Part I. The key ESG risks and challenges for 2023
Trends, risks and solutions to consider
By 2023, managing and reporting on sustainability criteria and ESG (environmental, social, and governance) through standardized data and innovative digital platforms is no longer a “desirable” or recommended trend. It is a top priority for companies.
Regardless of sector, geographic markets, or company size, the previous five years (particularly the last two post-pandemic years) have required companies – and the public sector – to adapt, engage and grow strategically in this area at a frenetic pace.
No. It is not about riding the sustainability train as a market trend not to fall behind and leave no one behind. It is about having a genuine corporate vision, including your employees, customers, and other stakeholders’ perspectives and needs. In a way that business growth integrates professional and technology-based management of the sustainability data. It is about understanding sustainability as a basic pillar of any company in any sector and across all markets globally.
ESG factors at the core of your business purpose
Fortunately, in Europe, the Americas, and much of Asia, experts are no longer limiting the sustainability discussion to the evolution of the concept’s name or it is an issue ESG-focused for the yearly non-financial reports. Nor do they limit themselves to recommending at what level strategic decisions should be made in the organizations, who should lead the commitments, or explain why organizations that have been able to link innovation, sustainability, and risk management to their corporate DNA are indisputably more competitive.
Increasingly, the industry debate is focused on how to measure and report material indicators in a standardized way and how to finance and participate in multi-sector and multilateral cooperation to advance the achievement of global commitments based on scientific criteria and following the roadmap for a decarbonized economy..
Similarly, priority must be given to promoting actions and investments with a positive social and environmental impact and with proper due diligence in governance. All this, while mitigating the negative impact of operations and planning business objectives according to the latest regulations and the requirements of the entire value chain.
The aim is to achieve an intrinsic and coherent relationship between ESG management and innovative risk management in health and safety, quality, and compliance. The relevance of the ESG-EHS duo is increasingly recognized and accepted.
In a series of three articles,we analyze at Laragon Sustainability Solutions the main risks, trends and possible technological solutions in the market to consider while planning your sustainability strategy, this year’s risk management and environmental, safety, health, and quality issues, as well as how to comply with the increasing global regulations in your industry.
Part I. The main ESG risks and challenges for 2023
The geopolitical and economic context at the close of 2022, the continuous development of regulations and standards, the pressure to meet the commitments made in the fight against climate change, the net zero roadmaps, and progress on the SDGs (Sustainable Development Goals and the 2030 Agenda), as well as the expectations and demands of stakeholders, pose specific challenges for the management of corporate sustainability, health, and operational and financial security.
According to the Global Risks for 2023 from the World Economic Forum, “global risk” is defined as the possibility of the occurrence of an event or condition that, if it were to occur, would negatively impact global GDP, population, or natural resources in significant proportion.
Source: World Economic Forum Global Risks Report 2023
The results of this annual survey, which have been published just before the World Forum meeting in Davos -on January 16- after a three-year break, explain a series of perceptions from both governments and the business sector. The report highlights the risks that will affect social, economic, human, and technological development in 2023, two years from now, and in the next decade, and the level of preparedness of the world’s economies to face these challenges.
The analysis of global risk management is a strategic instrument in the area of ESG and EHS management. In particular with a view to the next two years and the road to 2030.
The perception of leaders in both the public and private sectors concurs in environmental issues such as the need to enhance climate change adaptation and mitigation efforts, biodiversity loss and ecosystem collapse, responses to environmental disasters, and the natural resource crisis.. However, the immediacy of social, geopolitical, and economic issues takes preponderance in the outcome of the risks posed by the current crises.
The economic aftermath of the COVID-19 pandemic and the Ukraine war add up to the unsustainable levels of debt and inflation, the cost-of-living crisis, rising energy costs, geo-economic confrontation, erosion of social cohesion and polarization of the society, as well as the cybercrime and cyber-insecurity and the involuntary migration on a large scale..
