Both anticipated and less expected changes occurred across the ESG landscape in 2022. Anticipated changes included regulatory developments across the globe, including in the US, the UK, and the EU. Less expected changes included global and regional political shifts, such as the fallout from the Russian invasion of Ukraine, the continued evolution of governmental policies following the COVID-19 pandemic (such as responses to labor market challenges and reshoring efforts), and growing political tensions throughout the world.
In 2023, investors, customers, regulators, and other key stakeholders are expected to continue to demand corporate responsiveness on ESG issues. However, how these stakeholders expect organizations to respond to ESG issues is becoming increasingly more nuanced and complex. In this complicated macroeconomic, political, and legal context, this fourth annual installment of Latham’s ESG Top 10 List highlights the ESG developments and trends that are likely to emerge in 2023.
1. Despite, and perhaps because of, macroeconomic challenges, companies will need to continue to refine their ESG strategies. As Warren Buffett said, “[i]t’s only when the tide goes out that you discover who has been swimming naked.” As global markets reflect current uncertainties, prioritizing key ESG initiatives in cost-effective ways will become an imperative. The need to assess material environmental and social risks and opportunities does not disappear in an economic downturn. However, companies will need to assess their ESG strategies and reprioritize actions that were slated to be taken to ensure that ESG strategies are tied to the company’s long-term value and business strategy. Some entities may take a different approach and commit further to their ESG programs on the basis that cutting too far back on ESG initiatives may prove to be a false economy in the long run. For example, a challenging global macroeconomic environment could actually present an opportunity for companies to mature and develop their approaches to ESG, as for many companies, ESG grew up in the marketing, public relations, or investor relations group; in the early days, ESG was often about how an organization was perceived, rather than how the organization did business. As highlighted below, increasingly, ESG represents a complex web of legal and enterprise risk issues, and under economic pressure and expanding regulatory requirements, ESG efforts will need to become more refined, sophisticated, and bespoke.
2. The global ESG regulatory mosaic will become increasingly more complicated, creating potential conflicts and risks. Global ESG regulatory regimes will become more complex as new and emerging ESG regulation — including in the US, the UK, and the EU — continues to move ESG from a soft law or “private ordering” regime to hard law. Companies will need to develop plans to comply with intricate and often conflicting sets of legal and financial disclosure requirements across multiple jurisdictions. While companies doing business in more than one jurisdiction have always had to consider the regulatory regimes of each jurisdiction, emerging ESG regulations are often uniquely focused on value and supply chains, such that ESG-related regulatory regimes are more likely to bleed across geographic lines. Increasingly, ESG regulations will have:
- cross-jurisdictional and extraterritorial implications (e.g., US companies or their subsidiaries may be responsible for general ESG reporting under the EU’s Corporate Sustainability Reporting Directive (CSRD) double materiality standard);
- inter-jurisdictional implications (e.g., the International Sustainability Standards Board’s (ISSB) forthcoming standards are proposed for adoption by a number of regions as the basis of their mandatory domestic ESG reporting requirements); and
- intra-jurisdictional implications (e.g., US state-level laws and actions that conflict with federal legislation, regulation or enforcement).
This also means that, even if an organization does business in only one jurisdiction, to the extent it has third parties, including capital providers, doing business in others, that organization may face pressures based on the regulatory requirements of those other jurisdictions.
In addition, regions that have not previously placed specific focus on ESG are introducing regulation in this area. In particular, a number of countries in Asia have introduced ESG-related disclosure requirements for listed companies. And while calls to harmonize regulatory regimes across jurisdictions continue, the gaps, overlaps, potential conflicts, and risks are likely to continue for some time. Because of these developments, companies should undertake an ESG regulatory mapping exercise to consider how their businesses, including through their value and supply chains, may be affected by regulations in multiple jurisdictions.
