This month’s Policy Digest covers both triumphs and setbacks in the shaping of sustainability reporting standards and regulations. We start with the positive – the International Sustainability Standards Board (ISSB) standards continue to be adopted by countries across the globe. On the back of this policy momentum, the ISSB has released a jurisdictional adoption guide for countries, acknowledging the specificity of use cases and local needs.
In Europe, a make-or-break vote on the EU Corporate Sustainability Due Diligence Directive (CSDDD) was postponed once again. In effect, this means that until Member States reach a legislative consensus, the fate of the EU’s supply chain due diligence law will hang in the balance. By contrast, EU lawmakers made headway on the EU Nature Restoration Law for the restoration of vulnerable ecosystems and struck a deal on a regulation prohibiting products made with forced labour.
In the same month, the European Council and Parliament reached a provisional agreement on the world’s first voluntary framework for the certification of carbon removals and advanced a new sustainable packaging law. Recognizing the gravity of risks associated with environmental harm, Members of European Parliament (MEPs) also approved legislation establishing penalties, including imprisonment and fines, for environmental offences.
Large EU companies are grappling with the implications of sustainability regulation, none as far-reaching as the Corporate Sustainability Reporting Directive (CSRD). With the reporting deadline for CSRD fast approaching, Sweden has proposed a one-year delay for covered companies within its jurisdiction to comply with the regulation. The EU’s collective policy measures have led to increasing scrutiny of a company’s non-financial performance. With regulators taking on enforcement functions, ESG ratings providers (ERPs) have emerged as intermediaries, bridging the gap between companies and regulators by providing third-party opinions on ESG performance. The EU expects to finalise the regulation for the authorisation of ERPs soon. However, questions on the proportionality of compliance burden for small providers remain.
Moving to the United States, the Securities and Exchange Commission (SEC) finally adopted the much-anticipated climate disclosure rule. Under the new rule, Scope 1 and Scope 2 emissions disclosure will be mandatory for large companies. But disclosure requirements of Scope 3 emissions – those generated by supply chains and the use of products and services – were abandoned in the final proposal, raising the question of whether the legislation goes far enough.
Meanwhile, regulators in Asia-Pacific are working to fast-track the implementation of ISSB standards. Singapore confirmed that it will introduce mandatory climate reporting rules from 2025 and Malaysia launched a consultation on ISSB adoption, proposing to start reporting from December 2025. China is also paving the way forward for transparency by mandating climate disclosures for listed companies. Among other regional updates, the final version of the ASEAN Taxonomy (version 2) has taken effect. Finally, the Reserve Bank of India (RBI) set forth requirements for banks to disclose climate-related risks starting in April 2025.
Combined, these developments mark continuity and consistency in the realm of ESG regulation. As seen in this month’s Policy Digest, global regulators are betting big on policies that support a global baseline for sustainability disclosure requirements.
International
International Financial Reporting Standards (IFRS) foundation releases preview of ISSB adoption guide
In February, the IFRS foundation released a preview adoption guide to support jurisdictions integrating and adapting concepts from the ISSB standards into regulatory frameworks. Several countries have already drafted proposals and strategic roadmaps for the adoption of the IFRS S1 General Requirements for the Disclosure of Sustainability-related information and the IFRS S2 Climate-related Disclosures. The forthcoming adoption guide aims to enhance transparency in the ISSB’s view on varied approaches for global ISSB adoption. The IFRS Foundation revealed ‘four pillars’ of proportionality, transition reliefs, phasing-in of requirements and capacity building to create pathways for the consistent application of ISSB-aligned reporting standards across countries. In many countries, a deferral of disclosure rules will allow first-time reporting entities ample time for the assessment and evaluation of financial material topics and ESG performance.
Europe
Decisive vote on EU CSDDD still pending
The EU CSDDD has yet again failed to secure a qualified majority as member states remain divided on the scope and obligation of the regulation. The final text of the regulation published on January 30th stipulates that in-scope companies must incorporate due diligence policies for monitoring, identifying and mitigating adverse impacts in the value chain. In-scope companies are also obligated to end partnerships with companies responsible for adverse impacts that cannot be prevented or ended. Given the increased policy focus on business sustainability across the supply chain, the legislation is likely to remain a key priority for legislators. However, it may take time and political compromise for it to reach the finish line.
EU Parliament adopts Nature Restoration Law
Members of the European Parliament (MEPs) successfully voted to adopt the EU Nature Restoration Law. The new law sets a target for EU countries to restore 30% of covered habitats (including but not limited to forests, grasslands, and wetlands to rivers, lakes, and coral beds) in poor condition by 2030. EU countries will have to monitor progress towards improving the biodiversity of agricultural ecosystems and restore peatlands as a means to reduce emissions in the agricultural sector. These targets may only be suspended in case of exceptional circumstances such as meeting adequate food production requirements.