The impact of multiple crises in parallel
Against this backdrop, it is key for companies to consider changes in their financial and sustainability objectives. The energy price crisis has meant greater short-term dependence on fossil fuels and fewer resources available for the transition to a low-carbon economy. And the energy system transition, although it has advanced slowly, with regulatory momentum in Europe and the United States, is expected to stagnate or even regress with respect to the global commitments discussed at COP26 in Glasgow and the recent COP27 in Egypt.
In addition to environmental, social, health and safety, and corporate governance issues, there is also pressure from regulatory bodies. Globally, regulatory schemes and regulations are committed to strengthening requirements in terms of sustainability, quality, and risk management. It is particularly relevant to avoid greenwashing, to promote more and better reporting standards, and to establish stricter disclosure of science-based climate targets and investment with ESG criteria.
It is highly relevant for the analysis of ESG trends in 2023 to evaluate the interconnected risks for the business sector and the imminent risk of polycrisis. Polycrisis understood as the simultaneous interaction of multiple imbalances and negative trances on a global scale, the impact of which is cumulative and exponential.
The decline of geopolitical cooperation between the world’s major economies will have a domino effect on medium-term risks in this regard and will slow down progress on the environmental and socioeconomic commitments previously set out in the roadmap for a decarbonized economy and sustainable development.
Top 5 risks that require an immediate plan of action
1. Inflation and cost of living crisis.
If before the global pandemic due to COVID-19, the price of basic necessities such as food and housing was on the rise worldwide, costs increased even more in 2022, as a consequence of the war in Europe and disruptions in energy and food flows from Russia and Ukraine. The World Economic Forum’s Global Risks Report notes that “to curb domestic prices, some 30 countries introduced restrictions, including export bans, on food and energy last year, further boosting global inflation”. Coupled with this and the rising cost of living, less than half of consumers are now willing to pay a premium for a product based on its perceived sustainability credentials. This has been demonstrated by a new global shopper survey from Capgemini Research Institute, which reveals that fewer consumers are turning to sustainable shopping as they grapple with the cost-of-living crisis[1].
Low-income countries, for their part, are facing multiple crises: debt, climate change, and food security, so the current cost-of-living crisis could – if a relevant action and cooperation plan is not implemented – turn into a broader humanitarian crisis in many import-dependent markets.
2. Energy Price crisis.
The war in Ukraine has increased the demand for fossil fuels, making it imperative to ensure energy resilience and affordability while reducing emissions. Fuel price increases have sparked protests in some 92 countries in 2022 alone, some of which resulted in political unrest and fatalities, as well as strikes and union actions[2]. This raises the risk that the current energy crisis will increase economic, military, and political capital in multiple countries.
Unfortunately, in the context of high geopolitical tensions, progress in climate change mitigation has been minimized. The drive towards renewable energies is increasing but without a corresponding decrease in global emissions. Despite the growth of renewable energies, the use of fossil fuels is also expanding to meet the growing demand for energy. According to the report The Energy Transition: A Region-by-Region Agenda for Near-Term Action from McKinsey, “Global energy demand grew by 14% between 2011 and 2021, driven mainly by emissions-intensive sources. As a result, global energy-related emissions have increased over the past decade by about 5% and the share of primary energy from fossil fuels has remained virtually unchanged at 82%. Energy prices are estimated to remain 46% above average in 2023 relative to the January 2022 forecast.”
However, experts on net zero issues hope that social pressures will influence the decisions of regulators and energy-importing countries to continue to promote investment in safe, cleaner, and cheaper renewable energy sources.
3. Climate change adaptation and mitigation.
Atmospheric levels of carbon dioxide, methane, and nitrous oxide have reached record highs. Business-as-usual emissions projections make it highly unlikely that the goals of limiting warming to 1.5°C (Paris Agreement) will be achieved. Despite the seriousness based on scientific data, efforts to mitigate and adapt to climate change face the dilemma of the energy crisis, fossil fuel use, and cost of living.
