ESG Trends 2024: Key Insights for Businesses in North America
Monday, Oct 28, 2024This year, we’ve seen significant shifts in sustainability ESG reporting, with heightened stakeholder expectations and regulatory pressures shaping how companies approach their ESG integration efforts.
You'll find that ESG reporting frameworks and processes are becoming more sophisticated, with a growing emphasis on addressing ESG data challenges and combating greenwashing. From the evolving role of the chief sustainability officer to the increasing importance of Scope 3 emissions reporting, this article delves into key ESG insights to help you prepare for the changing dynamics in North America. We'll explore the latest developments in ESG regulations, the impact of activist pressure, and sector-specific trends to give you a comprehensive view of what's been happening in ESG in 2024.
ESG Litigation and Activist Pressure in North America
ESG reporting is becoming increasingly complex, with organizations facing heightened scrutiny from various stakeholders. Litigation and activist pressure have continued to impact North American businesses.
- Climate-Related Lawsuits
Climate-related litigation has surged globally, and North America is no exception. You'll notice a significant increase in lawsuits targeting companies for their environmental impact and climate risk management. In fact, one in ten organizations in North America experienced ESG litigation in 2023, compared to just 2% the year before. This trend is expected to continue, with 27% of respondents anticipating more exposure to ESG disputes in 2024, based on a report shared by the Harvard Law School forum on corporate governance. The energy sector is particularly vulnerable to climate-related lawsuits. The share of respondents involved in energy-related litigation doubled, highlighting the growing focus on this industry's environmental impact. In the coming years, energy, real estate, construction, and technology companies are bracing for increased ESG dispute exposure.
- Shareholder Activism
Shareholder activism impacts ESG reporting and corporate strategies. According to Climate Action 100, 263 climate-related shareholder resolutions have been filed so far this year. Major financial institutions like JPMorgan and Citigroup are among the giants facing pressure from activist shareholders.
The implementation of SEC Rule 14a-19, also known as the universal proxy card rule, has made it easier for shareholders to engage in activism. This rule requires both executives and dissidents to list every board nominee on a single slate, facilitating remote voting and potentially increasing the influence of activist shareholders.
- Regulatory Enforcement Actions
Regulatory bodies are stepping up their enforcement actions related to ESG issues. The Securities and Exchange Commission (SEC) has been particularly active in this area. In 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement. This task force has proactively identified ESG-related misconduct and has taken several notable enforcement actions.
One significant case involved a USD 55.90 million settlement with Brazilian mining company Vale S.A. for making false and misleading disclosures about the safety of its dams. This action demonstrates that the SEC is scrutinizing not only public filings but also voluntary reports and statements made on company websites.
The SEC has also taken action against investment firms for misleading ESG claims. For example, Goldman Sachs Asset Management, L.P. reached a USD 4.00 million settlement with the SEC for failing to follow its own ESG policies and procedures in managing certain mutual funds and separately managed account strategies.
To safeguard your organizations and institutions against these growing pressures and regulations, you need to be aware of the increasing importance of ESG reporting frameworks and processes. The capacity building for ESG integration within your organization is crucial to addressing these challenges effectively. By staying informed about ESG trends in 2024 and beyond, you can better prepare for the evolving regulatory environment and stakeholder expectations.
The Evolving Role of ESG in Corporate Strategy
ESG’s role in corporate strategy has become crucial. Companies are recognizing that ESG considerations are not just merely a matter of compliance but also a crucial component of long-term value creation and risk management.
- Board Oversight of ESG
The board of directors plays a pivotal role in overseeing ESG matters. As ESG issues are discussed more frequently in boardrooms, many companies are enhancing board oversight and management responsibility for business-relevant ESG issues. There's no one-size-fits-all approach to allocating ESG oversight responsibilities among the board and its committees. How board oversight is structured depends on specific company circumstances, including the company's business and industry, board composition and culture, and the significance of particular ESG issues to the company.
To effectively oversee ESG matters, boards should consider updating company policies, corporate governance guidelines, and committee charters to reflect the allocation of these responsibilities. Given the continually evolving nature of ESG issues, some companies may opt for more general descriptions in their policies to limit the frequency of necessary updates.
- ESG Integration in Risk Management
Integrating ESG considerations into risk management processes has become a critical aspect of corporate strategy. Companies are recognizing that ESG risks are essentially business risks and should be incorporated into the company's strategy and enterprise risk management (ERM) processes. This integration involves enhancing the board's and executive management's understanding of these risks and fostering a collaborative culture among risk management personnel.
To put this into action, your company's board and executive leaders must understand explicitly how ESG-related risks could influence the company's performance. Management must be aware of their duties concerning current or forthcoming ESG disclosure obligations and thoroughly grasp the company's tolerance level for ESG-related risks.
