ESG regulation in 2024: Everything you need to know [updated] (2024)

Sustainability reporting regulations (or ‘ESG regulations‘) can be confusing at the best of times, but global progress is being made to increase the consistency, accuracy, and transparency of disclosure requirements. In this article, we’ll highlight some of the most critical to keep in mind in 2024.

Sustainability considerations are becoming essential across businesses of all sizes. Companies can no longer ignore the increasing number of sustainability reporting laws and regulations that are popping up globally.

What are ESG regulations?

ESG regulations are government standards for ESG-related actions, reporting, or disclosures. ESG stands for environmental, social, and governance, and it is a framework for evaluating the sustainability and ethical impact of a company or investment.

The regulations are designed to improve transparency and accountability, and to encourage companies to adopt more sustainable practices. They can also help to protect investors from greenwashing, which is when a company makes misleading claims about its ESG performance.

The growth of ESG regulations

Research from data management firm ESG Book shows that ESG regulation has increased by 155% over the past decade, reflecting the rapid growth of sustainability-based policy interventions.

This sharp rise is only expected to continue, as markets look for more effective and transparent ways to drive capital to sustainable businesses and outcomes.

The ESG regulations you need to know in 2024

Navigating the landscape of existing and upcoming regulations can be intimidating, especially with the ‘alphabet soup’ that are the SFDR, CSRD, and NFRD, and so on. To help keep you informed, below are some continually updated key ESG regulations that will take note of in 2024.

Be sure to also see our comprehensive guide to ESG disclosure frameworks, to learn how your business can remain compliant with many of the regulations below.

Sustainability Disclosure Requirements (SDR)

pending

Origin

The UK Financial Conduct Authority (FCA)

Who it affects

FCA regulated firms, such as asset managers or owners

Important dates to know

The FCA aims to finalise and publish any rules by the end of the fourth quarter of 2023 after delaying due to the significant amount of feedback that the FCA received during the consultation period

Purpose

To help the UK’s asset management sector improve the sustainability information consumers have access to, solving the problem of greenwashing as a barrier to sustainable investment

Background

The Financial Conduct Authority (FCA) closed consultation on its new Sustainability Disclosure Requirements (SDR) regulation on 25 January 2023. The comprehensive package takes a holistic approach to address various areas of sustainable finance, including the introduction of sustainable investment labels, disclosure requirements, an anti-greenwashing rule, and limitations on using sustainability-related terms in product naming and marketing.

The FCA recognises that sustainability issues can be significant to investors when deciding where to assign their capital. The SDR approach is a core tenet of implementing the UK Government’s Greening Finance Roadmap, and it sends a clear message that the FCA acknowledges greenwashing as a hurdle to sustainable investment.

Feedback on the consultation closed in January 2023, and the FCA had aimed to finalise and publish any rules by the end of the first half of 2023, however this has been pushed back to enable it to consider the significant response to its consultation of the new rules, which secured around 240 written responses.

The rules will now be finalised by Q4 2023.

More on SDR:

• Official Website

The Sustainable Finance Disclosure Regulation (SFDR)

mandatory

Origin

European Parliament

Who it affects

Investors and other financial market participants (FMPs)

Important dates to know

It became mandatory on January 1, 2023; the European Commission launched two consultations, one public and one targetted, on the implementation of the SFDR on September 14, 2023

The deadline for submitting feedback on both consultations is December 15, 2023

Purpose

To make the sustainability profile of funds more comparable and better understood by end-investors and encourage the flow of capital into sustainability focused firms

Background

The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation aimed at enhancing transparency in the sustainable investment market. It looks to prevent misleading environmental claims (also known as “greenwashing”) against investment products and to increase the flow of investment into sustainable products, accelerating the transition to a low-carbon economy.

Although SFDR has been applicable since March 2021, it didn’t become mandatory until January 1st, 2023 when it entered the level 2 phase.

The SFDR mandates that investment products be categorised into three distinct groups based on their degree of sustainability and related features. Additionally, financial market participants who are now subject to these regulations are required to comply with specific disclosure obligations, including:

• Collecting relevant data from portfolio companies and other entities
• Implementing reporting templates (also known as Principle Adverse Impact indicators)
• Aligning reporting processing with the content and methodologies laid out by the regulation

A consultation was opened in April to proposed amendments, this is scheduled to close at the start of July, after which the European Commission may seek to update the SFDR regime at the end of 2023/early 2024.

