Environmental and social issues have never been far from the headlines over the past 12 months. While they often take a back seat in times of economic or political uncertainty, these issues are returning to the top of the agenda ever more quickly after a crisis, according to Ipsos. As Context embarks on a new financial year, we’ve compiled our take on the 12 months gone by and what it means for business.
Growing compliance requirements
The regulatory burden has grown significantly over the past 12 months, with several new rules coming into force and many others receiving final approval.
In the US, the Securities and Exchange commission published the first nationwide reporting requirements, obliging large companies to include mandatory disclosures on scope 1 and 2 greenhouse gas emissions in their annual report and registration statement from the 2025 financial year. However, within a month, the rules were put on hold pending a judicial review, delaying final implementation. Nonetheless, publication of the new rules sent a clear signal that more detailed climate reporting will soon be a requirement in the US.
In parallel, sustainability professionals will need to get to grips with requirements under Europe’s Corporate Sustainability Reporting Directive (CSRD), which applies to listed companies from 2024 and up to 50,000 medium and large businesses before the end of the decade. The Directive covers a broad set of environmental and social issues and sets out requirements to conduct and report on a detailed double materiality assessment.
The EU also approved the Corporate Sustainability Due Diligence Directive, obliging companies to assess, reduce and address negative impacts in their supply chain, including on issues such as child labour, slavery, exploitation, water and deforestation. The directive applies to all large companies operating in the EU. In addition, the EU deforestation-free products regulation enters into application later in 2024.
Following a review which found that 53% of sustainability claims were vague, misleading or unfounded, the EU updated consumer protection law to rule out greenwashing. The new rules, which came into effect in March 2024, set out what companies can and cannot say about their products, requiring claims to be clear, specific and substantiated. They will be swiftly reinforced by a new green claims directive, currently making its way through the EU Parliament.
More regulation on the horizon
Additional regulation will continue to come thick and fast over the next few years, with a range of proposals under review.
Europe turned its attention to how things are made in 2023. The EU agreed a draft right to repair directive, making it easier and cheaper for consumers to ask for broken and defective goods, including mobile phones, vacuum cleaners and washing machines, to be repaired rather than replaced. If an item is still under guarantee, the repair will be accompanied by a one-year extension to the warranty. The new regulations are expected to come into force in 2026. While there have been complaints that the directive covers only a limited set of goods, it adds to the pressure on companies to design products to be repaired.
France went further, approving a ban on advertisements for fast fashion brands and a bonus scheme offering up to €21 off the cost of repairs for clothing and shoes. The French Government aims to ban manufacturers that produce vast amounts of cheap clothing every day such as Shein from the country’s screens, claiming their approach compels other manufacturers to expand their range to keep up with competition, leading to excessive production and consumption. The restrictions on fast fashion have yet to be approved by France’s upper house, but the new rules look set to come into effect in 2025.
Elsewhere government action came down in favour of local communities. The US Administration released an additional $328 million in funding to help communities address the impacts of climate change through water storage and recycling. Ecuador halted drilling for oil in the Amazonian national park, while Brazil issued landmark protections for Indigenous communities.
Under the spotlight
Almost 200 new climate legal cases were filed in the year to the end of May 2023, with an increase in cases filed against companies. While the total is down slightly on the previous year, litigation covered more countries and more issues. Around half led to a ruling that promoted climate action.
Governments were increasingly compelled to protect the rights of the next generation; companies may soon be expected to follow suit. The state of Montana was found to have acted against young people’s right to a ‘clean and healthful environment’ by promoting fossil fuels, while in Europe six young people are taking action against 32 countries, including all EU members, claiming that a failure to act on climate change discriminates against the next generation.
Companies faced scrutiny on multiple fronts. Singapore issued its first decision on greenwashing, demonstrating that regulators globally are increasingly prepared to take action. The Advertising Standards Authority banned a campaign for Prism+ air conditioning units. Prism+ had claimed that using its energy efficient units could ‘save the Earth’. In New York, activists questioned why materials manufacturer Saint Gobain should be recognised as the headline sponsor of Climate Week given its record on pollution, while state authorities took aim at PepsiCo for failing to act on plastic waste.
2024 is set to be the biggest election year ever, with over 40 countries and regions going to the polls, including in the US and EU. That has led to an uptick in scrutiny of company donations and lobbying activity to ensure democracy is protected.
An additional steer
September saw the launch of the UN Global Compact’s Faster Forward Initiative. Current estimates put us collectively on course to achieve just 15% of the Sustainable Development Goals by the end of the decade. The Faster Forward Initiative identifies five areas where companies can not only directly affect the pace of progress, but also unlock additional co-benefits, helping to deliver the wider sustainable development agenda. These are gender equality, climate action, living wages, water resilience, and finance and investment.