3. ESG litigation and regulatory enforcement will expand, with greenwashing a continued focus. Greenwashing was in the news globally throughout 2022, as regulators, short-sellers, private plaintiffs, nongovernmental organizations (NGOs), and others have sought to identify companies that they believe are overstating or misstating their ESG efforts or achievements. The intense investor and public pressure on companies to have strong ESG stories, coupled with the historically “voluntary” nature of many ESG disclosures, has heightened the risk of allegations that a company is not “walking the walk” with respect to its ESG statements. As ESG regulatory regimes expand, governmental bodies and private parties are likely to continue to increase their engagement, enforcement, and litigation efforts on such matters. Greenwashing claims by governmental bodies and other stakeholders (including NGOs, advertising standards bodies, the media, and competitors) are also likely to proliferate, with the risks associated with potential greenwashing claims likely heightened by increased calls for the creation and refinement of ESG taxonomies. Outside of greenwashing, ESG litigation more broadly is expected to continue to gather pace; issues relating to human rights in supply chains and climate matters and the sustainability, circularity, or “greenness” of a company’s products or services are likely to be among the most popular topics of contention. To address these risks, companies will increasingly need to embed ESG considerations in functions like their procurement, contracting, and operational decision-making and controls.
4. Climate change will remain a central focus, but other environmental issues, including biodiversity and environmental and energy justice, will increasingly make the ESG conversation more complex. The global attention on mitigating and adapting to climate change is expected to continue in earnest in 2023 as many public and private actors continue to embrace calls for urgent change. With this continuing focus, some of the more thorny aspects of the energy transition may be brought under increasing scrutiny. For example, as mandatory and voluntary greenhouse gas (GHG) emissions reporting frameworks continue to develop, business-to-business engagement on emissions reporting is increasing. Larger companies that are subject to requirements, expectations or voluntary commitments to report their Scope 3 emissions are seeking emissions data from smaller entities throughout their value chain. And as GHG reporting becomes more common, it is likely to lead to an increased focus on the calculation methodologies and frameworks used in determining these emissions (including in relation to complex areas such as the use of carbon removals, offsets, and avoided emissions).
2023, however, will not only be about climate change; other environmental issues, including how environmental and social issues dovetail, are likely to continue to move towards the center of the global ESG conversation. For example, a growing focus on biodiversity issues is likely to continue, both in relation to biodiversity’s connection to climate change and to the increasing acknowledgement that biodiversity loss can have significant impacts on the global economy and livelihoods. Certain voluntary ESG disclosure frameworks or standards, such as the CDP and the ISSB, have signaled that they will include these topics in their frameworks.
Additional developments are expected with respect to environmental and energy justice efforts. In the US, the Inflation Reduction Act included a number of provisions to benefit communities impacted by environmental justice-related issues and, on a global scale, frameworks continued to be developed seeking to combat climate change while ensuring the global south can meet its economic potential. For example, COP27 saw the announcement of a Loss and Damage Fund which aims to provide financial assistance for the nations that are most vulnerable to the impacts of climate change, with further focus expected on this topic (e.g., at COP28) in 2023 and beyond.
5. The ESG “backlash” in the US will continue to put ESG in the spotlight, and companies at the center of a political tug-of-war. In the US, the conversation regarding whether ESG is about long-term value creation or partisan values gained heat in 2022, and ESG is expected to remain increasingly political and polarized through 2023 and 2024. A number of state-level legislators and attorneys general (in some cases, in collaboration with certain federal politicians) are leading the charge to impose restrictions on the degree to which ESG considerations can be included in investment decisions by state-level pension funds, as well as with respect to other financial institutions doing business with or in the state. State-level actors, as well as certain members of Congress, are also focused on ESG regulatory developments at the federal level. Certain asset managers are also increasingly criticizing others in the investment community for their ESG positions. Some US states and federal Congress members may continue to pursue efforts to slow certain ESG regulatory developments and limit the scope of ESG initiatives, particularly if those initiatives have or may have an impact on industries important to their state’s economy. Other states will likely continue to promulgate ESG-related regulation at a faster pace than the federal government. Moreover, evolving areas of legal risk will likely be implicated in the ESG “backlash” including antitrust and tax, in addition to state law. As these developments continue, companies will need to navigate challenging legal and political structures, motivations, and allyships, as well as the congressional and state political cycles to make the best informed decisions about business and investment strategies and ESG programs and commitments. For these reasons, as well as for the reasons articulated throughout this article, companies need to carefully consider how and when board-level oversight of ESG efforts and initiatives is appropriate.
