Is this 'peak ESG'? Not even close. What lies ahead is more complex – and long overdue

By Matt Peacock, Partner

The ESG backlash is well underway. Investment banking whistleblowers have called out investment fund marketing greenwash. ESG is rapidly becoming a new front in the hyper-partisan culture wars in the US where reflecting environmental and societal risk factors in investment decisions is derided by the right as ‘woke’. And, everywhere, Ukraine and the global energy crisis is forcing a rapid recalibration of priorities. Does the future mean less not more focus on ESG factors by companies and investors? Have we just passed “Peak ESG”?

Well, no, it doesn’t, and we haven’t. Not even close. One of the many consequences of capital market greenwash and years of weak or misleading ESG disclosure by numerous companies has been growing frustration among policymakers. Politicians who are concerned about the potential for business to cause harm to planet and people are not impressed when corporate actions fall far short of corporate promises. Neither are voters. The longer that frustration builds, the more likely it becomes that policymakers will step in with new rules.

This isn’t a prediction. It is context to explain something that has already happened. That was the policy dynamic behind the creation of the forthcoming European Union ESG disclosure regime that will scale up over the next three to four years and will vastly increase the breadth, depth and complexity of corporate ESG reporting in future. For my friends in the corporate world: if you think this is mere Brussels beltway geeky compliance stuff that you can safely delegate to the sustainability report team, please bear with me, because for all companies involved, it will be so much more than that. Read on. 

It isn’t just a European development: the new regulations will have global impact, capturing multinational companies based outside the EU (including in the UK and US) with large European subsidiaries as well as EU companies, by some estimates up to 25,000 companies in all. It isn’t a distant challenge that can be left off the worry list until mid-decade: companies need to gather data from early next year for first public reporting in early 2024, and the most onerous obligations will be on the statute books less than two years later. And most importantly, it isn’t just a disclosure challenge: for some companies, the new EU ESG regime will seriously challenge core operating models, with material financial and strategic implications.

Some of the details aren’t fully settled yet and may yet change in some aspects over the next few months. But the spirit and intent is clear. The net outcome will be a remarkably prescriptive and granular ESG disclosure and due diligence rulebook for every company worldwide that has a substantial EU presence. I’ve worked for a regulator and I’ve spent years in regulated industries, and I think these new rules will be about as disruptive and operationally complex as it gets, easily comparable to the effect on the banking sector of the regulatory regime imposed after the 2008 global financial crisis.

All of the above is in addition to two other separate developments over the next couple of years. The first is the launch of the new International Sustainability Standards Board (ISSB) that will seek to bring about a long overdue convergence between financial reporting standards and ESG reporting standards. The second is the (likely but not yet definite) creation of a new biodiversity reporting framework convened by the Task Force on Nature-Related Financial Disclosures. At Blurred we don’t expect either of these to be as onerous as the new EU ESG regime, but they will be far from trivial in practice.

Is the new EU ESG regime a good thing? If you believe - as we do at Blurred - that businesses should act with integrity, transparency and honesty, then the answer is yes. Good companies are already doing much of what’s required, and less good companies have got away with vapid fluffy CSR-lite garbage for far too long. Will it be difficult to put into effect? Unquestionably, even for the best of the best. There is a hell of a lot of work ahead. Do not underestimate it.

 

Stuart Lambert