Businesses have faced a difficult operating environment over the past few years. First the Covid-19 pandemic, then war in Ukraine, have caused rising inflation, increased interest rates and high wage growth, meaning many businesses face difficult decisions in order to maintain profitability.
That has meant many companies putting improving sustainability on the backburner. But, as record global temperatures in 2023 show, climate change isn’t taking a break. In 2024, businesses will need to find a way to think long-term on sustainability while facing short-term pressure on their top line. That necessitates more robust net-zero plans but also expanding scope beyond carbon, amid new ESG regulations focused around reporting and transparency.
Preparing for new sustainability regulations
Around the world, governments will be introducing and updating sustainability regulations in 2024. There is a huge array set to come into force in the coming years and companies will need to prepare.
Levent Ergin, global chief ESG sustainability strategist at Informatica, says: “We are approaching a tipping point with ESG. Instead of companies operating blindly by accessing ESG data from a black box, new regulation promises greater clarity, and reliability in ESG data - something which is fundamental for informed decision-making and responsible capital allocation.”
Many of these regulations are aimed at making data and progress towards sustainability goals more transparent and standardised. The corporate sustainability reporting directive, for example, aims to standardise non-financial reporting. Applying to all large companies and listed SMEs that operate in the EU, it will require them to publish regular reports on their environmental and social impacts with the aim of helping investors, policymakers and consumers evaluate their performance.
Adapting to new standards will be a challenge for the organisations that don’t have an intelligent approach to ESG data management and governance
Similarly, the EU corporate sustainability due diligence directive mandates that companies operating in the bloc identify, report on and mitigate the impact of their operations (including those in their supply chains) on human rights and the environment. And in the UK, the Streamlined Electricity and Carbon Reporting regulation requires companies to report on their emissions and energy consumption.
Dana Haiden, chief sustainability officer at Virgin Media O2, says the business is preparing for this increase in reporting and transparency requirements already and this will intensify going into 2024. “The remit of these new regulations is so wide it impacts almost everybody in some way.”
All these new regulations mean companies will need to provide new data points, KPIs and metrics around sustainability. It also puts the onus on business to understand their ESG data and ensure robust data governance in this area. Those that cannot risk their corporate reputations plus could miss out on sustainable sources of funding or even be fined.
“Adapting to these new standards will be a challenge for the organisations that don’t already have an intelligent approach to ESG data management and governance. These companies will find this process highly complex and resource intensive,” says Ergin. “But those that do have a robust approach to ESG data governance, will have an advantage.”
Moving the sustainability conversation beyond carbon
Much of the focus both among global governments and businesses up to now has been on carbon emissions and reducing them. However, there is a growing realisation that while transitioning away from fossil fuels is important, it is just one aspect of dealing with the climate crisis and that efforts need to be more broad-based if we are to stave off the worst effects of climate change.
“The view of sustainability is broadening from an environmental perspective, but also from a social perspective,” says Haidan.
At COP 28 in December, a greater emphasis was put on reducing emissions of methane – a greenhouse gas that is 28 times more potent than carbon dioxide in trapping heat in the atmosphere. A move away from fossil fuels will help but a reduction in materials going to landfill by both companies and consumers is needed as well.
The role of nature and biodiversity is also, finally, under the spotlight. Only around a third of Europe’s biggest companies have set targets that aim to address deforestation and protect biodiversity, according to S&P Global. Yet allowing nature to degrade further poses significant business risks and means companies will be addressing this area more in 2024 and beyond.
The World Economic Forum estimates that, in 2019, more than half of the world’s $44tn (£35tn) economic value was moderately or highly dependent on natural resources. And healthy ecosystems have a key role to play in absorbing greenhouse gas emissions, keeping global temperatures lower and mitigating the effects of, for example, storms and floods.
“One big trend is this connection to nature and biodiversity,” says Haidan. “Up until this point, the biggest focus has been on carbon – tracking, management and reduction – and biodiversity and nature has not been a big focus.
