ESG Review of 2023 and Outlook for 2024

ESG: 2023 in hindsight

1.Robust regulation

In spite of geopolitical and economic turbulence, 2023 has been a year of growth for ESG. This growth can be attributed to increasingly robust regulations, coupled with a growing understanding of how such regulations impact the market, and key business stakeholders. To echo Deborah Meaden in her keynote address at the Hogan Lovells 2023 ESG Game Changers Summit, "[regulation is] changing at the rate of knots. What that means for business is that there can be huge risks and huge opportunities."

The introduction of investor-grade, high-quality ESG disclosure requirements has underpinned the changing regulatory landscape. The European Commission's adoption of detailed European Sustainability Reporting Standards (ESRS) in relation to the Corporate Sustainability Reporting Directive (CSRD), for example, is likely to have far-reaching effects on a wider spectrum of companies, specifically through the standardisation and strengthening of ESG disclosures. Similarly, the UK Transition Plan Taskforce released its final disclosure framework, setting out standards and guidelines for entities drafting their transition framework.

The hardening of ESG disclosure responsibilities has partly been in response to claims of greenwashing, which saw a 70% rise in the banking and financial services industry in the 12 months leading to September 2023 alone, according to a report by RepRisk. 2023 also saw a number of rulings by the UK Advertising Standards Authority (ASA), including enforcement actions against more than 20 companies, such as airlines, banks, fashion retailers and energy companies for misleading communications about their sustainability credentials. This was swiftly followed by updated guidance from the ASA on misleading environmental claims and social responsibility, highlighting the ASA’s intention to take a firm but proportionate approach to greenwashing claims.

In the EU, the European Commission proposed a law to ban greenwashing, which is expected to be confirmed in March 2024¹. In the U.S., the Securities and Exchange Commission made changes to the “Name Rule” to require that 80% of an investment fund’s portfolio corresponds to the asset it is advertising, in order to crack down on deceptive and misleading practises by U.S. investment funds².

Outlook for 2024: The first batch of companies will start conducting materiality analyses on their activities under the ESRS, and collecting the data that will be reported in 2025. This will provide valuable information on questions relating to engaging with the regulator, how an impact materiality assessment is implemented and how any issues uncovered during the assessment are addressed. The Financial Reporting Council’s consultation on changes to the UK Corporate Governance Code, including on better integration of ESG into board responsibilities and audit procedures, closed in September 2023³ and can be expected to be reported on in 2024. This is important in strengthening the corporate ESG framework for UK premium listed companies and ensuring businesses are abiding by their ESG responsibilities in a transparent and accountable manner. We expect to see greater harmonisation of ESG reporting standards across the board, with the EU-wide reporting standards representing a step in this direction.

2.Climate finance

Overall, green, social, sustainable and sustainability-linked bond (GSSSB) issuance is expected to have amounted to approximately US$1 trillion of total bond issuance over 2023⁴. Sustainable financial instruments remain a rising trend, and we can expect to see this continuing into 2024.

While sustainable debt deal volumes have remained at record highs over the last few years, financial institutions and investors demand greater credibility and evidence of performance with respect to green bonds. The EuGB Regulation, the world's first green bonds standard regulation, is a response to such calls for credibility through its aim to address the greenwashing of sustainable debt.

COP28 alone saw over US$85 billion of financing committed for the mitigation of greenhouse gases, adaptation to climate change, and loss and damage, for example:

• UAE Leaders’ Declaration on a Global Climate Finance Framework: signed by 13 countries, including the UK and the U.S. It aims to make climate finance available, accessible and affordable. The declaration includes widening the sources of concessional finance for climate action through innovative mechanisms such as hybrid capital, rechannelling of inefficient fossil fuel subsidies and delivering high-integrity carbon markets;
• Development banks launched a task force for debt-for-nature swaps to scale up the number and size of debt-for-nature swaps which enable developing economies to reduce their debt obligations in return for protecting vital ecosystems within their countries;
• Energy Transition Accelerator (led by the U.S. and backed by some global banks) has been announced to create a framework for countries and power sectors to move away from polluting power sources by selling emission reductions. It is intended to improve the existing voluntary carbon credits market by using high-level national data and measuring emissions reductions through historical data and not hypothetical future savings;
• Green Climate Fund: US$3.5 billion in new money, including US$3 billion from the U.S. to mobilise finance at the "pace and scale required”; and
• Loss and Damage Fund: US$792 million.

Outlook for 2024: We can expect continued demand for sustainable debt, though with the added scrutiny of stricter disclosure and evidential standards on issuers and lenders alike. We can also expect a larger proportion of issuers of green bonds to comply with the standards set out in the EuGB Regulation to demonstrate sustainable business practices and resilience. An estimated US$1.7 trillion was invested into clean energy, alongside increased interest from private equity funds in 2023. Looking forward, we can expect investor appetite to remain high, with investors looking to capitalise on the increased demand for long-term renewable energy, decarbonisation and energy transition investments.

3. Energy transition and technology

The UNFCC first global stocktake agreement was finally agreed on 13 December 2023 following fierce negotiation at COP28. The final draft contains the outcome of the first global stocktake following the adoption of the Paris Agreement. Arguably, the most significant outcome of the UAE Consensus is that it calls on Parties to contribute to “transitioning away from fossil fuels in energy systems…accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science”. This was the first time “fossil fuels” were specifically mentioned in a COP outcome.

This is a huge step forward. Nonetheless many participants and commentators argued that the adopted agreement did not go far enough, while potentially containing unresolved workstreams in the bid for a just transition to net zero.

In 2023, commitments with respect to energy transition have included a greater focus on the reduction of methane emissions, the development of nuclear energy, and the prioritisation of protecting nature and biodiversity as part of the transition away from fossil fuels. These topics were heavily discussed in COP28, and for more information on the energy transition commitments made, see our key takeaways from COP28.

Outlook for 2024: We recognise that the events in 2023 have been testament to the fact that a just energy transition goes hand-in-hand with technological innovation. For instance, the proliferation of accurate data is central to the energy transition, since strict disclosure requirements can only be met with equally accurate, real-time data. In 2024, we can expect AI to play a greater role in the internal processing of ESG-related datasets to ensure compliance with ESG regulations, detect potential regulatory breaches, predict or identify sustainability trends and inform the ESG strategy of companies. For more information on key ESG trends, read our analysis on ESG trends to watch.

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 maximise positive impact for clients. Please contact us to discuss next steps or for our latest ESG-related materials, including our ESG Academy.

Authored by Nicola Evans, Patrick Sarch and Aun Hussain.

References

1. https://www.europarl.europa.eu/news/en/press-room/20230918IPR05412/eu-to-ban-greenwashing-and-improve-consumer-information-on-product-durability

2. https://www.reuters.com/sustainability/us-sec-poised-ban-deceptive-esg-growth-fund-labels-2023-09-20/

3. https://www.frc.org.uk/consultations/corporate-governance-code-consultation/

4. https://www.spglobal.com/esg/insights/featured/special-editorial/global-sustainable-bonds-2023-issuance-to-exceed-900-billion