Earth Day is fast approaching, and although the planet is coming off its hottest year on record, the discourse on sustainability has never been more adversarial.
In 2024, several environmental, social and governance (ESG)-themed ETFs folded, and a number of high-profile companies have scaled back their sustainability policies. But the most notable change has been in Washington where the new U.S. administration has rolled back multiple federal environmental regulations and climate policies since coming into power in January.
Does that mean ESG is dead? No, sustainability work is still happening in most organizations. The overarching theme appears to be resilience and pragmatism – resilience against climate change and pragmatism regarding sustainability as a business practice.
“A lot of energy transition companies that have continued to grow, independent of policy uncertainty, are those that have always said, ‘We don’t want to be dependent on policy supports,’” explains Jonathan Hackett, Managing Director and Head of Sustainable Finance at BMO Capital Markets.
Here are some of the notable sustainability trends that are expected to continue this year in spite of the recent policy-driven push back.
Redefining sustainability and ESG
One change regulators and investors will likely welcome is that companies are being more specific in their language rather than just referring to an umbrella of “ESG work,” explains Melissa Fifield, Managing Director and Head of BMO Climate Institute. In Canada, that’s likely due to recent federal greenwashing legislation, which is intended to prevent companies from making unsubstantiated environmental claims about their products and business activities.
“From a broader communications trend, we’re seeing an ESG evolution,” she says. “Companies are less inclined to use the acronym generically, which has become polarizing to some. But the work companies are doing to manage environmental and social risk to their business operations continues.”
One of the challenges companies, investors and policymakers have faced in the ESG and sustainability space is a lack of clarity about what these words and others, like “green” and “net zero,” mean. The resulting confusion made it far easier for certain CEOs to claim ESG prowess when their companies were environmentally progressive but perhaps not socially responsible. It was also easier for firms to make broad sustainability claims without having to back them up.
For example, Hackett notes that people questioned whether a company could call itself “sustainable” if it wasn’t actually working toward achieving net zero, meaning the business reduces its carbon emissions as much as possible and offsets any remaining emissions with carbon removal.
“All of these definitions have been blurred together, both by proponents and by people criticizing them,” he adds. “What we’re seeing is the breakup of all of these concepts from being under a single monolith.”
Value over values
Companies are taking a more pragmatic approach toward sustainable practices. Organizations are no longer turning to renewable energy for handshakes and high-fives; they’re doing it because it makes economic sense.
Case in point: at the 34th annual BMO Global Metals, Mining & Critical Minerals Conference in March, Dr. Andrew Forrest, Executive Chairman of Fortescue, explained his rationale for proceeding with a US$6.2-billion investment to eliminate the mining company’s carbon footprint.
During his keynote address he was clear that the company’s green energy stance was about economics, not ideology. Eliminating Fortescue’s fossil fuel costs alone is expected to save hundreds of millions every year, he explained. “This isn’t about anything but dollars and cents,” he said.
This change in thinking is notable, says Hackett. “There was a mishmash before, where people conflated values with value and believed that the economy would reward companies for doing the ‘right’ thing,” he explains. “Yes, an energy retrofit might factor in carbon pricing sometimes, but a lot of the time, consuming less energy is just good for your business.”
In the same way, companies in the business of sustainability – from solar panels to electric vehicles and more – are succeeding because they’ve overcome that “green premium,” or any additional costs that come with choosing a “green” alternative. When an environmentally superior product performs as well as (or better than) its normal competitors for close to the same price, the path to widespread adoption opens up.
“We’re not embracing sustainability simply out of virtue, but because it makes business sense, and that’s what gives it staying power,” says Fifield.
Improving supply chains
A growing number of companies are focusing on their supply chains to build more resilience and stability in their businesses in the face of extreme weather events and geopolitical unrest. Given that the bulk of most companies’ carbon emissions come from their supply chains, it’s also an opportunity to screen new suppliers for their sustainability practices as a way to mitigate risk, as they choose new ones.
BMO has developed a sustainable procurement program which requires suppliers to have environmental and social risk practices and policies in place. The program is also aimed at helping BMO “work toward our Climate Ambition, to be our clients’ lead partner in the transition to a net-zero world.” Fifield notes that BMO recognizes the influence it can have over suppliers’ emissions performance. If a large company asks its suppliers to measure their greenhouse gas emissions and you want your business to be a supplier for that company, you’ll start measuring those emissions.
“Even if it wasn’t necessarily on your radar as part of your business strategy and you’re not being regulated to do so,” Fifield says, “if your customers are asking for it, that’s a pretty good incentive.”
Balancing AI potential with AI challenges
Businesses are looking to artificial intelligence (AI) to help find new ways to reduce energy consumption and drive further innovation in the sustainability field, but the technology also presents its own challenges. The sheer volume of energy it consumes as it works toward these goals means it’s still unclear whether AI will be a net positive or a net negative, especially given that its energy demand continues to grow as the field grows.
Hackett notes that forecasts for AI growth have been highly unreliable, and many people have an underlying assumption that as the technology continues to mature, it will become more efficient in its energy use. “It’s not clear whether that efficiency curve will be borne out and whether or not the demand curve will correspond,” he says.
Still, the quest to ensure energy output can keep pace with AI’s demands fuels some technological innovations that Hackett believes are interesting from an energy transition perspective. He points to the development of small modular reactors (SMRs), a new type of nuclear reactor that’s cheaper and faster to build, which can be scaled to meet not only AI’s demands, but energy demands generally.
“This push on AI has created a real growth and actual activation of the strategies that can lead to SMRs, energy storage and other technologies being rapidly deployed,” he explains.
Democratizing the energy transition
Finally, the common thread running through these trends is ensuring that everyone is prepared for the challenges we’ll face as the climate continues to change and send shocks through the world.
“We need more people to see themselves in what this transition is going to look like. Because at this point, our climate is changing dramatically, and we’re on a path that no one can predict,” Fifield says. “It’s about navigating and adapting to this new reality. And the more people see the role they can play in a thriving future and the business opportunities associated with it, the better for all of us.”