“Now we’re seeing more companies choosing to voluntarily disclose their nature-related financial risks, which is the first time many companies have started to look at the impacts of their business on nature.”
Balancing short-term profit with long-term sustainability investment
In August, a team of researchers from the University of Bath, the University of St. Gallen and the Swiss Finance Institute conducted research into the progress companies make on their ESG initiatives when facing competitive pressures. The research, highlighted by investment strategist Joachim Klement, found that those facing higher pressures in their home market, and therefore lower margins, tended to invest less in ESG. This despite other studies suggesting that strong ESG performance and being a good corporate citizen can be a source of competitive advantage.
The research suggests that when faced with short-term operational challenges, leadership focuses on short-term operational measures to fix them at the expense of longer-term focus areas such as sustainability. But the research also found that at companies with longer-term shareholders or those operating in industries that consider climate action more important, the shift away from ESG was not as great.
Research also suggests that those companies that invest for the long-term outperform those swayed by short-term winds. And those that go on the offence during difficult economic times tend to be rewarded with higher revenue growth and earnings.
The trend in 2024 for businesses, then, is how to balance the long-term need to invest in sustainability efforts with the short-term need to boost earnings. As global temperatures continue to rise and the 2050 deadline for net-zero carbon emissions draws ever closer, 2024 is seen as a pivotal year in whether the world is on track to limit global warming.
No matter what we do in the short term, sustainability is still embedded in the way we plan long-term
But Mette Lykke, CEO of food waste company Too Good to Go, admits it takes a lot of resources and is an area that is increasingly complicated for businesses, especially with the added cost of incoming regulation.
“This is an area that is very complicated and is going to take a lot of resources to figure out,” Lykke explains. “There’s definitely a balance to be found between how much business spends on reporting versus actually doing initiatives that could move the needle.”
Virgin Media O2’s Haidan agrees that this need to think long term around sustainability is “misaligned” with quarterly earnings reporting. However, she believes there will be more companies taking the sustainability agenda seriously and so prioritising beyond the short term.
“At Virgin Media O2, we get a lot of support from the management team and the organisation overall to really embed sustainability in the right intervention points within the system. For instance, sustainability is part of our investment committee review, so any capex investment we make we also review whether it impacts our carbon reduction targets,” she says.
“Embedding that through that process means no matter what we do in the short term, sustainability is still embedded in the way we plan long-term.”
Getting communication right
A final area business leaders and sustainability experts must focus on in 2024 is communication. The Advertising Standards Authority is already clamping down on misleading environmental claims in communications and recently updated its guidance.
Companies now need to follow key principles including ensuring that if an environmental claim relates to a sole product, rather than the whole business, that should be made clear; including ‘balancing information’ if a business has a harmful impact on the environment but is highlighting positive environmental activities; and including information on overall harmful impact if an ad refers to lower-carbon activities.
Companies also need to be wary of using imagery of the natural world, using absolute claims such as ‘sustainable’ or ‘environmentally friendly’ and suggesting its negative impact is a thing of the past if it is not.
Brands that fail to adhere to this are likely to fall foul of the advertising code. It could also cause a hit to brand reputation. For Lykke, key to avoiding this is ensuring that communications are sincere and not just done for storytelling purposes.
“There is a lot more scrutiny now (from consumers and policymakers). For example, you need to invest in carbon accounting and then have experts review what you do if you want to make any external claims,” she explains.
For Virgin Media O2’s Haidan, while sustainability is core to its business, it is not something it talks about a lot in communications. It doesn’t not offer products or services with green claims attached to them, except for device recycling whether the link is clear.
As the Intergovernmental Panel on Climate Change has warned, the world is nearing the threshold where 1.5 ºC of warming above pre-industrial levels, as agreed internationally as part of the Paris Agreement in 2015, won’t be achieved. That could have dire consequences for society, economies and businesses.
In 2024, companies need to think longer-term, prepare for more robust regulation and look beyond carbon. As Haidan puts it, sustainability must be part of every decision and integrated into every aspect of business.
