Every new year brings change, reasons to revisit expectations, and prompts to rethink worldviews.

Although sustainability recaps and forecasts abound at this time of year, there is less guidance on how to leverage that insight into action. If preparing for the future involves studying the past, summary publications and predictions should be paired with recommendations regarding what society expects business to do.

At the Sustainability Institute by ERM, our annual trends report explores the issues shaping corporate sustainability and considers how companies have responded to them — our contribution to this custom of retrospection. The reports also outline specific actions companies can take to respond.  

As we finalize this year’s report, we note again that sustainability trends do not exist in a vacuum. Larger global shifts, both sharp shocks and slow erosions, are always underway, rearranging the landscape upon which corporate sustainability evolves. To set the stage for this year’s trends report which will be released in mid-January, we dig in to three of these factors: Geopolitics, Macroeconomics, and the Erosion of Public Trust.

Geopolitics

The war in Ukraine transformed geopolitics in 2022. The world, and Europe in particular, was upended by a crisis that continues to affect everything from food supplies to energy prices. However, that war was not the only transformative geopolitical development. The burden of China’s Zero-COVID lockdowns, which had disrupted supply chains around the world, was finally lifted in December following a year of mass protests within the country.

More positively, international negotiations on both climate change and nature progressed in 2022, thanks to two United Nations Conference of Parties (COP) meetings. Delegates negotiating on climate at COP27 agreed upon the structure for rich nations to establish a “loss and damage” fund to support the countries that are most vulnerable to physical climate risks. And delegates negotiating on nature and biodiversity at COP15 adopted the Kunming-Montreal Global Biodiversity Framework (GBF) to provide a structure for nations to combat biodiversity loss by reducing nature degradation and increasing nature-related financing to developing countries.

Coupled with increasing stakeholder expectations, these intergovernmental agreements highlight the sustainability-focused environment in which today’s corporations operate. Ensuring value creation through sustainable actions is paramount to business success. To build value and increase resiliency, we expect more companies to court ESG-driven investment going forward. Corporate responses are likely to vary widely, but our 2023 Trends Report predicts a few will stand out:

  • Geography: Companies will shift their value chains away from geopolitically vulnerable regions to limit their exposure to events that could disrupt their operations.
  • Activism and Boycotts: Consumers will pressure companies to speak out on and respond to geopolitical developments and to take stands on human rights and other issues.
  • Diversification: Companies will accelerate efforts to diversify energy sources and transition to renewables in order to limit exposure to geopolitically-influenced fossil fuel price volatility and supply instability.

Macroeconomics

The pandemic-linked global economic boom of late 2020 and 2021 is now on the wane, and recession looms in many markets. The combined effect of sanctions related to Ukraine, supply chain disruptions, a tight labor market, and persistent consumer demand have pushed inflation to levels not seen in decades. Policymakers are concerned about inflation, and borrowing costs are being increased to rein in prices and temper demand. In 2022, this combination caused the most precipitous stock market decline since the 2008 financial crisis.

With recession likely, companies face macroeconomic uncertainties that threaten profit outlooks and may even upend business models. Unlike past periods of economic hardship when sustainability initiatives often fell by the wayside, we expect companies to maintain or even expand sustainability efforts because of a better understanding of the business performance benefits they bring. Our 2023 Trends Report highlights examples of this including:

  • ESG: Companies will continue to focus on ESG-related performance both to increase resilience and to meet investor expectations for action. At the same time, investor focus on companies with strong ESG credentials will outweigh the negative pressure of anti-ESG scrutiny.
  • Circularity: Companies will pursue more circularity-focused initiatives. Such initiatives can generate efficiencies that save money and reduce waste generation.
  • Human Capital: Companies will increase focus on human capital development, both in recognition of employee value and in response to a growing difficulty to fill positions caused in part by inflation and rising interest rates.

Erosion of Public Trust

A recent drift towards populism in many parts of the world has been accompanied by falling public trust in institutions. A 2022 study found that 59 percent of people globally automatically distrust something until they see evidence for it, with governments and the media being the institutions they distrust the most. Interestingly, the study found that corporations were the institution the public trusted most—more than governments, media, or NGOs. However, 2022 showed that corporations are not immune to the overall erosion of trust.

Policymakers in some regions have set their sights on ESG, accusing companies and investors of putting political goals before business objectives. Investors and regulators also accused some corporations of greenwashing by overselling sustainability credentials for financial and reputational benefits. The 2023 Trends Report notes various responses likely to help alleviate or disprove these concerns:

  • Improved disclosure: Companies will expand ESG-related disclosures in response to a proliferation of voluntary standards, mandatory regulations, and heightened stakeholder expectations for ESG transparency.
  • Policy advocacy: Industries will better align ESG-related lobbying activities with public positions on ESG issues to avoid being called out on discrepancies.
  • Shareholder engagement: Public companies will increasingly embrace ESG-related shareholder proposals and other ESG performance demands from investors to mitigate distrust and maximize positive stakeholder value.

Navigating global shifts in the new year

Change is constant and anticipating and adapting to change is crucial to business success. The push for sustainability has greatly impacted the business world, forcing companies to reconsider approaches to value creation. On its own, the movement toward sustainable business is a major undertaking for companies. Coupled with the dramatic global shifts underway, it is even more complicated.

Over the long term, however, companies that focus on sustainability will be better equipped to navigate global shifts and overcome challenges. In doing so, they maximize their chances of long-term financial success and help accelerate the transition to a more sustainable future.