ESG and Sustainability: 2023 Year in Review & 2024 Predictions

Keep up with the latest legal and industry insights, news, and events from MoFo

ESG is not dead – despite all of the noise in the press. ESG and Sustainability—in various forms—have survived, reinforcing its longevity but with more clarity, standardization, transparency, and accountability. It is true that, during 2023, the ESG and sustainability space experienced significant attacks on multiple fronts, increased politicization, and redirected attention from stakeholders. Stakeholders became more interested in how a company stacks up against its claims versus whether it was making ESG considerations at all. Regardless of the headwinds, three predictions from 2022 proved true: ESG regulations multiplied across the globe, industries continued to converge, and fragmentation is waning, positioning specific elements of ESG and Sustainability as priorities for boards, management, and investors for years to come.

In the series of trends and outlooks to follow, we provide a snapshot of major developments in the ESG and sustainability space in 2023 and provide our predictions for 2024.

Our global ESG Steering Committee, which includes more than 35 partners from across the firm, contributed to the writing of this alert.

2023 Year in Review

In this review, we categorize notable events under regulations, guidance, and standards; litigation; political, market, and strategic trends; and antitrust concerns.

Regulations, Guidance, and Standards

Last year likely saw the greatest number of ESG and sustainability regulations passed in a single year. Globally and nationally, policymakers reinforced commitments to standardize, sanitize, and scrutinize the space. Most regulators are following S1 and S2 under ISSB, which is a good place to start for established players and those trying to make sense of this sector for the first time.

Increased regulations forced companies to think about how their processes and policies stack up against regulations, compliance budgets, and human resource capacity to fulfil regulatory requirements. While they are at it, companies must also map where their businesses intersect with regulatory requirements, examine coverage—direct and indirect—and understand their jurisdictional footprint to see if they are covered by third-country obligations.

Federal Developments

State Developments

California Climate Accountability Package (SB 253 and 261) passed.
California adopted AB 1305: Voluntary Carbon Market Disclosures Business Regulation Act (VCMDA).

Standards

The International Sustainability Standards Board released its IFRS; S1 and S2 introduced disclosure standards for sustainability and climate-related risks.

International Developments

EU’s Corporate Sustainability Reporting Directive (CSRD) and Sustainability Reporting Standards (ESRS) adopted.
Provisional agreement on the EU’s proposed Corporate Sustainability Due Diligence Directive (CSDDD) reached.
UK’s Financial Conduct Authority (FCA) Anti-Greenwashing Rules confirmed.

In light of these developments, companies are advised to:

Investigate where they have operations—including their value chain—and design efficient programs to navigate compliance and alignment across jurisdictions with different and sometimes conflicting requirements.
Develop an ESG and sustainability program that captures the most expansive requirements and is cognizant of overlaps across regulations, standards, and frameworks, then make modifications as they iterate in developing compliance and voluntary programs to tailor policies and processes to jurisdictional nuances.
Train and align teams and functions on new and evolving regulations, and ensure coherent strategy and outlook across every team and function in the organization.

Litigation

Although 2023 witnessed a climate litigation plunge, the year also saw nuances in litigation as plaintiffs and recent precedent continue to show that constitutional rights and legal remedies are tools that can compel action and alignment. Plaintiffs cut across states, individuals, employees, consumers, shareholders, and non-governmental organizations.

Environmental Litigation

As of December 31, 2022, the Sabin Center’s Climate Change Litigation databases identified 1,522 cases filed in the United States. As of December 14, 2023, the number has increased to 1,636 cases in the United States and 222 cases filed against corporations globally. The United States has the largest share of climate litigation.

Novelty in Climate Litigation

Claims included rights to a safe environment, voluntary carbon markets (VCMs), derivatives litigation, and securities litigation around companies not living up to environmental commitments or environmental-oriented claims. Examples include plaintiff’s victory in Montana v. Held on the right to a safe environment, VCMs’ greenwashing case against Delta, California’s lawsuit against Big Oil companies, and the lawsuit against KLM Royal Dutch Airlines for misleading advertisements about its carbon emission goals and its commitment to them.

Social Litigation

Notable litigation was centered around diversity, equity, and inclusion considerations by institutions and corporations. Examples include:

Students for Fair Admissions v. Harvard and UNC – SCOTUS ended affirmative action.
American Alliance for Equal Rights v. Fearless Fund Management – Court of Appeals blocked venture capital fund for black-women-led businesses.
AG letters to Fortune 100 – 13 state AGs wrote letters to Fortune 100 companies to request that they comply with race-neutral principles in employment and contracting practices.

Consumer Protection Litigation

Stakeholders brought claims based on ESG considerations and communications to consumers. For example:

AG Tennessee v. BlackRock – Lawsuit over alleged false or misleading statements to Tennessee consumers on the extent of ESG considerations.

We expect that as regulations proliferate, there will be more litigation. To navigate these developments, companies and investors are advised to:

Ramp up guardrails to prevent litigation risks by coordinating efforts across all teams and functions to ensure that actions, disclosures, and communications are consistent and coherent.
Map legal and regulatory requirements in jurisdictions where you operate or have footprints to understand how requirements vary and adjust programs accordingly, for example, in states with effective anti-ESG laws.
Develop concrete ESG programs and work with counsel for guidance on how to avoid the avalanche of lawsuits and enforcements to follow regulations.