EU lawmakers advance regulation for sustainable packaging
The European Parliament and Council have reached a provisional agreement on new rules to enhance sustainability in packaging within the EU. The measures aim to reduce, reuse, and recycle packaging, minimise harmful substances, and promote a circular economy. Key aspects include targets for packaging reduction, bans on certain single-use plastics, and the prohibition of “forever chemicals” in food contact packaging. The agreement also encourages the use of reusable packaging, sets minimum recycled content targets, and mandates better waste collection and recycling practices. The agreement must be formally approved before implementation.
EU to enforce ban on products made with forced labour
The European Parliament and Council have reached a provisional agreement on a regulation that would ban products in the EU market made with forced labour. The regulation establishes a framework for investigating human rights violations across the supply chain. Once a company is found in violation of the regulation, the export and import of those products made with forced labour shall be suspended at the EU’s borders and the company will also be forced to withdraw goods that have already entered the EU market. Furthermore, the Internal Market and International Trade Committees are proposing that reintroduction of previously banned goods to the market would necessitate corrective actions. MEPs have called for the establishment of a list identifying high-risk regions and sectors, and in such cases, the burden to prove compliance with international human rights standards would fall on companies.
EU Council and Parliament reach provisional agreement certification scheme for high-quality carbon removals
The framework may be used voluntarily for certifying carbon farming and carbon removal technologies. This certification framework outlines qualifying criteria for carbon farming such as restoring forests and soils, avoiding soil emissions, rewetting peatlands and efficient farming practices. It also specifies rules for carbon capture and minimum requirements for binding carbon in durable products (35 years). The aim of the regulation is to monitor and measures compliance with EU-wide standards, crack down on greenwashing and ensure credibility to the certification process. The Commision has stated that an EU registry will be established in four years to provide greater transparency on certified carbon removals. This initiative will help unlock financing for innovative carbon removal technologies, thereby supporting the growth of a low-carbon economy.
EU to impose environmental crimes, fines and penalties
MEPs voted to adopt new rules on environmental crimes and sanctions. This includes an updated list of ‘qualified offences’ including illegal timber trade and depletion of water resources. Depending on the severity of environmental harm, offenders may face fines, imprisonment or be required to reinstate the affected environment. The regulation provides that companies may be fined up to 5% of their annual turnover or up to 40 million euro depending on the nature of the crime.
EU ESG Ratings Regulation on the horizon with exemptions for small providers
The EU Parliament and member states reached an agreement last month for the authorisation and supervision of ESG ratings providers (ERPs) by the European Securities and Markets Authority (ESMA). The new rules seek to address deficiencies in the operations of ESG ratings providers and enhance transparency around methodologies for sustainability ratings and scores. Regulators have included measures to prevent potential conflicts of interest under the new rules. The latest agreement clarifies that smaller providers will be subject to a lighter touch, optional registration regime of three years for smaller providers. Providers that choose to comply must adhere to general organisational and governance principles, as well as transparency requirements with regard to ratings users. ESMA is authorised to conduct site inspections, investigations and request information at will. Once the temporary exemption is lifted, smaller providers will be within full scope of the regulation and must pay full supervisory fees to comply.
Sweden proposes delay to CSRD implementation
By design, the European Union’s landmark sustainability reporting rule – the Corporate Sustainability Reporting Directive – requires Member States to transpose the directive into national law by July 6th 2024. The Swedish government has however raised concerns about lack of preparedness for full scale reporting in the upcoming financial year and accordingly proposed a deferred timeline for the adoption of CSRD. The proposal submitted to the Swedish Council on Legislation suggests that listed companies with more than 500 employees should begin following reporting regulations from the fiscal year starting after June 2024. This differs from the EU directive, meaning Swedish companies under the CSRD would start reporting from FY 2025, instead of FY 2024 as required by the EU. If approved, large Swedish companies within scope of the CSRD will lag in sustainability reporting compared to other EU companies.
North America
US SEC adopts long-awaited corporate climate disclosure rule
The United States Securities and Exchange Commission (SEC) recently adopted a regulation mandating climate-related financial disclosures for public companies, aiming to provide investors with decision-useful information to assess climate change risks in their portfolios. This regulation, which follows a protracted rulemaking process, sets a precedent for sustainability-related financial reporting legislation in the U.S. In 2023, California enacted two climate disclosure bills, surpassing the SEC in some respects, notably requiring Scope 3 emissions reporting. Despite controversy and delays, the SEC rule will encourage companies to integrate climate considerations into their strategies and aid investors in making well-informed decisions based on the sustainability characteristics of their assets. However, challenges remain, such as potential obstacles to effective enforcement and concerns over the limited scope of disclosed information. Ultimately, this regulatory push signals a significant step towards enhancing transparency and comparability in climate-related financial reporting, aligning with broader efforts towards convergence of global climate reporting standards.
