Using the European Green Deal, adopted in 2020, as a starting point, the report identifies five themes driving sustainability-focused regulatory initiatives – decarbonisation; greenwashing; transition planning; supply chains and circularity; sustainable finance.
- Decarbonisation: Some 68% of companies view management, regulators, and consumers as the main stakeholder groups putting pressure on companies to act on climate change.
EU policymakers are prioritising regulatory measures that target decarbonisation across transportation, raw materials and energy. The recent approval of changes to the EU Emissions Trading Scheme (ETS) and Carbon Border Adjustment Mechanism (CBAM) will affect the costs and incentives for companies in these areas – both upstream and downstream in their value chains. The ETS aims to reduce free carbon allowances in aviation, maritime shipping, industrial facilities, and road transport. The scheme aims for a 100% reduction in aviation by 2026.
The scope and extent of carbon markets are also changing, which will have implications for carbon offset strategies. Deloitte says in 2023 companies should focus on gathering a range of important data across their value chain, including data on their baseline emissions, energy use and extent of their CBAM-covered products.
“The hard part is getting started, having the momentum, and making the initial investments. Once that’s in place, it’s easier to keep going,” says John Ferguson, President and Chief Executive Officer, Purolator.
“Customers across regions have high expectations for the products they purchase and companies they choose to do business with. ESG metrics are an increasingly important part of their decision-making process.”
Mary Jacques, Executive Director of Global ESG and Regulatory Compliance, Lenovo
- Greenwashing: Greenwashing has become a key concern for policymakers and regulatory developments are rapidly expanding across industries, especially with the recent release of the proposed EU Green Claims Directive. Deloitte says companies need to begin rolling out steps that will ensure their green claims are accurate, complete and defensible. Some 63% of businesses think governments should crack down on greenwashing, while 55% think governments should implement new regulation and policies. Only 27% see existing regulations as adequate.
When the European Commission and national consumer authorities in the EU screened corporate websites in 2020 they found that, out of 150 claims about products’ environmental characteristics, over 50% provided ‘vague, misleading or unfounded information’. The sectors analysed in the survey included garments, cosmetics and household equipment.
“Customers across regions have high expectations for the products they purchase and companies they choose to do business with. ESG metrics are an increasingly important part of their decision-making process,” says Mary Jacques, Executive Director, Global ESG and Regulatory Compliance, Lenovo.
Companies are advised to adopt a “green claims management” control framework, commission LCAs, and conduct water footprinting. The latter looks at how green water (water from precipitation), blue water (surface or groundwater), and gray water (pollutants discharged to fresh water sources) are used through a product lifecycle.
- Transition planning: EU policymakers are finalising new rules and standards that will require companies to design and disclose credible transition plans aligned with limiting global warming to 1.5 degrees Celsius. All listed companies (including SMEs) in the EU and all large companies operating in the EU will need to disclose a transition plan aligned with this.
The EU Corporate Sustainability Reporting Directive (CSRD) came into force in January. In the reporting phase, companies are expected to use data-driven insights to create further value by performance monitoring.
According to data disclosed in 2022 to CDP (a non-profit organisation that runs the global environmental disclosure system for investors, companies, cities, states and regions) from 1,495 mostly publicly listed companies headquartered in Europe, 49% have published a climate transition plan that is aligned with limiting global warming to 1.5 degrees Celsius. However, just 0.5% of these companies reported on all of the CDP’s 21 transition planning indicators and only 5% both reported on two-thirds or more of the indicators and have emissions reduction targets aligned with 1.5 degrees Celsius. There were gaps in implementation strategy at 80% of companies.
“Companies tend to think about waste and pollution as a compliance issue but really it is the ultimate operational inefficiency – you are buying more than you need and have to pay to dispose of the waste.”
Tensie Whelan, Professor of Business and Society, NYU Stern School of Business
- Supply chains and circularity: EU policy and changing consumer sentiment towards sustainability will oblige companies to take action to transition from linear to circular economy models. This transition is an immense undertaking and clear direction and support from business leaders is essential. If executed well it has the potential to unlock new revenue streams and reduce companies’ long-term costs.
Navigating the complexities of the EU regulatory landscape, as well as having a good understanding of the interplay of relevant measures at the EU and national levels, will be crucial.
With the Ecodesign for Sustainable Products Regulation (ESPR), due to be adopted in the second half of 2023, the EU is introducing higher standards for companies in the design and performance of their products.
Consumer concerns about waste are borne out in the figures, with 75% of UK adults saying they recycle household waste, while 69% reduce food waste, and 64% limit the use of single-use plastic.
“Companies tend to think about waste and pollution as a compliance issue but really it is the ultimate operational inefficiency – you are buying more than you need and have to pay to dispose of the waste that is left over,” says Tensie Whelan, Professor of Business and Society and the Director of the Center for Sustainable Business at NYU Stern School of Business.
- Sustainable finance: The market for green bonds is growing steadily, offering additional sources of funding. Financial services firms already face regulatory requirements to collect this information from corporates, and the breadth and detail of information needed will increase over coming years. In 2023 companies should develop a green finance strategy and define pathways to access public and private finance.
In November 2022 the European Central Bank (ECB) set out its expectations and gave banks an 18-month deadline to formulate their implementation plans and take steps to integrate climate and environmental risk into their strategy, governance, business processes and risk management frameworks. The combination of their own transition plans and enhanced risk management capabilities has made banks pay closer attention to evaluating their climate-related exposures.
2023 may also see changes to the way credit rating agencies incorporate ESG factors into their assessments.