6. ESG activism will be a focus for US boards in 2023. An ESG activism playbook has started to take shape in recent years. Holders of minimal shares, new players, and even established activists are seeking to effect change in the C-suite or boardroom and/or achieving notable press using ESG topics such as “the tip of the spear” in their campaigns. For example, in the US, there is considerable speculation as to whether activists will use the new universal proxy rules to effect ESG change, and 2023 will be the first year when any shareholder can use this rule to nominate directors in a cheaper and easier way. Companies and their boards will need to be attuned to, and stay ahead of, this risk in 2023. The positive news for boards, however, is that ESG-focused activists still need a compelling thesis and strong director nominees, significant funding, and effective legal, policy, investor relations, and communications advisors for a successful campaign. Most importantly, activists will also still need the support of the large institutional investors who, despite recent US political attention, have clients that continue to direct them to allocate capital towards ESG-, sustainability-, or climate-sensitive investments. Additionally, certain investors may become more active in their push back against corporate ESG initiatives, and in doing so, increase the likelihood that companies will find themselves at the center of political ESG debates.
7. The shift in capital towards ESG-aligned investments will continue, but energy and infrastructure security will become more critical aspects of the ESG conversation. The shift of capital towards ESG-aligned investments is expected to continue in 2023 and beyond, with regulatory drivers being significant factors in this shift. The EU Taxonomy Regulation, which includes provisions that come into force in 2023 and supports the EU Green Deal’s explicit policy objective that, “[l]ong term signals are needed to direct financial and capital flows to green investment and to avoid stranded assets”, is one of the key regulatory drivers. The US Inflation Reduction Act, which is projected to pour over $400 billion into the US sustainability market over the next decade, is another example. Further, demand for ESG-linked finance instruments is expected to increase globally, including demand from private capital providers, banks and other lenders. These entities will continue to create programs and refine existing ones to meet market and client demand and corporate ESG commitments, keep up with evolving best practices, and stay competitive (see Latham’s latest Private Capital Insights for more).
However, 2022 also highlighted the complexity of the global ESG conversation regarding balancing energy and infrastructure security with climate change issues. The ongoing conflict in Ukraine, resulting sanctions on Russian oil and gas, and other resounding effects on global economies and energy security have led to a sharp increase in global energy prices and ongoing volatility, and real impacts are being felt by a number of countries in the EU. While ESG may be useful as a construct for framing a conversation, it is also incredibly broad. Recognizing the tensions and tradeoffs of certain ESG issues and frameworks will likely grow in importance throughout 2023, as governments are increasingly forced to make difficult decisions on how to keep accessible and affordable energy flowing while limiting greenhouse gas emissions and abide by their international agreements in relation to climate change.
8. Pursuing value chain transparency and navigating value chain risks will become significant areas of focus and cost for companies. Much of the emerging ESG regulation worldwide requires, or would require, companies to focus increasingly not only on the ESG credentials of their own operations, but also that of their supply chains and broader value chains. Such legislation has been implemented in jurisdictions including France and the UK in recent years. Meanwhile, 2022 saw an EU-wide proposal for a Corporate Sustainability Due Diligence Directive (CSDDD) that may introduce significant due diligence obligations on companies with a large presence in the EU (including some non-EU incorporated companies). These obligations include possible requirements to mitigate and remediate human rights abuses in their supply chains. In addition, the growing focus on Scope 3 GHG emissions means that companies may be obligated to ascertain the emissions of third parties in their value chains, regardless of whether those third parties are publicly held or located in jurisdictions that require emissions monitoring or reporting. The possibilities of unavailability of such data, a lack of oversight into the day-to-day practices of many organizations, supply chain resiliency challenges arising out of the COVID-19 pandemic, and other geopolitical factors have led many companies to look to “reshore” and bring supply chains closer to home. This trend will likely continue (in certain sectors) through 2023.