More on SFDR:

• Official website

The EU Taxonomy

mandatory

Origin

European Parliament

Who it affects

Large companies and financial market participants offering products and services within the EU

Important dates to know

January 1, 2023 (the day it became mandatory to report on the EU Taxonomy alignment)

Purpose

To help direct investments to the economic activities most needed for a sustainable transition

Background

The EU taxonomy is a classification system that establishes a list of what economic activities should be considered ‘sustainable’, and it plays an important role in helping the EU scale up sustainable investments, while implementing the European Green Deal.

The purpose of this taxonomy is to combat greenwashing and help investors select environmentally conscious investments.

Investments are evaluated on five criteria:

• Contribution to mitigating climate change
• Ability to adapt to climate change
• Alignment with circular economy principles
• Impact on pollution
• Effect on water and their impact on biodiversity

While the EU Taxonomy has been around since 2020, large companies have not been obliged to report on their alignment until January 1st, 2023. Organisations must now publicly disclose to the degree their turnover is taxonomy-aligned, i.e. fulfils the EU Taxonomy criteria on what is considered a “green” or “sustainable” economic activity.

This is achieved by amending the disclosure requirements in the EU’s Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR).

Before 2023, companies were only required to disclose the alignment for the first two, namely climate change mitigation and climate change adaptation. It is now mandatory to disclose each economic activity’s alignment with the Taxonomy’s six environmental objectives.

More on EU Taxonomy:

• Official website

The Corporate Sustainability Reporting Directive (CSRD)

mandatory

Origin

European Parliament

Who it affects

• EU companies that meet two of the following three conditions: $40 million in net revenue, $20 million in assets, or 250 or more employees.
• Non-EU companies if they have considerable activity in the EU, including a physical presence: specifically, net revenue of $160 million in the EU for each of the last two consecutive years and a listed EU subsidiary that generated a net turnover greater than $40 million in the preceding year

Important dates to know

• January 5, 2023 (the day the CSRD came into force)
• June 30, 2023 (the day the directive’s mandatory sustainability reporting standards will be finalised)
• June 9, 2023 (The ESRS standards used by CSRD are opened to consultation)
• July 31, 2023 (the day the final ESRS standards were announced)
• September 13, 2023, the EU Commission published a proposed change to increase the financial thresholds for being “large” by approximately 25% to account for inflation in the EU
• October 17, 2023, the EU has proposed a delay to the sector-specific sustainability disclosures ESRS
• January 24, 2024, EU lawmakers approve the delay to standards for specific sectors and non-EU companies
• January 1, 2024, Large public interest entities (PIEs) with over 500 employees will need to start reporting for the 2024 financial year
• January 1, 2025, All other large PIEs (with over 250 employees and a turnover of over €40 million) will need to start reporting according to the CSRD requirements for the 2024 financial year
• January 1, 2026, listed SMEs (small and medium-sized enterprises) will need to start reporting according to the CSRD requirements for the 2026 financial year

Purpose

To help investors, consumers, policymakers, and other stakeholders evaluate large companies’ non-financial performance

Background

The Corporate Sustainability Reporting Directive (CSRD) broadens the existing Non-Financial Reporting Directive (NFRD)and looks to fix key structural weaknesses in current ESG regulation around reporting.

The new regulation will have a wider reach, affecting a higher number of large EU-listed entities including businesses, banks, and insurance companies. Around 50,000 entities will be impacted by the CSRD, almost five times as many as the old NFRD legislation. However, in September 2023, the EU Commission published a proposed update that, if adopted, would increase the financial thresholds for being “large” by approximately 25% to account for inflation in the EU and may move some businesses out of scope.

The Corporate Sustainability Reporting Directive (CSRD) will have a wider reach than the previous Non-Financial Reporting Directive (NFRD), impacting around 50,000 large EU-listed entities, including businesses, banks, and insurance companies. This is almost five times the number of entities covered by the NFRD. However, the EU Commission published a proposed update in September 2023 that would increase the financial thresholds for being “large” by approximately 25% to account for inflation, which may move some businesses out of scope.

Companies will need to report more broadly on sustainability focused topics, including:

• Environmental matters: Encompassing the establishment of any science-based targets and comprehensive climate risk-related reporting
• Social responsibility: Covering information about the treatment of employees, and the communities where they operate
• Respect for human rights: Sharing their human rights standards, and those from their partners and suppliers
• Anti-corruption measures: What is in place in relation to corruption and bribery
• Board diversity: The diversity in leadership, including age, gender, educational and professional background

Entities will also now need to report on how environmental and social matters influence their own development and how their operations impact the environment and society – this is called “double materiality”.

