By Jessica Butts, Principal, ESG Global Advisors
Professionals who have been following the environmental, social, and governance (ESG) space have surely noticed many changes over the past few years: changing media narratives, changing standards & regulations, changing stakeholder expectations, and a new wave of politicization, to name but a few.
Through all of these changes, there is at least one fundamental factor that has remained constant: strong demand for ESG information from institutional asset owners – or more simply, large investors. These organizations control the largest pools of capital, and they remain steadfast in their views on the importance of incorporating ESG issues into investment decisions across their portfolios.
A 2023 Morningstar survey of 500 global asset owners controlling over $10 trillion found that 85% of respondents believe ESG factors are material to investment policy, with 70% saying ESG issues have actually become more material in recent years. Asset owners’ perception of materiality is a good proxy for demand, since they are obliged to consider all material information in allocating capital.
A 2023 FTSE Russell survey of 350 global asset owners produced similar findings, with 80% of respondents reporting that they are implementing or evaluating ESG considerations in their investment strategies.
So, while there has been a lot of noise happening around ESG in media and political circles, it is clear that institutional investors will continue to drive demand for corporate ESG performance in 2024 and beyond.
Here are 6 ESG trends that will shape the market in 2024:
[Jump to a section by clicking the links below]
- The Obvious: ESG Disclosure Regulations & Standards
- The Not-So-Obvious: Climate Reporting in Private Markets
- The Next Big Thing: Double Materiality Assessments
- Return of the ‘S’: New Developments are Bringing it Back
- Climate-Concerned Votes Against Corporate Directors
- The Wildcards: Geopolitics and the U.S. Presidential Election
Key takeaways for boards and management of corporates across North America are summarized at the end.
ESG Trend #1: The Obvious: ESG Disclosure Regulations & Standards
To state the obvious: In 2024, the market will be shaped largely by forthcoming ESG and climate-related disclosure standards and regulations. Though often seen as a ‘tick the box’ exercise, reporting and disclosure should represent the output of a thoughtful approach to ESG. The continued standardization of reporting approaches means that we now have practical ‘organizing principles’ to inform internal approaches to ESG strategy, especially as it related to the integration of ESG into a company’s governance risk management, metrics and target-setting processes.
The International Sustainability Standards Board’s (ISSB) disclosure standards are effective for reporting periods beginning on or after January 1st, 2024. While these standards are currently voluntary in many jurisdictions, including Canada, there is a massive amount of momentum behind their adoption. For example, following the International Organization of Securities Commissions’ endorsement of the ISSB standards earlier this year, nearly 400 organizations from 64 jurisdictions (including associations covering some 10,000 member companies and investors) recently endorsed the ISSB climate reporting standards and committed to supporting their adoption as a global baseline.
Key Insight: Under short-term pressures, management teams and boards are increasingly asking whether it is advisable to wait for final regulations to be mandatory to get started on ISSB-aligned reporting. Corporate sustainability leaders will see this momentum as writing on the wall and begin preparations for ISSB-aligned disclosures, while others may choose to wait until their hands are forced by regulators. Given Canada’s leadership in bringing the ISSB’s satellite office to Montreal, and the significant amount of regulatory attention to this issue across the Canadian financial markets, companies should begin by conducting an ISSB readiness assessment to identify the gaps and develop plans to address them prior to the regulations being mandated.
The Canadian Securities Administrators (CSA) welcomed the ISSB’s standards in July and announced plans “ to conduct further consultations to adopt disclosure standards based on ISSB Standards, with modifications considered necessary and appropriate in the Canadian context.” So, Canadian market participants can expect (yet another) consultation on climate disclosures in 2024.
Of significant importance, climate risk guidance for federally regulated financial institutions (FRFIs) is coming into effect, as the largest banks and insurers will be required by the Office of the Superintendent of Financial Institutions (OSFI) to disclose their scope 1 and 2 emissions alongside their approaches to climate risk management by fiscal year-end 2024. Scope 3 disclosures will be due in 2025. This is significant given the banks, pensions, and insurers regulated by OSFI are the primary providers of capital across the Canadian economy. To fulfil their regulatory obligations, they will need to collect this data from clients as part of their investment process.
Additionally, with the US SEC releasing disclosure rules for ESG funds in 2024, it would not be surprising to see a potential CSA consultation on ESG fund disclosures.
Key Insight: Canada will see its first wave of mandatory climate disclosures for FRFIs later in 2024, while corporate issuers await another consultation from the CSA sometime in 2024. These ‘delays’ in regulation should not be viewed as rationale for delay on internal effort to prepare for emerging requirements. For companies just starting out on their ESG reporting journey, groundwork needs to be laid across various internal functions, and 2024 affords a critical opportunity for engagement between finance and ESG-related functions within issuers. Just as Rome wasn’t built in a day, ESG reports are often year(s) in the making.