9. ESG labor and employment implications will continue to evolve. The COVID-19 pandemic and its fallout have shown that talent and employee retention are key to long-term success. Increasingly, regulation and stakeholder engagement efforts are focusing on the social elements of ESG. In the US, the newly enacted federal “Speak Out Act” limits the enforceability of certain pre-dispute non-disclosure and non-disparagement clauses covering sexual assault and sexual harassment allegations. This law came on the heels of an act signed into law earlier in 2022 that amended the Federal Arbitration Act to give employees who are subject to arbitration agreements the option to bring claims of sexual assault or harassment in court. In addition, the proposed Equal Pay Regulation in the EU may be enacted in 2023, which may introduce requirements that seek to ensure alignment in gender pay in companies and increase transparency in relation to gender pay gaps. The EU’s CSRD will also introduce workforce-related disclosure obligations. The increased focus on social issues may also be occurring at the same time as a global economic downturn, as mentioned above, which may create an environment ripe for calls for corporate commitments on equality-related issues, such as livable wage, corporate tax transparency, and political and lobbying disclosure requests.
10. Tracking and using credible ESG data from a wide range of sources will become increasingly essential. As regulatory regimes, specifically those that implicate value and supply chains, expand throughout the world, companies will increasingly need to build complex systems to navigate data compiled from their own operations as well as third-party data. The ESG data provider market has grown in recent years in response to demands for increased corporate transparency, but challenges remain. Much ESG data remains subject to significant estimations, assumptions, and ambiguities. In many cases, such data is required to be sourced from third parties, meaning its quality is often difficult to assess and may need to be restated in the future, particularly when data is transferred from party to party. Further, the frameworks, standards, and taxonomies for translating ESG data into digestible and standardized information are still developing, making comparability across companies, let alone sectors, difficult if not impossible. Companies will need to seek out their own data options to create effective internal oversight of the full range of their ESG-related obligations. The growth of the ESG data market and investors’ reliance on it has also led to an increased push to regulate the providers of ESG data and ratings. The EU and the UK announced initiatives in this regard in 2022 while US politicians stepped up scrutiny. These measures are expected to develop in 2023.
By Latham & Watkins on January 5, 2023
 Examples of regulations that may have implications for companies in jurisdictions other than the jurisdiction in which the regulation was adopted include the UK Modern Slavery Act, the EU Corporate Sustainability Due Diligence Directive, the German Supply Chain Act, the US Uyghur Forced Labor Prevention Act, the California Transparency in Supply Chains Act, and the New York proposed Fashion Sustainability and Social Accountability Act.
 The various laws, regulations, guidelines, and policy initiatives throughout Asia include corporate listing and reporting requirements (such as climate stress testing requirements in some instances), green or sustainable taxonomies, fund-level disclosures, and an increased focus on ESG data providers.
 ESG-related disputes are likely to become more complex and varied, both in relation to formal court proceedings and through other mechanisms, such as National Contact Points in relation to the OECD Guidelines for Multinational Enterprises and other “soft law” forums.
 Methodologies and frameworks include, among others, the Greenhouse Gas Protocol, which is a private framework that forms the basis of the US SEC’s climate risk disclosure proposal and most existing corporate voluntary GHG emissions reporting.
 A clear example of such state-level action being when 24 state attorneys general wrote to the US SEC in June 2022 claiming that its proposed climate-disclosure rule “reflects mission creep of the worst kind” and indicating that they would bring a lawsuit against the final rule.