External factors encouraging attention to ESG

Increasing governmental regulations

Growing numbers of governing bodies are requiring companies to report their ESG efforts. In 2022, the European Union (EU) passed the Corporate Sustainability Reporting Directive (CSRD), which requires all large companies in the EU to publish regular reports on their ESG activities, starting in 2025.2 This will continue with a phased rollout to smaller and mid-sized companies thereafter. The CSRD is the EU’s latest effort to reach the goals of the European Green Deal, which aims to create the first climate-neutral continent.3 Many countries in Asia are also formulating their own ESG-related disclosure guidelines, taking their cue from the EU. The China Securities Regulatory Commission published new ESG-related disclosure requirements for companies’ annual and semi-annual reports.4 The U.S. Securities and Exchange Commission is considering new rules that would require more detailed disclosure of climate-related risks and GHG emissions.5, 6

Growing employee and consumer attention:

A company’s ESG actions can influence talent recruitment and retention, and even business development. Potential and existing employees want assurance that companies are taking their responsibilities seriously. Consumers also are looking at companies' sustainability activities beyond the end product when making purchasing decisions.

Heightened importance of business impact on external populations:

The impact of a company’s GHG emissions on public health and safety is among the urgent challenges in our interconnected world.7 Stakeholders expect companies to address such issues that affect people who are not directly involved with a company.

Rising global and social pressure to commit and follow through:

More than 190 countries signed the 2016 Paris Agreement, the first international treaty aimed at limiting climate change. International organizations have also emerged to track and report companies’ sustainability efforts. To achieve the Paris Agreement targets, companies and nations must do more than reduce emissions. They must cut them to a net zero in the near future.8 The United Nations has helped to rally the global community around GHG emission reduction through its Race to Zero campaign. More than 70 countries—including China, the United States and those in the EU—have set a net-zero target. More than 1,200 companies have set their own net-zero targets as well.9

1 McKinsey Quarterly, “Five ways that ESG creates value,” November 2019.

2 Harvard Law School Forum on Corporate Governance, “EU Corporate Sustainability Reporting Directive—What Do Companies Need to Know,” August 23, 2022.

3 European Commission, A European Green Deal, 2020.

4 Responsible Investor, “Annual reports in China will now include environmental and social information,” July 16, 2021.

5 Commissioner Hester M. Peirce, “We are not the Securities and Environment Commission—at least not yet,” SEC, March 21, 2022.

6 Dan Papscun, “SEC’s climate proposal tees up test of ‘material’ info standard,” Bloomberg Law, March 23, 2022.

7 McKinsey Sustainability, “Does ESG really matter—and why?” August 10, 2022.

8 United Nations, The Paris Agreement, 2015.

9 United Nations, “For a livable climate: Net-zero commitments must be back by credible action,” 2022.