The top ESG trends to watch right now
From new climate rules to rising social campaigns, 2024 has been an action-packed year in the world of ESG, with much to track in terms of evolving regulations and shareholder expectations.
As we look ahead to the second half of the year, what developments must HR, IR, sustainability, compliance and audit teams prioritize in the months ahead? How can the board members and risk leaders who oversee it all avoid surprises and stay ahead of change?
Diligent Market Intelligence (DMI) took a deep dive into the data, from investor voting to shareholder activism. We distilled the details into a new special report: "ESG Engagements in 2024."
Material risk becomes mandatory reporting
It’s official: Corporations, investors, regulators and stakeholders alike consider climate change a fundamental business risk. In 2023, 76.2% of the 3,000 largest U.S. companies cited it in their 10-K reporting, up from 68.2% a year prior. Even more tellingly, new climate reporting regulations from the U.S. to the EU emphasize materiality in their requirements.
The Securities and Exchange Commission’s (SEC) climate rule, for example, requires businesses to disclose material climate-related risks that may impact the registrant’s strategy, operations or financial conditions, plus activities taken to mitigate climate risk. The EU’s Corporate Sustainability Reporting Directive (CSRD) takes a “double materiality” approach, meaning companies must disclose the impact of their business on the environment and society, and on the company’s financials.
“There is certainly a lot of ramping up that companies are going to have to do to meet the new requirements and prepare for sustainability reports to face more scrutiny,” David Zilberberg, counsel with Davis Polk & Wardwell, told DMI.
Moreover, California rule SB 253 calls on companies conducting business in the state to disclose Scope 1, 2 and 3 emissions annually. So now may be the time to escalate this notoriously complex area of reporting as well.
While the SEC’s new rules include no provisions for Scope 3 emissions, the CSRD and new mandates by the International Sustainability Standards Board (ISSB) do. Furthermore, research by Clarity AI revealed that 80% of emissions produced worldwide fall under the category of Scope 3. So, Scope 3 reporting “will likely become the new normal for larger multinational enterprises with extensive relationships with suppliers, material providers and transporters,” Clarity AI Senior Account Executive Brendan Penn said in an interview for the report.
Nature is the new climate
As the SEC, CSRD and other regulatory bodies codify and standardize best practices for climate reporting, a new area of environmental oversight is rising to the fore: nature.
Championed by global organizations like the United Nations, nature disclosures expand the conversation beyond climate risk into areas such as biodiversity and land degradation. WhileS&P companies made more climate proposals in 2023 — 65 versus 10 for nature—each type had roughly equivalent success rates: 21% support for climate proposals and 24% support for nature proposals.
Meanwhile, compliance, risk and governance teams should keep an eye out for new reporting frameworks that are taking shape.
“We expect to see a firming up of targets and disclosures soon thanks to emerging frameworks like the Task Force on Nature-related Financial Disclosures (TNFD) and the Science Based Targets Network (SBTN),” Patrick Fiorani, a research and engagement specialist with Glass Lewis, said in the DMI report.
A rising labor presence in social demands
As environmental issues escalate in importance, the “S” in ESG will be an area to watch as well. In just the first quarter of 2024, U.S.-based companies reported 181 social campaigns — more than double the 71 environmental campaigns launched in the same period and over half of the 234 social campaigns launched throughout all of 2023.
In a new development, labor unions have been behind many of these campaigns — and gaining traction. At U.S.-based companies, for example, three proposals related to freedom of association and collective bargaining secured 34.2% average support as of April 30. And Ancora Advisors’ activist campaign seeking board seats at Norfolk Southern railroad has gained the support of two unions: the Brotherhood of Maintenance of Way Employees Division and the Brotherhood of Locomotive Engineers and Trainmen.
“Labor unions are playing a bigger part in driving companies to enhance workers’ rights and freedoms, both launching proxy contests and filing shareholder proposals,” DMI Senior Editorial Specialist Will Arnot wrote in the report. According to data from DMI’s Activism module, Quarter 1 2024 saw seven social campaigns involving labor unions —the same number as in the entirety of 2023.
Dive deeper into the year’s top ESG trends. Download the full DMI special report today.