Asia Pacific
Singapore switches from ‘comply or explain’ to mandatory climate reporting in 2025
The Accounting and Corporate Regulatory Authority (ACRA) and the Singapore Exchange Regulation (SGX RegCo) released details on the adoption of mandatory climate-related financial disclosures in accordance with the ISSB standards. Based on feedback from the initial consultation, Singapore will introduce a phased approach for the implementation of climate-related disclosures (CRD). Large listed companies will be the first group obligated to report Scope 1 and 2 emissions from FY 2025 and Scope 3 emissions in FY 2026. Mandatory climate reporting (Scope 1 and 2) will take effect in FY 2027 for large non-listed companies and Scope 3 data must be provided by non-listed entities by FY 2029 at the earliest. The regulatory bodies have defined large non-listed companies as entities with minimum annual revenues of SG $1 billion and assets of at least SG$500 million. The timeline also provisions for listed and non-listed entities to obtain limited assurance for Scope 1 and 2 emissions by 2027. Singapore’s CRD notably provides exemptions for large non-listed companies with parent companies reporting against ISSB, ESRS and other national ESG disclosure rules, while those following recognized reporting frameworks like Global Reporting Initiative (GRI) and TCFD will receive transitional relief.
Australian companies advocate for one year delay to mandatory climate reporting
In a recent press release, the Business Council of Australia (BCA) voiced concerns over the expedited implementation of a new law mandating climate-related reporting. Australia’s Treasury released draft legislation earlier this year requiring large companies that meet size, revenue and assets thresholds to report climate-related risks and opportunities and GHG emissions across the value chain. While agreeing with the necessity of climate-related financial disclosures, the BCA has requested additional time to develop skills and capabilities for comprehensive sustainability reporting. The BCA has also called for alignment with international standards and extended liability safe harbors until 2030 to keep climate litigation at bay until auditing requirements take effect.
Malaysia launches consultation on ISSB adoption
The consultation highlights the Malaysian context where alignment with ISSB standards is critical for an ‘export-oriented country that is intricately integrated into global supply chains’. The Advisory Committee on Sustainability Reporting (ACSR) under the authority of the Malaysian Securities Commission (SC) is seeking feedback on the use and application of IFRS S1 and IFRS S2 standards, with transition reliefs as a requirement. The Committee is also weighing its approach in relation to a sustainability assurance framework. Malaysia announced its intent to incorporate ISSB standards into its National Sustainability Reporting Framework last year. The Consultation paper aims to build on existing sustainability reporting requirements and proposes adoption of IFRS S2 with reliefs and IFRS S1 with reliefs for Main Market listed issuers by 2025 and 2026 respectively. The consultation will close on 21st March 2024.
Chinese Stock Exchanges Announce Mandatory Rules
The Shanghai Stock Exchange, Beijing Stock Exchange and Shenzhen Stock Exchange announced that they will enforce climate disclosure rules for listed companies starting in 2026. Several countries in the region have endorsed convergence with the ISSB standards that takes on a financial materiality approach for the assessment of material risks. According to recent reports, China may go one step further by adopting a double materiality approach for sustainability reporting. This process would mirror the European regulation – CSRD’s – double materiality approach for identifying both impacts of business activities on the environment as well as risks posed by environmental factors on the business. Although the regulations contain provisions limiting the applicability of reporting requirements for listed companies, the disclosures have the potential to capture critical climate-related information including Scope 1 and 2 emissions.
Reserve Bank of India (RBI) releases draft disclosure framework for climate-related financial risks
The RBI has released a draft disclosure framework aimed at addressing climate-related financial risks for regulated entities (REs). The framework establishes baseline disclosure requirements across four pillars – Governance, Strategy, Risk Management and Metrics and Targets – in line with TCFD. Scheduled commercial banks, financial institutions, and larger non-banking financial companies (NBFCs) will need to disclose this information starting from FY 2026, with specific metrics and targets required by fiscal year 2028. The RBI emphasizes the importance of consistent and comparable disclosures to prevent mispricing of assets and misallocation of capital due to inadequate information about climate-related financial risks. The draft framework is open for public comments until April 30.
ASEAN Taxonomy Version 2 takes effect
In 2023, the Association of Southeast Asian Nations (ASEAN) Taxonomy Board (ATB) released the final version ASEAN Taxonomy for Sustainable Finance (Version 2), demonstrating Asia’s commitment to meeting the Paris Agreement commitments. Similar to the EU Taxonomy Regulation, the ASEAN Taxonomy aims to standardize the classification of sustainable activities and assets to provide a “common language” for assessing a company’s sustainability. Version 2 includes advanced assessment methodologies, technical screening criteria, and science-based thresholds to classify activities. The ASEAN Taxonomy’s third Essential Criteria now includes social aspects, alongside “Do No Significant Harm” and “Remedial Measures to Transition.” After receiving feedback from member states and multiple stakeholders, the ATB has released the final version of the Taxonomy. This will serve as voluntary guidance for member states who wish to follow one of two assessment approaches – the Foundation Framework (FF) or the Plus Standard (traffic-light classification system for green and amber activities).
Other news and resources
- EFRAG announces public consultation on draft XBRL Taxonomy for ESRS Set 1. Read more
- Hong Kong Monetary Authority (HKMA) to launch physical risk assessment platform. Read more
- UNPRI introduces ‘Progression Pathways’ to support responsible investment practices. Read more
- UNPRI unveils 2030 EU Policy Roadmap. Read more
- SGX Regco consultation seeks feedback on mandatory sustainability reporting. Read more
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