As we move towards 2025, environmental, social and governance (ESG) issues continue to evolve, with regulation, technology and the impact of companies on people high on the agenda. Here we outline five key trends to watch.
- Corporate accountability for climate action
With just five years left to run on the Paris agreement, which aims to limit global warming to no more than 1.5°C above pre-industrial levels, governments and regulatory bodies are increasingly holding companies to account for their climate action plans.
Recent years have seen the introduction of a raft of new regulations, including the SEC’s climate disclosure rule in the US and the EU’s Corporate Sustainability Reporting Directive (CSRD).
A survey this year by Deloitte1 found that 99% of companies are preparing for increasing disclosure requirements and that three-quarters are investing by creating new roles and responsibilities within their organisations.
- Biodiversity and natural capital
In recent years the economic significance of dangers to natural capital has been in the spotlight. The World Bank2 estimates that the global economy could lose $US 2.7 trillion by 2030 (compared to business as usual) if certain ecosystems collapse.
The release in September 2023 of both the final Taskforce on Nature-related Financial Disclosures (TNFD) guidance and Nature Action 100 (a global engagement investment initiative) drew renewed attention to the linked threats to both nature and the world’s economy.
Currently there is a marked under-investment in conserving our natural resources, known as the ‘Nature Finance Gap.’
However, as policymakers worldwide implement stricter environmental regulations to address such issues as climate change and biodiversity loss, there are likely to be a growing number of investment opportunities in this space.
- Increased focus on the ‘S’ in ESG
Today there is more focus than ever on the social impacts of organisations, encompassing areas such as community engagement, employee well-being, diversity, inclusion, and philanthropy. The social and sustainability impacts of global supply chains are also coming under greater scrutiny.
As a result, companies are now paying more attention than ever to social factors when undertaking their due diligence, undertaking human rights impact assessments to identify risks and report on their efforts to assess and address issues such as modern slavery.
- Technological advancements
The integration of artificial intelligence (AI) with ESG reporting is expected to revolutionise data collection, analysis and reporting. According to Deloitte, 74% of companies are planning to invest in sustainability reporting technology and tools over the next year.
This will not be a simple task, given there is not currently a globally standardised approach to ESG disclosures. However, the trend will facilitate more detailed and real-time reporting, allowing stakeholders to make more timely and informed decisions regarding sustainability.
- Expansion of the voluntary carbon market
Voluntary carbon markets (VCM) allow carbon emitters to offset their emissions by purchasing carbon credits in schemes designed to remove or reduce GHG from the atmosphere.
Companies can participate in this market either individually or as part of an industry-wide scheme. For example, several airlines now offer voluntary carbon offsetting for passengers through trade association the International Air Transport Association (IATA).
Following a few years of strong growth, the voluntary carbon market hit a crisis of confidence in 2023, driven by concerns about its credibility.
However, since then the Biden administration released a Statement of introducing the concept of ‘high integrity’ carbon credits and financial regulators have issued guidance and consultations on the VCM. This not only expected to help address some of the challenges so far but may also represent a new stage of maturity for VCM initiatives.
Summary
ESG is continuing to grow rapidly and shape the corporate agenda. Rigorous ESG standards not only prompt companies to recognise their impact on people and the planet but also help them to align their operations with investor interests.
If you would like to find out more about how UFS applies ESG principles to its investments, you can view the Ethical and ESG Investment Policy on our website.
- Deloitte: 2024 Sustainability Action Report
- World Bank 2021: The Economic Case for Nature
Edwin Lo, Chief Investment Officer, Uniting Financial Services
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