On March 22nd, the United Nations held a water conference for the first time in almost 50 years. As climate change worsens, water scarcity is becoming a growing concern in regions around the world. Droughts, increased evaporation from rising temperatures, and infrastructure damage from extreme weather has impacted access to water for sanitation and nutrition. According to WaterAid, an annual investment of $200 billion is required in order to secure clean and safe access to water for the world’s population by 2030.
Water scarcity is only one of many complex environmental and geopolitical issues that countries and companies must address. Competent Boards’ ESG and Climate & Biodiversity programs help to provide the tools that board members and business leaders need in order to tackle these challenges head on.
1. Governance trends for 2023. While the proposed Securities and Exchange Commission (SEC) disclosures focus on climate, companies should be proactive in thinking about the governance aspect of ESG as well. Audit committee members in particular should be well informed on the impacts it will have on financial reporting. Boards are increasingly assigning ESG oversight to the nomination and governance committees, while 15% of boards have a committee tasked solely with managing ESG and sustainability. Finally, more boards are taking a multi-committee approach to sustainability and ESG issues, as more than half of S&P 500 company boards address ESG-related matters with the whole board or multiple committees.
2. Financial regulations crucial to reducing GHGs. Despite the urgency of the climate crisis, financial institutions in Canada and around the world continue to fund new fossil fuel developments. Ahead of the 2023 federal budget announcement, new Canadian climate-related financial regulations announced by the Office of the Superintendent of Financial Institutions aim to close the gap between Canada and other G20 countries. Financial institutions will be mandated to report on future climate change and energy transition-related risks. Banks and other institutions will also have to develop realistic climate transition plans to manage the huge fossil fuel risks they are currently exposed to.
3. Colossal ESG-ratings overhaul coming soon. A new MSCI ratings system is poised todowngrade or strip ESG ratings from thousands of funds. After pressure from regulators MSCI has announced that it will be changing its ESG rating methodology to address accusations of greenwashing and reduce rating volatility. Unreleased research by BlackRock finds that the number of AAA rated exchange-traded funds (ETFs) in Europe is expected to drop from over 1,000 to 54, and the amount of unrated funds will jump twenty-fold from 24 to over 450. These ratings are set to change at the end of April, and will have widespread impacts on European companies in particular as investors rely on ESG ratings heavily while making investment decisions. Swap-based ETFs will see the most drastic change as the MSCI stated it would stop rating swap-based ETFs until they could develop a fair and consistent methodology.
4. Cybersecurity key to ESG strategy. While environmental and social issues tend to take centre stage in ESG conversations, cybersecurity is an often-overlooked but essential aspect of company strategy. ESG reporting requires the collection and storage of sensitive information on employees, suppliers, and more. Without adequate cybersecurity protocols, companies put themselves at risk of cyberattacks that would compromise this information. A strong cybersecurity strategy also lends credibility and trustworthiness to the company in the eyes of shareholders and stakeholders. Cybersecurity ties into environmental and social risk as well, since compromised IT systems can create huge environmental issues such as the Colonial Pipeline cyberattack in 2021, where hackers shut down a pipeline in the United States. This unplanned shutdown caused power outages, increased energy prices, and a scramble to find alternative methods to transport the fuel.
5. Return on sustainability investments grows. According to research by Corporate Knights, the investments that brought the greatest returns over the past five years have been related to sustainability. The Sustainable Economy Intelligence (SEI) Database tracks the green economy revenue and spending of almost 3,000 companies around the world. Companies who scored in the top one fifth of the SEI rankings saw their investment values grow by almost 150% over the past four years, while companies in the top of comparable indices such as the MSCI All-World Index only saw an increase of 47%. The time to begin heavily investing in a low-carbon economy is now, and these returns on investments only strengthen the argument.
Ira Srivastava is Competent Boards Program Coordinator. Follow Competent Boards on LinkedIn.Back To News & Views