report: Task Force on Climate-related Financial Disclosures