Meanwhile, the U.S. Securities and Exchange Commission (SEC) had planned to publish new rules governing ESG fund disclosures and corporate climate disclosures in October of 2023, but that did not happen as the regulator is apparently taking its time to get things right as it anticipates legal challenges in a highly politicized environment. A recent SEC notice said both rules are now due for publication in April of 2024, and the regulator also plans to issue proposals for corporate board diversity and human capital management in the same year.
Key Insight for Corporate Issuers: Mandatory ESG and climate disclosure rules are coming to the U.S. market in Q2 2024. The SEC’s mandate is to focus strictly on public markets, and it has faced pushback against its proposed rules covering scope 3 emissions as they would spill over to private markets. Expect to see a degree of ISSB alignment, with some modifications around scope 3 emissions and potentially other areas as well.
Key Insight for Fund Managers: The American ESG funds market has had a bumpy ride over the past couple of years as it faced attacks from both ends of the political spectrum. The SEC has been clear that it intends to promote market integrity and truth in advertising. To that end, 2024 could bring much-needed clarity to the U.S. market for ESG funds.
On the regulatory front, California has already issued rules for companies doing business in the U.S. state, which call for mandatory disclosures of scope 1, 2, and 3 emissions alongside climate risk disclosures in alignment with the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations, which form the backbone of the ISSB standards. These rules come into effect in 2026 for the 2025 reporting year, so 2024 will be a year of preparation for an estimated 5,400 companies doing business in California.
Key Insight: Regardless of what happens at the SEC, mandatory climate disclosures including scope 3 emissions have already arrived in America via its largest state. U.S. companies that do business with the fifth largest economy in the world will be busy with preparations in 2024 including materiality assessments, data collection, systems development, and capacity building.
All of the above is playing out while Europe pushes ahead with disclosure rules flowing from the Corporate Sustainability Reporting Directive (CSRD), which will impact some 50,000 public and private companies including an estimated 10,000 from outside Europe and 1,311 based in Canada that are either listed in Europe or have subsidiaries or significant operations there.
What’s unique about the European rules is that they will require companies to address both financial materiality and impact materiality in their disclosures (also called “double materiality”) – meaning companies will need to disclose information on financially material sustainability issues alongside information on how their business impacts society and the environment. These rules will take effect in 2024 for an initial group of large companies, with others following suit in 2025 and 2026.
Key Insight: European rules are setting a high bar for sustainability reporting – a bar that will impact markets around the world. While many North American companies will not be directly impacted by the European rules, these rules will define the next phase of disclosure best practices in North America and globally. As we know, capital is global and investors will increasingly trend in the direction being set by leading jurisdictions, just as was the case in previous evolutions of ESG integration and reporting. See more of our thoughts on this topic in trend #3 below.
ESG Trend #2: The Not-So-Obvious: Climate Reporting in Private Markets
OSFI’s forthcoming disclosure rules for FRFIs will create a de facto requirement for many privately held Canadian companies to start calculating their GHG emissions and disclosing them to their lenders and insurers. This is because FRFIs will soon be required to report their downstream scope 3 emissions, which include their clients’ scope 1 and 2 emissions. Similarly, if the CSA were to move forward with ESG fund disclosure regulations, private markets would not be immune from extended impact.
In North America, pre-empting corporate regulatory requirements are the large multinationals that are driving GHG data and reporting expectations down through their supply chains – asking their suppliers, who are often private, small and medium-sized enterprises (SMEs) – to report on their scope 1 and 2 emissions such that those corporates and investors can report on their own scope 3. There are no official estimates for the number of private companies affected, but there are some 1.2 million SMEs in Canada, and many of them surely do business with one or more of the country’s 350 largest banks and insurers. It is therefore safe to conclude that many thousands of private companies will be impacted.
While the financial institutions’ scope 3 disclosures are not required until 2025, it is clear that 2024 will be a year of preparation and measurement for thousands of privately held companies in Canada. Europe’s forthcoming disclosure rules also cover privately held companies doing business there, making 2024 an inflection point for climate management in private markets.
Key Insight: Historically insulated from the burdens of public disclosure, privately held companies are now being brought into the climate disclosure conversation as Canadian financial institutions and large multinational customers will soon be collecting their scope 3 GHG emissions data. For now, private companies will not be required to disclose this information publicly, although this could change depending on future rules from the CSA, the CSSB and/or the federal government. Either way, privately held companies are entering a new era of emissions measurement and reporting via Canadian and European regulations that are indirectly capturing private companies (including SMEs).
