2022 will be remembered as one of the most volatile years the world has known regarding the climate crisis. The war in Ukraine and the reliance on Russian gas led in the short term to an increase in the use of coal, and even to the reopening of closed stations. But in a long-term perspective, the events in Ukraine sharpened the understanding that fossil fuels cannot be relied upon, and that renewable energy is also more reliable in the geopolitical aspect.
Companies, businesses and investment managers: this is how you will demand to treat the climate crisis in 2023
The growing inflation and interest rate hikes in the world have led in the short term to the perception that there is no room for consideration of considerations other than just the “immediate profit line”. But, in the longer term, more companies and more countries have internalized that activity that takes climate considerations into account is sustainable and more resistant to global trends.
Thus, for reference, the State of Israel recently issued a green bond (a state loan, the repayment of which depends on climate performance and sustainability). The idea for the bond began with an appeal from large investors abroad, who wondered to the Ministry of Finance how come Israel does not take part in The green market.” The bonds, by the way, saw record demand.
So most countries in the world react accordingly and continue – even if not at the required pace – in the transition to a green, low-carbon economy, and the business and financial sectors are at the forefront of efforts for this. And if the transition does not come voluntarily from companies and businesses, then in the coming year they will have to align themselves according to regulations that have a far-reaching effect, even if those regulations do not apply to them directly.
So what are the expected trends in 2023?
At the beginning of January, a regulation of the European Union, called CSRD, was approved, which will require companies to report in detail their impact on the climate, the environment and society, on the risks posed to their activities as a result and on other sustainability and ESG (environment, society and good governance) issues.
The CSRD will enter into force in 2024, and it will apply to over 50,000 companies in Europe: public companies, banks, insurance companies and also small businesses. The companies’ report will also have to be audited and checked by an independent body.
The guidelines proposed in the regulation are similar to those described in the guidelines that the US Securities and Exchange Commission (SEC) is expected to publish in April. According to the draft, the new instructions will oblige public companies to disclose their climate-related risks and impacts, so that every company traded on the US stock exchange will have to include information on climate issues in its periodic reports to the SEC, including in the annual financial reports. Guidelines are also expected to be published in Canada, Australia and the United Kingdom this year News dealing with reporting on climate issues in business activity.
Regarding the reporting format, here too 2023 is expected to be a year of revolution: the IFRS is the leading organization in the world for financial reports, whose standards have been adopted by most countries of the world (including Israel). It is expected to publish in June a final version of a uniform, comparable and easy-to-follow global reporting standard on sustainability and climate issues.
These are all significant developments, because they require many more companies and businesses to provide detailed information about how they are dealing with the climate crisis, and its potential effects on their business.
All of these guidelines are aimed at increasing transparency and accountability around climate-related risks and opportunities, but the impact of these changes will not remain only in the countries in question. The need for the companies – from any country – to report climate information will force them to receive information from all the suppliers and businesses that work with them, so the effects are expected to be felt among companies and businesses from other countries as well.
In addition, the availability of information, and its wide distribution, is expected to lead investors and financiers to deepen the use of various ESG considerations in making the investment decision. The new requirements can provide a lot of information that will help them assess the company’s long-term sustainability and resilience. This in turn may lead to increased investment in companies that take a proactive (or at least non-harmful) approach to dealing with the climate crisis, and reduced investment in companies that do not. It can also be expected that the use of these considerations will be incorporated, among other things, into contracts and due diligence when conducting transactions.
All this, without starting to deal with the possible impact on customers, and the desire of companies to align with their expectations. This in turn can also encourage companies to take a more proactive approach to addressing climate change, by for example reducing their greenhouse gas emissions.
Of course, these developments can also lead to new opportunities for companies, by developing and marketing products and services that address climate change and/or are adapted to life under the climate crisis. Bottom line, companies that are able to demonstrate their commitment to dealing with climate change, and their ability to manage climate-related risks, are expected to enjoy a competitive advantage in the market in the years to come.
It seems, therefore, that 2023 will be a turning point year that will have a significant impact on the way companies operate and invest, and on their ability to help accelerate the transition to a green and low-carbon economy.
Adv. Yanon Barzani is a risk management consultant at EBA&Co, and runs the “Climate and Environmental Risks” blog.