The journey to sustainable finance is laced with emerging ESG trends that you must watch closely if you want to improve financial sustainability.

Investors prioritize ESG factors when identifying growth opportunities and material risks. If your company fails to show a noticeable movement towards financial sustainability, it’ll fall under great scrutiny from investors and the public.

So, just how prepared are you for the rising dominance of Environmental, Social, and Governance (ESG)?

In this post, we’re looking at some interesting ESG market trends to pay close attention to, covering topics such as:

What is ESG investing?

ESG stands for Environmental, Social, and Governance. It’s a set of standards designed to assess how much impact a business has on the environment and society. ESG also measures a business’ accountability for its carbon footprint and has become an extremely important factor for investors.

The environmental part of ESG concentrates on how the business is working towards minimizing its impact on the environment. Some methods include reducing energy, switching to sustainable packaging, decreasing carbon emissions, improving recycling efforts, and so on.

The social part looks at how a company impacts society as a whole, paying close attention to its workplace culture. A few examples of social best practices include promoting equality, providing training, and investing in projects within the local community.

Finally, governance explores a company’s processes around decision-making and reporting. It also looks at its transparency with stakeholders. Some governance best practices include things like ensuring diversity and inclusion in leadership teams, ethical business processes, keeping leaders accountable for risk, and accurate reporting to key stakeholders.

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Benefits of ESG: Why is it so important?

Before we look at some of the emerging ESG trends, it’s worth being aware of why ESG is taking off the way it is. After all, there’s a reason why so many businesses want to reduce their carbon footprint.

Here are a few key benefits that companies have seen following a successful implementation of ESG within the organization:

  • Top-line growth
  • Cost reduction
  • Competitive advantage
  • Increased employee productivity
  • Improved efficiency
  • Boosted revenue
  • Increased innovation
  • Stronger stakeholder relationships
  • Investment and asset optimization
  • Decreased regulatory and legal interventions

To read about more benefits of ESG, check out our blog post – Are you prepared for ESG and sustainable finance?

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The CFO will often take the lead when it comes to putting ESG efforts into place. However, with the importance of ESG growing, it looks like many organizations will appoint a specific ESG role. This role will oversee and manage a company’s ESG goals, ESG funds, and sustainability procedures.

These roles will likely include Chief Sustainability Officers and Chief ESG Officers. Their main responsibilities will depend on the individual organization but will involve embedding ESG and sustainability within the company successfully.

Both roles will likely introduce new procedures to help companies embrace ESG as effectively as possible. The scale of work required could range from a simple readjustment to a complete overhaul. If it's the latter, it's most likely due to a noticeably absent effort towards sustainability.

2. A demand for credible corporate financial disclosures is on the rise

An emerging ESG trend that has already taken effect is the introduction of new regulations and reporting standards.

In 2021, a lot of large-scale businesses eagerly published their ESG data to showcase their efforts. However, many companies were faced with backlash from investors, regulators, and the general public, who accused them of greenwashing.

The problem lies with the concern that companies are using sustainability labels on products or services solely to boost marketing efforts.

To resolve the issue, a brand-new standard-setting board was launched called the International Sustainability Standards Board (ISSB).

The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.” – ISSB

Keeping organizations accountable and setting disclosure standards will help ensure a higher level of credibility is met.

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3. ESG is now a mainstream investment proposition

One of the most pressing ESG investing trends is the fact that sustainable finance is no longer a niche player.

ESG has quickly moved into mainstream investment propositions. Without a real ESG strategy in place, your company could find it increasingly difficult to lock down investors.

ESG integration is more important than ever. This means that your business must integrate key ESG insights and data into the investment process and do so regularly.

4. The financial services industry will focus more on climate stress testing

Climate change is a possible threat to financial stability. Major financial institutions are waking up to the fact that something has to change sooner rather than later.

Yes, the energy sector has a massive role to play. However, financing also has a lot of impact on the environment that hasn't been talked about to the level it should. Until now.

Recent ESG trends have shown that more financial service institutions are considering their role in improving the economy’s climate resiliency. Banks and other establishments must assess their impact on the environment with climate stress testing. This includes assessing their potential for climate-related risks and physical risks. Then, taking the necessary steps to manage those ESG risks.

Climate stress testing is a useful way for the financial services industry to measure its climate risk. And it stands to be a huge ESG trend moving into 2023 and beyond.

Net-zero targets for carbon emissions are quickly becoming the ultimate goal for many companies. The main reason for this shift in priorities is because their stakeholders are pressurizing them to make huge leaps toward sustainability.

The only problem is that achieving net-zero targets is incredibly difficult. To solve the issue short term, many companies are taking part in carbon offsetting schemes designed to reduce CO2 emissions.

The Guardian defines carbon offset schemes as:

“...allowing individuals and companies to invest in environmental projects around the world to balance out their carbon footprints.”

Some examples of carbon offsetting schemes include:

Aviation – leveraging ‘carbon neutral’ flights and optimizing flights with artificial intelligence (AI) to reduce the production of contrail clouds.

Reforestation – planting more trees in areas of deforestation.

Wastewater treatment facilities – supplying clean water to areas with contaminated water.

Energy-efficient technology – improving the efficiency of infrastructures, for example.

Renewable energy – prioritizing replacing fossil fuel with renewable energy (e.g. wind farms).

Waste management – capturing methane at landfills that are generated from waste disposal.

Carbon sequestration – carbon capture and storage methods to reduce the amount of carbon being released into the atmosphere.

If you’d like to talk about any of these ESG market trends in more detail, consider joining our free Slack community. It's the perfect place for finance professionals to connect, network, share job opportunities, ask questions, and share ideas.

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