An expert group of the International Labour Organization (ILO) met in February to review living wages, publishing a clearer definition of a living wage and how to make it a reality globally. The ILO also committed to providing guidance for employers and workers on setting wages.
Beyond climate
Reducing emissions is no longer enough. Growing political instability brought supply chain risks into sharp focus, with attacks on shipping in the Red Sea disrupting supply chains. Ongoing geopolitical tensions also undermine businesses’ willingness to invest, increasing existing social inequalities. Meanwhile, international pressure has been growing for businesses have to consider a wider spectrum of environmental and social issues and their interconnections.
Following the global stocktake of national climate commitments, COP 28 recognised the triple planetary crises — climate change, biodiversity loss and pollution — and the need to tackle all three issues together to accelerate momentum. The decision urged governments to accelerate efforts to protect and restore nature to meet the Paris Agreement.
To date, there has been no formal mechanism for protecting the high seas — the vast expanse of ocean that extends beyond national waters. A new UN Treaty for High Seas Conservation aims to change that, introducing a framework for international cooperation to protect and restore the high seas. It could also lead to a ban on damaging practices such as bottom trawling and the use of harmful chemicals.
Meanwhile, negotiations got underway for a UN treaty on plastic pollution, leading to the publication of an initial draft. The ‘zero draft’ has been broadly welcomed as a comprehensive document, which would support reduction of plastic use, help prevent pollution and stimulate a shift to a circular economy. However, there is a need to sharpen the text to make it legally binding.
Business will have to understand its risks and impacts in relation to all these issues and report on its activities under both CSRD and new science-based targets for nature. In May, 17 companies embarked on a pilot to set verifiable goals for the protection and restoration of nature. The pilot is due to conclude in May 2024, providing a framework for companies to set and track nature progress.
Artificial intelligence (AI) has the potential to support progress on all of these fronts, providing a more comprehensive assessment of risks and responses to environmental issues. However, 2023 was the year when businesses had to grapple with the potential impact of AI on jobs, privacy, social inclusion and democracy.
More ambitious responses
While the sustainability agenda may be expanding constantly and the demands for action accelerating, we have also seen companies be more ambitious in their response.
Cross-company collaboration has increased in a bid to tackle systemic problems within the supply chain and spread the cost of innovation. The Footwear Collective brings together footwear manufacturers including New Balance and Crocs to tackle sustainability in the shoe industry. H&M Group joined forces with Vargas Holdings to form Syre to decarbonise and reduce waste in the textiles industry.
Apple, Coca-Cola and Microsoft, among others, have all been investing heavily in sustainability, either to identify innovative approaches to sustainability challenges, accelerate the development of start-ups and technology (for example, to capture and store carbon dioxide), or mitigate their negative impacts. One-third of the corporate venture capital funds launched in 2023 were sustainability focused. Another one-quarter related to AI, with just 40% of funds focused on any other issue.
The number of companies setting science-based targets for emissions reduction doubled in 2023, topping 4,000 before the end of the year. Some 160 stand ready to develop science-based targets for nature, while 230 have signed up to the UN Global Compact swelling its business membership to almost 24,000.
Preparing for the year ahead
We can’t tell you exactly how things will play out, but we do know that there will be ever greater demand for action on multiple fronts.
- Tip 1 – Understand your impacts, risks and opportunities: Double materiality sits at the core of the new European sustainability reporting standards. We’ve isolated the key steps to assessing impacts, risks and opportunities and developed an assessment toolkit to help make the process more straightforward.
- Tip 2 – Refine your climate strategy: As the urgency to combat climate change continues to grow, so does the importance of having a robust and credible climate strategy and net zero roadmap. Here are our 10 top tips for developing, implementing and evolving your climate strategy and driving meaningful change within your business.
- Tip 3 – Define how you contribute to a nature-positive world: Expectations are growing for businesses to have a carefully considered nature strategy that’s integrated with existing environmental and social action. Explore how companies are putting nature on the board.
- Tip 4 – Work towards a fairer society: Social issues are also set to come out from under the environment shadow of climate action, making it essential to define how your business promotes human rights, decent working conditions and diversity across the supply chain.
- Tip 5 – Get ready for implementation: CSRD will be rolled out in waves over the next five years. Starting early is important for smooth and efficient implementation.
- Tip 6 – Reflect on your reporting approach: With so much going on, it’s tempting to roll up your sleeves and dive straight in. Don’t. Changes in reporting requirements provide the perfect opportunity to rethink reporting and how your business communicates with stakeholders.
We’re helping clients to navigate the evolving sustainability landscape through strategy, reporting and communications support. If you’d like to chat about how we can help you prepare for the road ahead — including CSRD reporting and double materiality assessment, net zero and nature roadmaps, climate advisory services, or other strategic priorities — please get in touch via www.contextsustainability.com or helen.fisher@contexteurope.com.
