The ESG matrix successfully gains mainstream recognition for overcoming the challenges sustainability encounters. ESG evolves from pure reporting and regulatory compliance to a pivotal element in corporate strategies. ESG ratings are part of the process of making informed, sustainable investment and financing decisions in global capital markets. This trend influences design, procurement, finance, and marketing practices. Climate neutrality is a big component, therefore decarbonization plays a crucial role in business strategy and transparent carbon footprint calculations shape ESG ratings. Other priorities include biodiversity and increasing focus on AI solutions. Global ESG regulations emerged as EU recently marked the first step ahead.

The 2024 ESG drivers

1. Scope 3 Mandates Drive Reporting: Private firms, responding to Scope 3 emission rules, adopt sustainability reporting. Regardless of disclosure, all private suppliers to major corporations must implement robust greenhouse gas accounting methods, impacting diverse sectors.
2. Value Chain Sustainability Challenges: Reporting on material sustainability challenges intensifies, considering upstream and downstream impacts. With the EU’s CSRD, IFRS S1 and S2 standards, and the recent approval of CSDDD, companies globally face stringent requirements for measuring, managing, and reporting value chain impacts, starting in 2024.
3. Governance Demands in AI Era: Growing reliance on AI enhanced governance needs. AI’s potential to drive operational efficiency transforms tracking and reporting of environmental and social issues, reducing costs for companies.
4. ESG’s Political Dynamics: ESG remains politically charged in 2024, necessitating strategic communication amid elections and potential legislation. Stakeholder mapping and highlighting specific ESG initiatives provide strategies for engaging with diverse viewpoints in this polarized landscape.
5. Biodiversity’s ESG Spotlight: Nature investment trends surge in 2024 as biodiversity captures investor attention. Beyond climate, biodiversity’s risks prompt varied approaches, aligning with climate neutrality and carbon pricing goals for a resilient future.
6. “E” and “S” in Supply Chains: ESG best practices mandates prompt companies to prioritize ethical sourcing and fair labor. The convergence of environmental and social concerns gains momentum, driven by impending regulations mandating environmental and human rights due diligence. A potential global plastic ban adds urgency, with a treaty expected by 2024’s end impacting plastic’s entire life cycle.

Other ESG trends in figures:

• 4,4% of global GDP lost per year without climate change adaptation

Substantial annual global GDP losses loom, particularly impacting developing economies and leading to varied consequences in the corporate realm, according to recent S&P Global report on sustainability trends. (Link)

• Close to € 1 billion global value of climate’s impact on human health

The economic and financial costs of adverse health impacts from climate change increased and cumulative financial commitments from governments, multilateral development banks and private philanthropies came into focus at the UN’s COP28 climate change conference with a “Health and Climate Change Declaration.

• 50% of global economic output moderately relies on nature

The World Economic Forum estimates align with investor trends addressing nature and biodiversity challenges. Methods include measuring portfolio impacts, exploring conservation opportunities, and participating in debt-for-nature swaps and carbon credit initiatives.

• $1 trillion mark for the global sustainable bond market in 2024

The growing imperative to decarbonize the economy may propel the global market for green, social, sustainability, and sustainability-linked bonds (GSSSB) toward a significant milestone. Source: MSCI ESG Sustainability and Climate Report (Link)

Stronger ESG considerations in sustainable development

Companies across the world have already taken a voluntary approach to sustainability goals, decisions, and strategies. Real estate is among the main drivers towards sustainable development. The list below builds on many of the trends we identified last year.

1. The role of ESG expands from basic reporting to a key pillar in business performance and development strategy.
2. The publication of non-financial reports became a must, as well as the use of third-party verification to provide assurance on sustainability performance.
3. Green building certifications incorporate the most reliable ESG metrics and set more concrete and stricter evaluation, while their role switched – from the final objective in the sustainable development plan, to a starting point towards sustainable development that meets ESG goals in line with the business strategy.

Overall, 2024 already shows more complex ESG performance and reporting based on sustainability initiatives. The publication of sustainability reports practically became a must, as well as the use of third-party verification to provide assurance of performance.

New Legal Aspects

In February 2024, the European Union set the 1st jurisdiction in the world for ESG ratings, a provisional regulation aimed at boosting investor confidence in sustainable products. The rules prioritize transparency, integrity, and ESMA authorization to enhance the reliability and comparability of ESG ratings, while mitigating potential conflicts of interest. This agreement will facilitate progress towards achieving the net-zero objectives by 2050 while leveraging private finance into activities in line with the objectives of the Green Deal. The regulation is set to take effect on the EU ESG ratings market 18 months after its entry into force.  

What is the EU provisional ESG agreement?

1. Scope of Regulation:
   • Clarification on circumstances when ESG ratings fall under the regulation.
   • Details on exclusions from the regulation.
   • Definition of operating in the EU for territorial scope.

2. Disclosure Requirements:

• Financial market participants or advisers must disclose ESG ratings in marketing communications.
• Mandate to include information about the methodologies used in ESG ratings on their website.
• Amendment to the Sustainable Finance Disclosure Regulation.

3. Factors Covered by ESG Ratings:

• ESG ratings encompass environmental, social, human rights, and governance factors.
• Option for separate ratings for E, S, and G factors.
• Requirement for explicit weighting if a single rating is provided.

4. Authorization and Endorsement:

• EU-based ESG rating providers need authorization from ESMA.
• Non-EU providers must obtain endorsement from an EU-authorized provider or be included in the EU registry.
• Equivalence decision for third-country providers, following dialogue with ESMA.

5. Registration Regime for Small Providers:

• 3 years of temporary and optional registration regime for small ESG rating providers with less than € 12 million annual revenue.
• Proportionate supervisory fees during the temporary regime.
• General organizational and governance principles, transparency requirements, and ESMA powers apply.
• Transition to full compliance after the temporary regime, including governance and supervisory fees.

6. Exemptions for Small Providers:

• ESMA may exempt small ESG rating providers from some requirements based on justified cases and business characteristics.

7. Separation of Business and Activities:

• Principle of separation with an option not to set up a separate legal entity for certain activities.
• Clear separation and conflict of interest avoidance measures required.
• Exemption does not apply to providers involved in consulting, audit, and credit rating activities.

Possibility to develop benchmarks with sufficient conflict of interest mitigation measures, subject to ESMA approval.