ESG Market Alert – April 2023: Key ESG trends

In this month’s ESG Market Alert, we cover the following key trends in ESG:

• Reporting, disclosure and the importance of data
• The rise of social and governance issues, with a focus on diversity, inclusion and human rights
• The shifting discussion about biodiversity and the environment
• The Green Finance Boom
• Market practice development: Strong governance and legally walking the talk

Reporting, disclosure and the importance of data

The importance of accurate, regular recording and disclosure of sustainability data is growing. In particular, an increasing number of laws and regulations governing disclosure of environment and climate-related data aim to scrutinise green claims and require the true integration of sustainability into investment decision-making. In the UK, reporting in accordance with the Task Force on Climate-related Financial Disclosures Framework (TCFD), the FCA’s proposed general anti-greenwashing rule (applicable to all regulated firms), the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022, the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 and the UK Stewardship Code all require businesses to disclose data relating to sustainability considerations. As a result, Boards must ensure that they are in a position to manage their ESG disclosures, and consider whether current reporting practices adequately support the legal requirements.

The rise of social and governance issues, with a focus on diversity, inclusion and human rights

Diversity and Inclusion (“D&I”) and Human Rights continue to grow in their significance, partly as a result of the Black Lives Matter movement and the COVID-19 pandemic, with company stakeholders increasingly demanding that directors take action on social and governance issues and factor them in to decision making. There is also a greater focus on transparency and reporting with regard to a number of D&I indicators which will increasingly become a bankability issue; major investment firms and asset managers have signaled that they will require companies to disclose diversity data. Shareholder activism and pressure from employees amid the 2021-2 “war on talent” resulted in companies introducing new incentives and policies with a D&I focus. Whilst the UK has implemented gender pay gap reporting for companies since 2017, some businesses are disclosing ethnicity pay data on a voluntary basis with calls for this to be made mandatory.

There is a raft of legislation coming down the track aimed to prevent adverse human rights impacts in the context of global business. This includes the EU Corporate Sustainability Due Diligence Directive which will require businesses within and outside of the EU to monitor their supply chains for the risk of adverse impacts on human rights and the environment.

The shifting discussion about biodiversity and the environment

Growing threats to nature and biodiversity are prompting businesses to focus on the impact of their activities on nature. This growing focus is reflected in a number of global commitments between nation states and businesses, such as the establishment of the Finance for Biodiversity Foundation, 126 financial institutions representing 21 countries and over €18.8 trillion in assets, which aims to protect and restore biodiversity through finance activity. Businesses are increasingly being encouraged to consider nature-positive solutions to their business practices, which are estimated to have the potential to create up to 395 million jobs worldwide. Businesses can expect their reporting obligations regarding their impact on biodiversity and the environment to increase as these impacts occupy greater focus in the wake of COP27.

Companies may find it challenging to balance their environmental commitments with the requirement for energy affordability, energy security and shareholder returns in response to the Russia-Ukraine war. It is expected there will be growing fiscal support from policymakers for renewable energy initiatives and investments, with jurisdictions which offer such incentives expected to prove more attractive options for investment.

The Green Finance Boom

With an increased focus on companies making net-zero commitments, the market for green bonds, whereby issuers commit to use the proceeds of any debt finance raised for environmental objectives, is set to only increase as carbon-intensive companies look to raise debt to finance carbon-reduction initiatives.

Market practice development: Strong governance and legally walking the talk

Businesses are under increasing scrutiny to ensure that their wider business practices promote ESG outcomes. Internal governance structures should support transparency, trust, diversity and integrity as part of a company’s wider ESG commitments. Policies and standards should be integrated throughout the Company’s approach to supply-chain, recruitment, payment and promotion practices. Investors increasingly expect companies to adhere to such high standards; a failure to do so may leave companies exposed to reputational harm, lower equity valuations and ultimately litigation.

The Hogan Lovells Business integrity Group (BiG) are available to conduct a “health-check” and ESG 360° Assessment to review whether your business infrastructure is delivering on ESG commitments and suggest how changes to legal and contractual frameworks can be implemented to drive purpose and performance.

Download our full report here: Key ESG trends 2023

ESG Counsel™

The Hogan Lovells ESG team is here to help, including on all the issues raised in this snapshot. Hogan Lovells is one of the leading ESG firms in the world, delivering uniquely tailored cross-practice and -geographic holistic advice as ESG Counsel to clients globally. Our holistic and solutions-driven approach to managing ESG issues draws on the full scope of our global practice and sector capabilities (including our leading global corporate, environmental, governmental relations and regulatory, employment, and dispute resolution teams) to drive sustainable value and maximize positive impact for clients. Please contact us to discuss next steps or for our latest ESG-related materials, including our ESG Academy.

ESG Academy: New and improved resources 

Of the many ESG tools we’ve released, the one we hear you say you love the most is our ESG Global Vision Tool, our free online guide to global ESG rules and regulations, so we’ve set to work enhancing and improving it for you.

We’ve introduced a side by side ESG Litigation Guide that allows quick access to targeted information about ESG disputes, allowing maximum insight into the development of procedures on ESG issues and their handling by case law.

We now also offer enhanced functionality across our original tool, including the ability to generate a report, set alerts, and compare countries. All of our reporting is regularly updated and we are constantly adding new countries to our coverage. We hope you use and enjoy!

Authored by Nicola Evans, Patrick Sarch, Rita Hunter, Bryony Widdup, Chloe Honeyborne, Nick Cooke, Katie Dunn, and Muhammad Gangat.