Katharina Cavano l Palladium - Dec 19 2022
CFOs Have Entered the Corporate Sustainability Conversation (And Other ESG Trends in 2023)

The focus on sustainability and ESG for corporations continues to mount and this year brought a reckoning for some organisations and breakthrough commitments for others. The difference in 2022 is that more consumers are looking for better communication from the brands and businesses they engage with on ESG efforts.

Clear communication will be key in the years ahead, especially when it comes to how organisations are framing their work toward ESG goals as 78% of those surveyed say that companies have a responsibility to behave like a good citizen and 62% believe companies should be penalised for lack of action on key ESG issues. That communication goes hand in hand with clear reporting, something that Eduardo Tugendhat, Palladium Director of Thought Leadership, says will be significant in 2023.

Improved Measurement

“One of the most significant things that’s emerging is that the SEC [Securities and Exchange Commission] is leading on requiring companies to report on material Scope 3 GHG emissions and reduction targets from supply chains,” says Tugendhat. Scope 3 emissions, or emissions from an organisation’s supply chain, are notoriously difficult to measure and mitigate. Many companies lack a clear understanding of these emissions or how they will be mitigated.

“I envision that the SEC requirements will be followed by the EU and international accounting standards, which will put many big corporations in a position of having a fairly massive contingent liability,” he adds.

According to Tugendhat, for a lot of CFOs, it will become an imperative to fully understand this risk and think more strategically with supply chain partners on mitigation strategies that benefit all actors in the supply chain. That’s right – CFOs have now entered the corporate sustainability conversation. “CEOs made the commitments and now the CFOs have to put something in their financial reports that are, for all intents and purposes, a potential liability, and that suddenly changes this from being a nice-to-have to a must-have,” explains Tugendhat.

David McMillan, Palladium Senior Manager, hopes to see continued progression of scrutiny on ESG reporting and shift in how corporations are reporting on and thinking about their outputs, such as items provided, or outcomes, like livelihoods improved. “I hope that this scrutiny extends to expecting intermediate progress on long-term targets, like 2030 and 2050 carbon targets where we should soon have a better sense of who is actually serious about achieving those targets.”

Supply Chain Resilience

When it comes to carbon, Tugendhat envisions that we’ll see a shift from carbon offsetting programs to more companies evaluating their supply chains as a means to reduce emissions overall, as well as to increase efficiency and resilience. “It builds a competitive advantage in the marketplace,” he says. “By rethinking how they’re organising their production and supplies, organisations can bring together both the financial risk perspective and reduce the risk of carbon liabilities.”

He shares the example of large food and agriculture companies; “To make their supply chains more resilient, they need to incentivise and support farmers to be better custodians of land, water, and environment, as well as create more direct supply chains.”

The bottom line? Companies will need to shift, and quickly, beyond focusing on just emissions, and start looking at the S of ESG, too – especially those that work within vulnerable communities.

“Companies will inevitably realise that they cannot just be targeting carbon abatement and offsetting,” adds McMillan. “They also need to include community climate resilience as part of their environmental strategies as the effects of climate change are already here and affecting communities in ways that are expensive and deserve action.”

Green Economy Needs Mining

This is especially applicable in the mining industry, notes Tugendhat. “We’re going to see and hear more and more about the green economy in 2023 and one of the things people get upset about is that the green economy requires a lot of minerals, and that requires mining."

Whether it’s for electric vehicle batteries or windmills, a transition to the green economy is reliant upon critical minerals but mining them doesn’t have to be a sustainability risk. “Just like in the case of agriculture, mining can be part of the problem but also contribute to the solution,” Tugendhat adds.

There’s a growing shift in the mining industry as companies are realising the opportunity they have to be more proactive in investing not just in their production, but in the entire landscape around mines. The best way to start is by helping communities to be more resilient in ways that can also reduce the mine’s carbon footprint. Tugendhat echoes McMillan in his call for community resilience, and doubles down on the growing impetus for mining companies in remote areas vulnerable to climate change to better engage with and support communities, or risk business and conflict.

Last year, our experts forecast a focus on sustainable supply chains and this year it appears that focus will only become more refined. This is thanks in part to better measurement tools in place, but also to continued shocks to global economies. “The war in Ukraine has been a huge disruptor, on everything from energy and gas to agriculture and food supplies,” Tugendhat notes. “But remarkably and hopefully, there has been a tremendous amount of innovation and ingenuity in figuring out alternative ways of doing things, and it’s just a matter of building on some of that energy and turning it into ways that can scale sustainably.”

Better measurement and requirements; greener, more resilient, and shorter supply chains; and a shift towards sustainable community building are what our experts predict for 2023. The reality is, they all go hand in hand in building greener, cleaner economies in the race towards 2030 and beyond.

Read 'From Energy to Brazil, 2023 Promises Some Hope' and contact info@thepalladiumgroup.com for more information.