Top ESG themes for investors worldwide in 2023 will include sustainability standards with a broader scope and the potential for more regulatory coordination, according to a report released Thursday by ISS ESG, the responsible investment arm of Institutional Shareholder Services Inc.
The report, Actionable Insights: Top ESG Themes in 2023, identifies 10 key trends that could impact portfolios and stakeholder engagement priorities this year.
As investor demand for ESG disclosures increases, "it is well understood that 2023 will be the 'leap forward' year for mandatory corporate climate risk and ESG reporting," the report said, "but the more compelling policy challenge ahead is how will regulators define the limits to 'sustainability' reporting?"
The report looked at three leading corporate sustainability reporting standards released or in the works from the European Union, the U.S. Securities and Exchange Commission and the International Sustainability Standards Board to see what they mean for the scope of corporate sustainability reporting and for investors looking to compare that reporting in a meaningful way.
"Rather than heading towards fragmentation, corporate reporting on E and S issues may be heading to an all-of-the-above approach across multiple jurisdictions," the report said.
With mandatory corporate disclosure requirements around the world "clearly on the rise," the ISS ESG data suggested two broad findings "that may initially seem contradictory, but on closer examination offer important insights for the future of transparency regulation," the report said.
First, although reporting is often voluntary and adopted by businesses for illustrative purposes, some businesses "see good social and environmental practices as having a positive impact on the company's long-term prospects for value creation," the report said.
Second, with corporate reporting quality more closely correlated with good governance, making ESG reporting mandatory along with stakeholder pressure, "may well promote improvement in the execution of E&S practices," the report concluded.
This year will also see more investor focus on better and standardized data on portfolio companies' emissions, targets and reduction strategies, driven by investors' net-zero goals, ISS ESG said in the report.
To get more information on the environmental impact of specific industries like food and energy before investing in them, "investors will need to be creative as well as pragmatic in making these decisions," the report said.
Investors will also need to be aware of some industries' "relationships with regulation," including possible consumer protections in the cryptocurrency sector, the report said.
"Finally, ongoing crises such as the COVID-19 pandemic and Russia's invasion of Ukraine are likely to remain destabilizing forces that will continue to shape the ESG investing landscape in 2023," the report concluded.