- Linking ESG Performance to Executive Compensation
One of the most significant trends in ESG integration is linking ESG performance to executive compensation. This practice has become deeply ingrained in corporate America, with 75.8% of S&P 500 companies embedding some type of ESG metric into their leadership compensation policies, compared to 66.5% in 2021.
The most frequently used ESG performance metrics reflect companies' commitment to diversity, inclusion, and net-zero environmental impact. As companies more deeply integrate sustainability into their business strategy, operations, and culture, the next generation of ESG performance measures in executive compensation will likely reflect these trends while also being more tailored to the company's specific circumstances and goals for achieving competitive advantage and societal impact.
However, it's crucial to note that choosing these metrics carefully ensures an executive compensation plan that drives sustainable value creation. Compensation committees should identify and prioritize ESG factors tied to their company's long-term business strategy.
As you navigate these evolving ESG trends in 2024, it's clear that ESG has moved beyond being a peripheral concern to becoming a central component of corporate strategy. By effectively integrating ESG considerations into board oversight, risk management, and executive compensation, your company can better position itself to address stakeholder expectations, manage risks, and create long-term value in an increasingly ESG-focused business environment.
Sector-Specific ESG Reporting Trends
As ESG reporting becomes increasingly important across industries, sector-specific trends are emerging in response to unique challenges and stakeholder expectations. In this section, we'll explore the ESG reporting trends in financial services, energy and utilities, and technology and communications sectors.
- Financial Services
The financial services sector has been at the forefront of ESG reporting, driven by regulatory pressures and investor demands. In 2024, you'll see an increased focus on climate-related financial risks and opportunities. Financial institutions are enhancing their capacity building for ESG integration, recognizing the need to align their portfolios with sustainable development goals.
One significant trend is the growing importance of the Task Force on Climate-related Financial Disclosures (TCFD) framework. Many financial institutions are adopting this framework to provide more transparent and comprehensive climate-related financial information. This shift impacts how banks, insurers, and asset managers assess and disclose climate risks in their portfolios.
Another key trend is the integration of ESG factors into credit risk assessments and lending decisions. Banks are increasingly considering environmental and social risks when evaluating loan applications, particularly for industries with high environmental impacts. This trend will likely accelerate during the upcoming couple of years as stakeholder expectations around responsible lending practices continue to rise.
- Energy and Utilities
One notable trend in the energy and utilities sector is the increased reporting on Scope 3 emissions, which include indirect emissions from a company's value chain. Energy companies are expanding their reporting to encompass these emissions, recognizing the need for a more comprehensive approach to carbon accounting.
Another significant trend is the focus on water management and biodiversity conservation. Energy and utility companies are enhancing their reporting on water usage, particularly in water-stressed regions, and their efforts to minimize impacts on local ecosystems.
The sector is also seeing a rise in the adoption of science-based targets for emissions reduction. Companies are setting ambitious goals aligned with the Paris Agreement and providing more detailed reporting on their progress towards these targets.
- Technology and Communications
The technology and communications sector is experiencing its own set of ESG reporting trends, driven by increasing scrutiny of data privacy, cybersecurity, and the environmental impact of digital infrastructure.
One key trend is the growing emphasis on reporting data center energy efficiency and the use of renewable energy in powering digital operations. Tech companies are increasingly disclosing their progress towards achieving carbon neutrality or net-zero emissions for their data centers and overall operations.
Another significant trend is the focus on ethical AI and responsible technology use. Tech companies are enhancing their reporting on AI governance frameworks, data privacy measures, and efforts to mitigate algorithmic bias. This trend reflects growing stakeholder concerns about technology's societal impacts.
The sector is also seeing increased reporting on supply chain sustainability. Tech companies are providing more detailed disclosures on their efforts to ensure responsible sourcing of materials and fair labor practices throughout their supply chains.
Across all these sectors, there's a growing trend towards more comprehensive and standardized ESG reporting. Frameworks like the Sustainability Accounting Standards Board (SASB) standards and the Global Reporting Initiative (GRI) are being adopted more frequently, helping to address ESG data challenges and improve comparability across companies.
Key Takeaways
As we wrap up our exploration of ESG trends for 2024, it's clear that ESG reporting has a growing impact on North American companies in profound ways. The rise in climate-related lawsuits, increased shareholder activism, and stricter regulatory enforcement are pushing organizations to improve their ESG integration efforts. Boards are taking a more active role in overseeing ESG matters, while companies are linking ESG performance to executive compensation to drive meaningful change.
Looking ahead, sector-specific ESG reporting trends are shaping how different industries approach sustainability. Financial services are focusing on climate-related risks, energy companies are expanding their emissions reporting, and tech firms are addressing the environmental impact of digital infrastructure.
As ESG continues to evolve, staying informed about these trends will be crucial to meeting stakeholder expectations in 2024 and beyond.