ESG Trend #3: The Next Big Thing: Double Materiality Assessments
As noted above, the concept of double materiality (financial materiality + impact materiality) is enshrined in Europe’s forthcoming disclosure rules, which will impact many companies in Canada and globally. However, the rise of double materiality assessments will not be strictly confined to companies governed by the rules; in fact, many Canadian companies are already doing them.
A 2023 Millani study of 227 companies listed on the S&P/TSX Composite Index found that 19% are already performing double materiality assessments as a way to meet the information needs of investors and broader stakeholders. It is beneficial for issuers to do these assessments because materiality is a dynamic concept: impacts on the environment and society can become financially material over time. Therefore, a double materiality assessment enables a company to understand the ESG risks and opportunities it faces over the short and long term. For the North American market, the EU is often a ‘harbinger’ of things to come. It’s likely that as the market continues to wrap heads and arms around financial materiality in the context of ESG, the next step will be to understand impact.
Key Insight: Double materiality assessments have emerged as a new best practice for corporate issuers in Canada and internationally. The Canadian trend appears to be “organic,” meaning that it appears to be happening without explicit expectations from regulators or investors. In 2024, European disclosure rules will amplify this trend to set a new standard of practice for companies aiming to position themselves as sustainability leaders.
ESG Trend #4: Return of the ‘S’: New Developments are Bringing it Back
The S in ESG came into sharp focus in 2020 alongside the COVID-19 pandemic and racial injustice reckonings, but seemed to attract less attention from capital markets as the pandemic faded and climate-focused rules and standards took centre stage. While climate change will continue to drive market development, social issues will move up the agenda in 2024 as new developments play out.
Canada’s Modern Slavery Act, which follows similar legislation in Australia and the United Kingdom, introduces mandatory reporting requirements for certain government agencies and companies that do business in Canada and meet certain thresholds. In practice, the law applies to many mining and apparel manufacturing companies with international supply chains. Companies subject to the Act must publish a report by May 31st, 2024, outlining any steps taken to prevent and reduce the risk of forced labour or child labour in their supply chains, as well as information on any related due diligence processes.
In the U.S., the SEC is planning to propose rules governing corporate disclosures around human capital management in April of 2024. While the rules will not be enacted in 2024, the public consultation accompanying the proposal will surely attract the attention of both companies and investors.
Although the above rules are enough to bring markets’ attention back to the S on their own, a Taskforce on Inequality and Social-related Financial Disclosures (TISFD) is expected to launch in 2024, which will draw even more attention to social issues within the ESG space.
Furthermore, while the ISSB has not yet announced its next steps, stakeholders have pressed the standards-setter to develop reporting standards for human rights and human capital as part of its 2024 work plans. So, it would not be surprising to see the ISSB address these social issues in their forthcoming agenda.
Key Insight: New developments will put the spotlight back on the S, driven by Canada’s Modern Slavery Act and the SEC’s proposed rules governing human capital management disclosures. Canada’s Act ushers in a new era of transparency around forced labour and child labour in supply chains of companies that do business in Canada. Reporting companies can expect investors to benchmark and scrutinize their disclosures and potentially engage with them on any perceived gaps or concerns. The SEC proposal will surely attract attention from companies and investors, putting S back on the agenda in the U.S. while potential work from the TISFD and ISSB may amplify this trend.
ESG Trend #5: “Climate-Concerned” Votes Against Corporate Directors
Institutional investors are planning to ramp up their engagement with corporate issuers for a perceived lack of climate ambition. A recent BNP Paribas survey of 420 institutional investors found that a sizeable 76% of respondents see climate change and decarbonization as a “priority for voting, engagement, and possible investment changes.” Here in Canada, 41 investors managing roughly $5 trillion in assets are assessing TSX-listed companies against a net-zero benchmark and engaging with them to take action across 10 indicators of climate performance.
More concerningly for corporate boards, a growing number of investors are considering voting against directors of companies that are seen as not doing enough on climate. In a recent interview about good governance and sustainability, Ontario Teachers Pension Plan (OTPP) CEO Jo Taylor said, “Voting against directors for a lack of progress, when needed, sets the tone for change.”
The trend of “climate-concerned” votes against directors reached new heights in 2023, as major international players like Calstrs, Amundi, and others collectively voted against thousands of directors due to concerns around their companies’ handling of climate change. Here in Canada, CDPQ, BCI, and UPP have signaled their intentions to vote against boards due to climate concerns, while OTPP said it will “consider not supporting” individual directors of companies that have not taken appropriate action to oversee climate risk. Leading proxy advisory firms (ISS and Glass Lewis), which investors rely on for recommendations on management and shareholder of proxy proposals, are also taking increasingly stringent positions on climate change and target-setting in Canada. In particular:
- Glass Lewis: May recommend voting against the chair of the board or relevant committee if climate oversight and TCFD-aligned disclosure are seen to be lacking.
