Top 5 ESG Trends to Watch in 2024

In 2023, several major regulators and governments passed climate bills and reporting requirements into law, setting up 2024 to be an important year for ESG and corporate sustainability.

Here are the top five trends to watch in 2024.

1. Rapid Uptake in Mandatory Disclosures

The demand for better corporate transparency, particularly around environmental impact and exposure to the physical and transition risks of a changing climate, came to a head in 2023. New reporting and disclosure requirements will create a new wave of sustainability and ESG reporting for 2024 and beyond.

“2024 will be ‘The Year of Compliance’, where companies’ approach to sustainability reporting will move from voluntary to mandated,” says John Marchisin, a managing director at consulting firm AArete. “Regulatory and international body rulings, directives and guidance will force public and privately held companies to meet sustainability measurement and reporting requirements. These changes will radically shift how businesses report their emissions impact, both as a company and, ultimately, for the products and services they deliver.”

Corporate Sustainability Reporting Directive (CSRD)

As of January 1, 2024, European companies complying under the Non-Financial Reporting Directive (NFRD) will be required to report on their climate impact under CSRD, a new and improved version of existing requirements. From 2025, other large companies trading in the EU will be brought under the new regulations, meaning that 2024 will be the year many companies finally get serious about ESG data collection and reporting.

R. Paul Herman, CEO at HIP Investor, an investment advisory and ratings firm, believes what’s happening in Europe will create a ripple effect the world over. By mandating corporate sustainability reporting under the CSRD and investment fund reporting via the Sustainable Finance Disclosures Regulation (SFDR), Herman believes the European Union’s new rules will “lead the whole world in meaningful, material, and data-driven reporting — crossing borders, continents, and both corporate and investor worlds.”

The new regulations also introduce novel definitions of materiality, including financial materiality (how ESG affects a company’s finances), impact materiality (how a company’s activities affect communities and the environment), and double materiality (financial and impact materiality, combined). This is where the CSRD breaks the mold of existing reporting practices, which we believe signals a shift toward deeper integration of sustainability into core business strategy and risk management functions.

Securities and Exchange Commission (SEC)

The SEC’s climate disclosure rule proposed in March 2022 was set to be passed in the first half of 2023. The ruling has been delayed but looks set to pass by the end of 2023 or early 2024. Publicly listed companies in the U.S. are likely to be required to report anywhere from 2024 onward, so we expect to see them ramping up reporting and disclosure efforts in 2024. For these companies and their suppliers, the SEC rule brings a new kind of urgency to ESG data efforts.

California SB 253 and SB 261

Two California climate disclosure bills introduced this year will mandate climate reporting by 2026, which means companies will need to start preparing in 2024 if they haven’t already.

“[The] passage of California SB 253 and 261 [will force] companies with more than $1 billion in global revenue to report scope 1, 2, and 3 emissions if they do any business in California,” Marchisin says. “Similar legislation is moving forward in other Democrat-led western and northeastern states.”

With most large U.S.-based companies conducting business in the state, the scope for these two bills is significant, comprising more than 5,000 companies (SB 253) and over 1,000 companies (SB 261) respectively. Having been passed before the SEC’s landmark disclosure rule, these two California bills will certainly shape the ESG reporting landscape for years to come — not least because of its notable inclusion of private companies.

2. Greenwashing In the Spotlight

Greenwashing, a term that has been popular in mainstream criticisms of weak or misleading corporate sustainability efforts, will be supported by stronger legal definitions and consequences in 2024 and beyond. Already in 2023, we have seen an asset manager charged $19 million over misleading ESG disclosures.

“The EU has reached an agreement to ban greenwashing,” Marchisin says, “setting new rules for misleading advertisements and providing consumers with better product information.”

At the same time, we are seeing greater scrutiny of the use of carbon offsets, including The Guardian’s landmark reporting from earlier in the year. We are also seeing stronger guidance on carbon-credit-related claims from leaders in the voluntary carbon market. Better guidance and more decisive consequences will mean more clarity for consumers — but also greater risk for companies going public with ESG efforts.

Compliance will become a key concern for ESG teams, which will need to work closely with communications and marketing teams to ensure environmental messages adhere to jurisdictional requirements.

3. Deeper Integration with the Company Balance Sheet

As more climate-related financial disclosures become mandatory through developments like the SEC’s climate disclosure rule, we expect to see a closer integration of finances and sustainability, with ESG becoming increasingly the domain of CFOs and financial controllers.

To the firms focused on the future and thinking about eventualities such as a global price on carbon or mandated carbon removal purchases, carbon becomes at once an asset and a liability.

“A new concept of ‘liability-driven’ emissions can be applied to make the risks and liabilities more visible on the balance sheet,” Herman says. “This could mean that oil companies that put reserves of oil and gas discoveries and inventory on their balance sheet may need to calculate the future emissions taxes and downsides to producing those fossil fuels.”

We expect ESG teams to work closely with finance and risk management teams in 2024, perhaps putting internal prices on carbon and determining what a more regulated carbon environment could look like.

4. Scope 3 Emissions and Supply Chain Transparency

To date, many voluntary climate reports have steered clear of scope 3, or supply chain emissions. Yet scope 3 often accounts for more than 90 percent of a company’s total greenhouse gas footprint. Consumers are calling for better transparency of product footprints and lifecycles, while environmental and human rights scandals have highlighted how little consumer brands know — and disclose — about how their products are made.

However, companies will not be able to avoid addressing supply chains for long. Several recent laws mandate scope 3 reporting, including the California laws and the CSRD. The International Sustainability Standards Board (ISSB) is also promoting new sustainability frameworks for scope 3, according to Marchisin.

Herman sees significant work ahead. “Supply chains will need to up their game for transparency, performance, and accountability. From cotton producers to textile manufacturers to sea shipping to truck logistics, all aspects of a supply chain are part of scope 3 emissions,” he explains. “While European firm Kering acquired Puma and its Environmental Profit and Loss statement a while back, this end-to-end supply chain measurement approach of pollution, emissions, land use, and ecosystems will continue to trend up.”

We predict that 2024 will see companies place more emphasis on their supply chains, both in supply chain mapping and scope 3 disclosures, and in establishing sustainable, ESG-focused procurement policies and working with their suppliers to improve on both data collection and environmental and social impact.

5. Expansion Beyond Public Enterprises

We expect that 2024 will push sustainability reporting beyond the realm of publicly listed enterprises. Some new climate disclosure laws are notable for their inclusion of both public and private companies, including California’s recent SB 253 and SB 261 bills and the EU’s CSRD. Bigger than this is the fact that many new laws — the former and latter included — require companies to report on scope 3 emissions.

Scope 3 requirements extend the reporting burden to suppliers, meaning that any privately owned companies of any size supplying large public or private companies will likely need to start (or improve) their carbon accounting, whether or not they report these findings publicly. We expect scope 3 requirements to become the basis for deep change across all industries, as all companies within a sector work to meet the requirements of the largest companies in their field.

2024 Will Be a Defining Year for ESG

If 2023 was the year that saw ESG challenged in the mainstream media, 2024 will prove that ESG is here to stay. The rapid rollout of mandatory climate disclosures is significant not just for the number of companies that will soon be required to report against standardized frameworks, but also for the depth and scope of these reporting requirements.

2024 will be the year we see companies begin to take ESG seriously, not simply as an exercise in compliance and risk management, but as an opportunity to redesign their business models from the ground up. True integration of ESG will mean design processes are remade, procurement strategies are rewritten, and marketing and communication efforts change for good. ESG will no longer be simply an ‘add-on’, but rather a core part of business strategy.