Political, Market, and Strategic Trends

Central Themes Across Investors and Companies Included:

Stakeholders increased climate considerations, given the fact that 2023 was reported to be the hottest year in history.
SCOTUS decision on affirmative action sparked mixed reactions from corporations; some are resolute in pursuing DEI programs, some are refraining, and some are taking a break to monitor trends.
Cybersecurity continued to emerge as an ESG concern.
Responsible technology and artificial intelligence received increased investor attention and AI companies adopted new corporate forms.
In Asia, funds in smaller jurisdictions, and in certain large jurisdictions such as China, reduced ESG focus because of their difficulty in raising capital, or maintained ESG considerations but did so quietly.
More Japanese companies established human rights policies and are now in the process of developing infrastructures for supply chain monitoring.

ESG Backlash Proliferated

State ESG backlash increased but more anti-ESG bills failed than passed; 240 bills were introduced, up from 37 bills in 2021 and 2022 combined. Of the 240 bills, 95 failed and 38 passed as of December 14, 2023.

Corporate and Investor Posture on ESG Varied

Institutional investor pressure on ESG matters decreased.
There was reduced support for environmental and social shareholder proposals.
Greenwashing and social washing risk increased.
Companies pursued ESG and sustainability considerations quietly.

Trends will continue to evolve as stakeholders act for compliance, risk, or opportunity reasons. Companies and investors are advised to:

Beyond strict compliance requirements, ESG programs should be designed using a materiality lens to identify, rank and prioritize critical ESG risks and opportunities specific to the entity or its industry.
Companies should also confirm and adopt a plan to consider stakeholders in operations and with respect to goods and services, although the full stakeholder analysis recommended by accounting firms for double-materiality is not required.

Ensure that communications align with actions throughout the entity, including the supply chain. This will drive needed operational changes for alignment and mitigate greenwashing and social washing risks.
Monitor trends and developments, and reinforce programs as needed.

Antitrust

Antitrust pushbacks on DEI, climate, and supply chain considerations increased, with concerns around “institutionalized antitrust violations based on ESG and sustainability initiatives” such as coordinated efforts to compel action, industry alliances, and boycotts. As a result, companies and investors should:

Examine all ESG efforts, and vet sustainability communications and industry activity for potential antitrust risks.
Confer with counsel before sharing any information with competitors or other entities in the same industry.

2024 Predictions

Our thoughts on what is likely to happen in the ESG and sustainability space in 2024 are as follows.

Disclosure Standards, Guidance, and Regulations

The SEC will publish its Proposed Rules to Enhance and Standardize Climate-Related Disclosures for Investors in the first quarter of 2024, but without a requirement for scope 3 emissions disclosures.
The SEC will publish its Human Capital Management Rules in the second quarter of 2024; otherwise, the rules will be further delayed until 2025, or shelved, pending election results.
Companies will begin to gather data, develop infrastructures, and integrate CSRD requirements in strategy and overall planning.
Reporting will become further standardized and less fragmented as regulations proliferate.

Litigation

There will be continued weaponization of the First and Fourteenth Amendments, the Civil Rights Act, and related legislation against diversity initiatives by public and private actors.
There will be more litigation in 2024 and in the coming years because of increased disclosures. Entities are encouraged to scope their efforts within regulatory requirements, and in areas where regulation is absent, use leading standards such as the IFRS S1 and S2. If an entity must provide disclosures, disclosures must be accurate, consistent, and coherent across all teams and functions.

Political, Market, and Strategic Trends

General Considerations

More anti- and pro-ESG legislation will be introduced, most of which will not pass.
Companies will continue to pursue ESG and sustainability goals quietly, especially since regulations like the CSRD will require compliance regardless of home country requirements.
Increasing litigation and pushbacks will make companies rethink ESG- and sustainability-related advertising.

Social and Human Rights Considerations

There will be increased focus on human rights and environmental supply chain risks, considering the upcoming EU Corporate Sustainability Due Diligence Directive expected to be published in February 2024.

Responsible Technology

AI startups will continue to utilize hybrid forms and new corporate forms to organize their companies.
Investors will be more interested in whether and how well their funds and portfolio companies are identifying and managing the legal and ethical risks associated with their use of AI and, in particular, generative AI.

Mergers and Acquisitions

Investors and companies that rely on carbon credits to meet “carbon neutral” or similar pledges will need to increase their levels of diligence on projects and/or divert resources toward purchasing more expensive, higher-quality credits to mitigate reputational risks associated with ongoing quality issues affecting the voluntary carbon markets.

Investment Funds and Advisers

We anticipate that in Q1, the SEC will adopt its proposed ESG disclosures for investment advisers and investment companies. Once the SEC rules are effective, we anticipate the SEC will promptly launch sweeping examinations related to compliance with the new rules.
We anticipate that follow-on class actions and/or derivative actions from private plaintiffs could piggyback on SEC enforcement actions based on allegedly false and misleading disclosures to registered fund investors.

Debt Finance

Regardless of ESG backlash, lenders will continue showing commitment to sustainability considerations but will increase focus on credibility and transparency. The Loan Syndications and Trading Association’s updated guidance for sustainability-linked loans (SLLs) for U.S.-style syndicated loan agreements is proof of the continuing commitment. The guidance was updated following a series of events that show a growing trend toward standardizing loan frameworks with respect to SLLs, social loans, and green loans.

Antitrust

The anti-ESG movement will continue to investigate ESG initiatives that violate antitrust laws and the pro-ESG movement will promote innovative ways of pursuing ESG without violating antitrust laws.

Our team remains well positioned to continue supporting clients that are strategizing and developing holistic programs to position them for leadership and effective performance in ESG and sustainability.