The new rules will ensure consumers and investors have access to information they need to assess risks arising from climate change and other sustainability issues. It will also create a culture of transparency regarding the impact companies have on people and the environment. Finally, reporting costs will be reduced for companies over the medium to long term by merging the information that will be provided.

Affected companies will have to apply the new rules for the first time in the financial year 2024 for reports that will be published in 2025.

Update February 9, 2024: The European Council and Parliament reached a provisional agreement to adjust the timeline for implementing certain aspects of the Corporate Sustainability Reporting Directive (CSRD).

More on CSRD:

• Official website
• CSRD and what it means for business
• Top 5 things to know about CSRD
• Will your company need to change its reporting strategy for CSRD?
• How to perform a double materiality assessment

The Corporate Sustainability Due Diligence Directive (CSDDD)

pending

Origin

European Parliament

Who it affects

Large EU companies and non-EU companies with large EU undertakings

Dates to know

Introduced in February 2022, passed EU parliament vote on 1 June 2023

Purpose

To ensure that businesses address adverse impacts of their actions, including in their value chains inside and outside Europe

Background

The CSDDD is an EU proposal which will require companies to exercise reasonable due diligence in their own business lines and in their “value chains” to prevent or minimise human rights or certain environmental risks and to end human rights or certain environmental violations.

The CSDDD defines several measures to be taken for a company to fulfil its due diligence obligations:

• Undertaking appropriate risk management by integrating due diligence into policies
• Carrying out risk analyses to identify actual or potential adverse impacts
• Preventing and mitigating potential adverse impacts and bringing actual adverse impacts to an end and/or minimising their extent
• Establishing and maintaining a complaints procedure
• Monitoring the effectiveness of their due diligence policy and measures
• Publicly communicating the due diligence undertaken
• Creating climate transition plans aligned with the goals of the Paris Agreement
• Companies with over 1,000 employees will need to link their performance on the climate transition plan targets to the variable compensation of directors

As of 1 June 2023, the draft proposal has been approved by the EU Parliament. Following the vote, negotiations with EU member states will begin. These negotiations will focus primarily on disagreements around the scope of the new rules and the timeline for their implementation.

One of the most contentious points in the ongoing negotiations is the inclusion of finance. While the European Parliament originally votedin favour of mandatory due diligence rules covering for financial institutions, including asset managers and institutional investors, member states initially opted to exclude the sector.

The inclusion of finance was opposed in particular by France, which pushed to give EU countries the choice to include or exclude finance when transposing the directive into national law.

Depending on the results of negotiations, it is quite possible that the due diligence obligations could begin to apply as soon as 2025.

Update: On 19 March the European Parliament’s Legal Affairs Committee voted in favour of the CSDDD, with the compromised text formally rubber-stamped on 24 April.

One of the key changes is that the thresholds for determining EU and non-EU companies in scope has increased to both turnover of €450 million and at least 1000 employees.

The financial sector question is still not fully resolved, though some believe the sector is still in scope to a limited extent. Firms will only have to apply CSDDD in regard to their own operations and upstream supply chains.

More on CSDDD:

• Official website
• Your complete guide to CSDDD in 2023

Streamlined Energy and Carbon Reporting (SECR)

mandatory

Origin

UK Government

Who it affects

Large enterprises, publicly listed companies, and Limited Liability Partnerships (LLPs)

Dates to know

April 1, 2019 – SECR came into force

Purpose

To encourage businesses to implement energy efficiency measures

Background

The UK’s Streamlined Energy and Carbon Reporting (SECR) policy mandates organisations to include energy consumption and carbon emission data in their annual reports. Its goal is to expand the scope of reporting to a broader range of companies and promote energy efficiency initiatives.

All quoted companies (where its shares are listed on the London Stock Exchange) in the UK need to comply, as will unquoted companies that meet the Company’s Act 2006 definition of “large”.

Large is determined if it meets two of the following:

• 250 employees
• Annual turnover of more than £36m
• Annual balance sheet of over £18m

SECR was introduced as the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme came to an end. The newer regulation impacts approximately 11,900 companies incorporated in the UK, and requires them to disclose their energy usage and carbon emissions, a significantly larger number than previously required under the CRC.

