From the Good to the Controversial: Shifting Sustainability Goals and the Boardroom’s Dilemma in 2024
Heightened awareness of sustainability commitments combined with increasingly far-reaching regulation is creating a complex set of obstacles for the C-suite.
The path to corporate sustainability success is not without its hurdles. As businesses strive to meet their environmental, social and governance objectives, they encounter unexpected challenges.
The recent decision by the UK’s Financial Reporting Council (FRC) to drop plans to include environmental, social and governance (ESG) requirements in the UK Corporate Governance Code1 has been welcomed as a move to lessen the administrative burden on businesses.
Yet corporate sustainability is not just about box-ticking. Instead, it revolves around the shift toward more responsible, long-term value creation and performance.
The pursuit of corporate sustainability makes business sense as it offers corporations potential risk mitigation strategies and shared value creation opportunity for stakeholders such as customers, investors, employees and supply chain partners. By adapting to the changing landscape head-on, businesses can pave the way for a brighter future and create value for all stakeholders.
Increased regulatory pressure
The global financial markets are more attuned to sustainability and climate risks and regulators are moving to create rules and disclosure standards to reduce the risk of misrepresentation or “greenwashing”. Across Europe, there’s already the EU Taxonomy, which had its first reporting period in 2022, the Sustainable Finance Disclosure Regulation (SFDR) and the Non-Financial Reporting Directive (NFRD). The Corporate Sustainability Reporting Directive (CSRD) supplemented by the prescriptive European Sustainability Reporting Standards (ESRS) has increased the number of companies that will be required to report and in far greater detail. Both the CSRD and ESRS came into effect on the 1st of January 2024 and by the end of the year, the companies already covered by the NFRD will have to complete their first set of sustainability reports.
Meanwhile, the U.S. Securities and Exchange Commission (SEC), the privately run European Financial Reporting Advisory Group (EFRAG) and the International Sustainability Standards Board (ISSB) are all drafting proposals that have been endorsed by the International Organization of Securities Commission (IOSCO) covering about 95% of the world’s financial markets.
There is no doubt that regulators worldwide are intensifying their focus on asset managers and how they market their funds in line with sustainability criteria. In November 2023, the Financial Conduct Authority (FCA) set out its new anti-greenwashing rule to crack down on spurious claims by financial services operators. The Securities and Exchange Commission (SEC) in the U.S. has already challenged the ESG credentials of several funds as part of its own approach to call out greenwashing amongst asset managers. With the regulatory landscape evolving at such a pace, it’s little wonder businesses are concerned.
Navigating diverging demands and legal risks
Recent high-profile lawsuits in the U.S. have highlighted the growing trend towards litigation against firms for allegedly making misleading ESG claims. When it comes to corporate policies and investment decisions, corporate sustainability is still at the forefront. But there’s a harsh reality: the fear of litigation is pulling businesses in opposite directions.
On one hand, there’s the risk of climate-related lawsuits targeting corporations perceived as not doing enough. On the other hand, legal action is being taken against companies for their corporate sustainability-related work and investment policies. This has given birth to a troubling trend known as “greenhushing,” where companies keep their sustainability goals and practices under wraps to avoid penalties.
It’s a complex and evolving landscape, where businesses must navigate the demands of stakeholders, legal risks and regulatory scrutiny. The path forward requires careful consideration, bold action and a commitment to transparency.
Joined-up communications
In this ever-changing reporting landscape, the consequences of non-compliance are severe and the bar to be seen as a leader much higher. Companies now face legal concerns surrounding their targets, adding another layer of complexity to the mix. Moreover, consideration of incorporating the impacts of climate change into sustainability commitments and investment strategies adds further complication.
To thrive in this challenging environment, companies need a robust and integrated sustainability strategy supported by a holistic corporate affairs and communications plan. Engaging key stakeholders with an authentic sustainability story, evidenced by data is crucial to build and safeguard reputations, attract capital, retain and grow talent, and enhance loyalty with customers.
The time for action is now. Boards and C-suite leaders must proactively navigate these complexities, adapt to the changing landscape and seize the opportunities that lie ahead.
Jonathan Smith, Senior Vice President, Weber Shandwick
