Consumer Durables News

10 Trends to Watch Heading into 2023

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Growth of ESG Regulation, Transparency and Scrutiny

The evolving environmental, social and governance (ESG) regulatory landscape and incorporation of ESG factors into companies’ monitoring and reporting frameworks show no signs of slowing down in 2023. Environmental factors, particularly climate, sustainability-related and increasingly biodiversity impact, will remain top of mind. Investors are demanding greater transparency and consistency when reporting ESG factors and are increasingly scrutinizing the integrity of underlying data. Globally, many governing bodies are preparing to ramp up ESG-related regulation that impacts both corporations and the asset management industry.

The U.S. Securities and Exchange Commission (SEC) will likely issue new rules on climate-related disclosures (by corporations) and finalize proposed amendments to their rules to promote disclosure of consistent, comparable and reliable information with respect to ESG factors (by funds). The Sustainable Financial Disclosure Regulation (SFDR), launched in the EU in 2021, continues to gain traction and will be a focus of individual country regulators. In January 2023, the SFDR will become mandatory for financial market participants and participants will be required to comply. The European Securities and Markets Authority (ESMA), the counterpart to the SEC in Europe, has recently outlined its enforcement priorities for the coming year for International Financial Reporting Standards (IFRS) filers, with climate-related matters identified as the number one priority. Demand for increased ESG transparency is expanding within the Asia Pacific region as well on a country-by-country basis.

Importantly, the International Sustainability Standards Boards (ISSB) is expected to issue a comprehensive set of global sustainability-related disclosure standards with a specific emphasis on evaluating the impact of ESG on enterprise value—a key aspect for investors’ decision-making. Some of these disclosures will continue to be voluntary, but others will be mandatory and subject to audit requirements. As greenwashing claims continue to surface, regulators are ramping up their scrutiny of ESG claims by funds and companies. With a bigger push to align executive compensation with ESG measures and not solely shareholder returns, this will also sharpen the minds of the boards of all companies.

Beyond reporting, regulators around the world are starting to move into ESG-related due diligence, with compulsory human rights due diligence legislation already introduced or under discussion in several jurisdictions— and gaining substantial public support in the process. For regions or sectors where law makers have been slower, companies are proactively taking their own measures driven largely by their company values, risk management strategies and external stakeholder expectations. Many are reinforcing due diligence processes in line with the UN Guiding Principles on Business and Human Rights (UNGPs) and the Organization for Economic Co-operation and Development’s (OECD) Guidelines for Multinational Enterprises. Recent research also shows an increase in companies incorporating human rights abuse factors into compliance programs, rising 11% globally from 24% in 2021 to 35% in 2022.

Throughout 2023, we also expect to see increases in ESG litigation being brought against companies by activists, investors and individuals. Greenwashing and misleading investment-related claims are two obvious areas, however, like ESG itself, cases will cover a range of areas such as breaches in supply chain practices, fiduciary duties and diversity and inclusion initiatives. Companies investing in their ESG frameworks and policies, and ensuring effective implementation throughout the organization, is no longer a “nice to have” but a must have in order to counter risks to the reputation and value of their brand and deliver strong, long-term benefits for the company and society.

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