SECR complements existing responsibilities that companies might already face, such as mandatory greenhouse gas (GHG) reporting for publicly traded companies, the Energy Saving Opportunity Scheme (ESOS), Climate Change Agreements (CCA) Scheme, and the UK Emissions Trading Scheme (ETS). SECR expands reporting requirements for publicly traded companies and introduces new annual disclosures for large privately held companies and limited liability partnerships (LLPs).

The German Supply Chain Due Diligence Act (the LkSG)

mandatory

Origin

German Parliament

Who it affects

German and non-German companies with more than 3,000 employees. In 2024, the scope will broaden to companies with 1,000 employees

Dates to know

January 1st, 2023 (the day the Act came into effect)

Purpose

To ensure that businesses operating in Germany address environmental and social impacts of their actions

Background

Germany’s new Supply Chain Due Diligence Act (initially called the Supply Chain Act) requires large companies to observe social and environmental standards across their supply chain. Companies must monitor their own operations and their direct suppliers worldwide, taking action if any violations are found.

The act went into effect on January 1st, 2023 and its coverage will be broadened in 2024 by reducing the employee threshold from 3,000 to 1,000. This will significantly expand the range of companies that fall under its scope.

The act (also known as Lieferkettensorgfaltspflichtengesetz, or LkSG) is not only limited to German companies. Despite being enacted by the German government, it intends to expose human rights abuses in global supply chains by requiring all companies selling goods or products in the German market to implement a due diligence mechanism.

Companies that fail to comply or submit the required documentation risk facing fines and sanctions; for example, fines of up to 2% of their annual turnover for larger companies, exclusion from public contracts for up to three years, and damage to reputation and trust.

More on LkSG:

• Official website

SEC’s climate disclosure rules

mandatory

Origin

US Securities and Exchange Commission

Who it affects

All US-based public companies

Dates to know

March, 2022 – The rule was originally proposed

October, 2023 – The previous date it was expected to be finalised

April, 2024 – The current date it’s expected to be finalised

Purpose

To support investors in seeking more information about the effects of climate-related risks on a
company’s business to inform their investment decision-making

Background

The US Securities and Exchange Commission (SEC) proposed a rule in March 2022 that would require public companies to provide standardised and enhanced disclosures regarding climate-related risks and opportunities. This proposal aims to improve transparency and provide investors with reliable information to make informed financial decisions.

Key components of the proposal include:

• Greenhouse Gas (GHG) Emissions:Companies would be required to disclose their Scope 1 and Scope 2 GHG emissions,with independent verification for larger companies.
• Financial Statement Disclosures:The rule would mandate specific climate-related information within financial statements,like the potential financial impact of climate risks.
• Qualitative and Governance Disclosures:Companies would need to explain their governance processes for managing climate risks,strategies for mitigating or adapting to them,and any climate-related opportunities they identify.

While the proposal was initially expected to be finalised in October 2023, the month came and went with no official update. However, recent updates indicate a potential release in April 2024. Once finalised, the rule is expected to be phased in over a timeline to be determined.

More on SEC climate disclosure rules:

• Original press release
• US regulatory agenda, 2024

The standards behind these regulations

Regulations and standards are often confused. Regulations require companies to do something, while standards provide a benchmark of what needs to be done. For example, the CSRD regulation requires businesses of a certain size and operating capacity to report on sustainability topics. The standards underpinning this regulation have been created by the European Financial Reporting Advisory Group (EFRAG) and are expected to be adopted by the Commission by mid-2023.

For SFDR, there are several voluntary standards and norms that companies can use. These include those set up by the GRI, CDSB, SASB, and CDP (more letters for the alphabet soup). While these standards are valid in their own terms, they are not helpful for companies and investors to determine a one-size-fits-all approach. The ISSB is looking to unite these standards into a global and consistent standard that will reduce the burden and duplication on businesses, and present investors with the information they need to make informed decisions with their capital.

Frameworks supporting these regulations

In addition to the disclosure regulations above, there are a variety of frameworks that aim to support organisations in their compliance efforts. These frameworks may take the form of questionnaires or provide guidance on how to meet regulatory requirements for internal teams.

If your company is required to comply with any of these regulations, it would be beneficial to examine the frameworks in order to gain a more in-depth understanding of how to comply.

Anything to add?

Do you have any questions about these regulations that weren’t covered in this article? Please don’t hesitate to reach out to us using our contact form, and we can look to fill those knowledge gaps.