It is pertinent to note here the analysis of the World Economic Forum report which notes: “The lack of deep and concerted progress on climate goals has highlighted the divergence between what is scientifically necessary to achieve net zero and what is politically feasible. (…) Without significant policy change, policies or investments, the interplay biodiversity loss, food security, and natural resource consumption will accelerate ecosystem collapse, threaten livelihoods in climate-vulnerable economies, amplify the effects of natural disasters and limit progress on climate change mitigation.”
Although climate and environmental risks dominate perceptions of global risks over the next decade, they are also the ones for which we are considered least prepared. Issues to consider in this section in 2023 include managing emissions (reportable and unreported), participating in the carbon market, responding to growing climate activism, avoiding greenwashing, adapting to regulatory compliance in reporting commitments to net-zero emissions, and working collaboratively with countries that rely heavily on fossil fuel industries to drive a just transition.
4. Challenges in supply chain sustainability.
The supply chain crises of recent years have highlighted the need for resilience in strategic industrial and economic sectors. In the above-mentioned context of polycrisis, and especially in Europe due to the war in Ukraine, the post-pandemic economic aftermath, and the current global inflation, sustainable supply chains are limited and reduced.
This contraction of value chains increases geographically concentrated risks, such as labor shortages, civil unrest, pandemics, and natural weather events. In addition, developing crises negatively impact the prospects for funding some technological advances in this area such as innovations in lab-grown raw materials, tracking of goods through blockchain technology, and e-waste extraction and management.
5. Crisis in technology companies
The major technology companies see among the main challenges for 2023 the need to focus on operational efficiency and invest for the long term, anticipate the role that software and digital infrastructure will play in sectors such as construction, energy, and manufacturing, and think deeply about internal resilience and its relationship with employees and collaborators.
It has been a difficult start to the year for the technology sector, which continues to battle recession fears. More than 17,000 employees have been laid off from 18 technology companies so far in January 2023[3]. This figure is in addition to the 153,937 tech workers laid off from 1,020 companies in 2022. Iñigo Fernández Alonso, Senior Executive Director of Technology PageGroup notes that “by 2022, about 150,000 jobs have been lost in technology companies around the world, about 40% more than all the jobs that disappeared with the bursting of the dotcom bubble. However, the analyst emphasizes that this is due to a readjustment of demand for these technology companies, following the peak generated by the pandemic.”
Satya Nadella, Microsoft’s CEO in a recent interview made clear Microsoft’s position, shared by other global IT giants: “This year we are going to have a supply cycle that will persist and a classic demand cycle; there will be some economies that will go through a recession, some will be deep. The next stage is digital, and requires both private sector innovation and public sector participation.”
Technology is undoubtedly a key factor in managing potential risks and facing the challenges presented by emerging crises. However, among other perceived risks in this area, stand out that the imbalance in access to technology will exacerbate inequalities, while cybersecurity risks will remain a constant concern. Along with the increase in cybercrime, attempts to disrupt critical technology-enabled resources and services will become increasingly common, and attacks on agriculture and water, financial systems, public safety, transportation, energy, and communication infrastructures are expected. The technology sector will be one of the targets of stronger economic policy and regulatory intervention. However, the development of emerging technologies is expected to continue apace, leading to advances in AI, quantum computing, and biotechnology, among other technologies.
Lack of preparation for long-term risks means increasingly complex trade-offs for policymakers and business leaders struggling to cope with simultaneous crises. Hence, it is imperative to plan, and properly manage risk identification and forecasting, invest in preparedness, monitoring, and response, and work collaboratively on resolving material issues with ESG and sustainability criteria throughout 2023.
[1] Nearly half (44%) of consumers say they are reducing their overall spending and only 41% of consumers worldwide say they are willing to pay more for a product they consider sustainable. This is a significant decrease compared to the results of the 2020 report, where 57% of consumers claimed to pay above-average prices for products they perceived as sustainable. This is according to the second edition of the Capgemini Research Institute’s annual Consumer Trends Report.
[2] Analysis of the World Economic Forum’s Global Risks 2023 survey.
[3] Source: Insider Intelligence
In the next installment of the series, we will share the top ESG issues that we believe will be trending for sustainability, EHSQ, Regulatory Compliance, and ORM professionals this 2023.
