ESG in 2023: 3 Ways to Prepare for New Regulations

CFOs should focus on these key changes to quickly adapt and meet new sustainability and ESG-related regulations this year.
Adam MoloneyJanuary 3, 2023
ESG in 2023: 3 Ways to Prepare for New Regulations
Photo: Getty Images

As investment in sustainable asset funds continues to rise, organizations face an array of new regulations in the United States, Europe, the Middle East, and Africa. The new regulations will ensure the companies comprising these funds meet true environmental, social, and corporate governance (ESG) criteria versus some version of greenwashing. 

By early 2022, ESG investment assets reached $8.4 trillion and accounted for 13% of the total amount of U.S. assets being managed professionally. This massive influx of capital flowing into companies that tout their ESG qualifications has gotten the attention of regulators across the globe. The attention is well-warranted as a company’s position on sustainability, and efforts to curb its carbon emissions (or lack thereof), can influence stakeholder decisions.

  Adam Moloney

For example, the U.S. Securities and Exchange Commission has proposed new reporting requirements that will require transparency. Under the new requirements, companies must measure and publish their Scope 1 and Scope 2 carbon emissions beginning in 2024. And for larger companies, required reporting on Scope 3 emissions (or carbon emissions from customers and the supply chain) may not be far behind.

Europe is also stepping up its regulation of sustainability and ESG-related assets. The Corporate Sustainability Reporting Directive, which is part of the European Green Deal, includes the requirement to report sustainability information under the framework of the European Sustainability Reporting Standards. It’s estimated the new mandate will impact more than 50,000 large and listed companies based in Europe, as well as companies based outside of the region, but have subsidiaries or branch offices there.

As companies prepare for an influx of new ESG reporting mandates and regulations in 2023, there are three key changes companies should quickly establish to prepare for the challenges ahead.  

1. Appoint a Chief Sustainability Executive

The initial impact of these regulatory changes will result in companies making more of a cross-functional effort to understand what needs to happen internally to meet the moment. This will require businesses to build out teams with sustainability roles, from coordinators to C-level executives. 

Chief sustainability officers will be critical in influencing, communicating, and cutting through organizational complexity to allow their company to deliver on ESG commitments. People generally support the idea of working or living more sustainably until it involves them having to change their behaviors. And this is true in the corporate world as well. 

Many employees will be slow to adapt to new policies or focus on the difficulties involved with changing operational processes to be a more sustainable business, including how it deals with the IT asset end-of-life phase, which requires it to move from a destruction mindset to a reuse/recycle process. 

It’s up to the chief sustainability officer to cut through those obstacles while also continually making an effort to push for change. Once employees are informed and supportive of the goal, they are much more likely to be cooperative with the steps required to get there. This may take some creativity on the part of the chief sustainability executive, for example, including the company’s achievement of its ESG goals as an element of employee bonuses could be a true motivator that links teams together to meet a common goal.

2. Create an ESG Policy Budget 

New ESG regulations will require organizations to hire people for key roles to implement new policies and to partner with companies that will help them achieve sustainability objectives. The first pushback on change is the lack of budget for making these changes; however, for sustainability policies to be successful, a budget must be set aside, and this will require the CFO’s buy-in to make it happen. 

Justifying the spending may take some convincing, yet many of the changes could potentially save money. For example, extending the life of IT assets will result in purchasing fewer new computers, hard drives, and laptops each year.

3. Assess Partners’ Sustainability Practices 

There is a clear mandate for carbon footprint reduction in the new regulations. As companies calculate and seek to reduce their carbon footprint, they will also need to assess their supply chain in detail to ensure that their partners operate sustainably. This will range from the suppliers of tangible items such as computer equipment to suppliers of utilities into their office space and even the providers of professional services such as accountancy and insurance. The carbon footprint of all company partners will be impacted by the footprint of those partners and it will be important that these partners are taking steps to reduce their own carbon emissions and sustainability. Those companies who are not looking seriously at this now will be left behind.

Alongside the growing number of companies establishing “net zero” targets for carbon by 2050 (or sooner), governments worldwide are ramping up regulatory rules that will separate the companies engaging in greenwashing from those that are serious about reducing their carbon footprint and doing their part to stem the harmful effects of climate change. 

While meeting the new mandates set forth through regulations may take time, effort, and money, the organizations that rise to meet these challenges will do much more than just future-proof their businesses via compliance. These proactive companies, alongside their executives, will exhibit the values that both stakeholders and potential investors and customers appreciate now and into the future.

Adam Moloney is CFO at Blancco Technology Group, a data erasure and mobile lifecycle solutions provider.