- ISS: Generally recommends voting against the chair of the responsible committee or board if the company is not viewed to be taking minimum steps to understand, assess, and mitigate climate risks, including by establishing GHG reduction /net zero targets and aligning to the TCFD recommendations.
Key Insight: Climate-concerned shareholders will continue to turn up the heat on corporate directors in 2024. While it’s unclear if there will be enough votes against directors to unseat many or any of them, even a minority of votes against reappointment can be enough to create public embarrassment for companies. For the most part, investors are currently asking for foundational elements related to climate governance and disclosure. However, those asks will likely grow and evolve as companies get the foundations in place. In other words, the trend of “climate-concerned” votes against directors has arrived and it is likely here to stay. The new reporting regulations will only serve to amplify this trend as investors seek more detailed climate-related disclosure from companies.
ESG Trend #6: The Wildcards: Geopolitics and the U.S. Presidential Election
Although politics is not exactly an “ESG” trend, political tensions have the potential to impact policy and regulation, upend supply chains, and complicate stakeholder relations, which brings us back to the S in ESG. Any geographic expansion of the wars currently being fought in Europe and the Middle East could create new supply chain disruptions via supply route blockages or damage to supplier facilities, while a protraction or escalation of violence could deepen domestic tensions that unfolded in 2023.
Separately, as we learned in 2020, there is a high probability of political turmoil in America in the lead-up to and aftermath of the 2024 U.S. presidential election. Continued political headwinds against climate and ESG out of the US are likely to increasingly manifest through 2024 and beyond. In the event of a Trump second term, we can expect a dismantling of ESG and climate-related policies and regulations at the federal level. This could occur through appointments at the SEC and other agencies, as well as by restricting tax credits, loans, and grants earmarked for clean technologies under the Inflation Reduction Act.
Key Insight: Unfortunately, the wars that began in 2022 and 2023 appear to be continuing into 2024, creating tragedy for the affected countries and communities alongside supply chain and stakeholder concerns for companies. The combination of wars and modern slavery legislation points to a heightened need for companies to manage exposure to social and operational risks in their supply chains, while the 2024 U.S. presidential election could spell trouble for ESG and climate-related policies at the federal level.
Having said that, the combination of California and Europe’s climate disclosure rules, alongside investor demands and the global momentum in support of the ISSB standards, signals that there is a “floor” in place to support the global trend towards climate disclosures despite what happens within the U.S. federal government.
2024 ESG Trends: Key Takeaways
The year 2024 is set to be a highly eventful one for ESG, as standards and regulations unfold to bring much-needed clarity to markets. This includes clarity around terminology as well as consistency and comparability of ESG and climate-related information in capital markets. As we look ahead to an eventful year, our key takeaways are below
- The shift towards climate transparency will dovetail with investors’ calls for corporate climate accountability to raise standards of practice across the board. Companies that don’t move quickly enough on climate will see votes against their directors at annual meetings.
- Climate accountability will also spill over to private markets in 2024 as private operators begin calculating their GHG emissions for disclosure to their financial institutions. Privately held companies will also be impacted by European disclosure rules, which will amplify the already-growing trend towards double materiality assessments in 2024.
- While climate change is the driving force behind many of the trends at play, the S in ESG will come into sharp focus in 2024 as Canadian modern slavery legislation comes into force and the SEC proposes disclosure rules around human capital management. Wars continue to be a source of risk to global supply chains and stakeholder relations, and we may see more work to amplify a renewed focus on social issues including human rights and inequality.
- The biggest ESG wildcard in 2024 is undoubtedly the U.S. presidential election, which could bring political turmoil and potentially lead to a dismantling of ESG and climate-related policies at the U.S. federal level. However, the U.S. already has mandatory climate disclosures on the way for thousands of companies doing business with the country’s largest state. This, in combination with global momentum and investor demand, indicates the shift towards climate transparency will continue regardless of what happens at the U.S. federal level.
For those of us working in ESG, it is most certainly an understatement to say that “the only thing constant is change.” Looking back, the pendulum has been swinging in both directions since 2020. While geopolitics continues to evolve, in 2024 we expect the dust will begin to settle as ESG and climate-related regulations increasingly come into play, bringing with them much needed clarity and consistency. Complexities remain, of course , but the ripple effects of the maturing and standardization (in relative terms) are overall positive for ESG momentum across global capital markets and economies. This will no doubt will keep ESG practitioners busy and energized through 2024.
Need help with navigating the ever-evolving ESG landscape? ESG Global offers customized services for corporates (both public and private) and investors (asset owners and asset managers) across nearly every sector of the economy. We also offer a comprehensive range of ESG strategy and reporting services for companies. Visit Our Services to learn more.