ESG Policy Digest: December 2024

6th December 2024

In this month’s edition of the ESG Policy Digest, we delve into the latest regional policy updates, covering key aspects of the ESG reporting journey – from regulatory frameworks for data disclosure to advancements in sustainability reporting standards and assurance practices.

GLOBAL

CDP and EFRAG announce enhanced interoperability

CDP and EFRAG have announced enhanced interoperability between the CDP questionnaire and the EU’s Sustainability Reporting Standards (ESRS), particularly the ESRS E1 climate standard. The collaboration aims to streamline sustainability disclosures, with significant overlap identified between the two frameworks. This alignment is intended to make it easier for companies reporting under ESRS to also complete CDP disclosures, and vice versa. Further guidance and mapping will be published in early 2025, supporting companies in their upcoming disclosure cycles.

IOSCO Report on Transition Plans Disclosures

IOSCO has published a report on transition plan disclosures, emphasising the importance of consistent, comparable, and reliable information for investors. Key areas for future action include promoting guidance on transition plan disclosures, assurance, and enhancing regulatory clarity. The report outlines five essential components for effective disclosures: targets, decarbonisation strategies, governance, financial resources, and financial implications. IOSCO encourages alignment with global standards and collaboration with the ISSB to mitigate greenwashing and enhance market integrity.

Europe

EU prioritises streamlining of corporate sustainability reporting from 2025

On November 8th 2024, the EU Commissioner Ursula von der Leyen announced plans to streamline the EU’s sustainability disclosure rules. The EU’s sustainable finance agenda is built on a foundation of corporate reporting regulations including the CSRD, EU Taxonomy and the CSDDD. While many concepts are common across these regulations, reporting obligations are “often overlapping”. In a bid to reduce administrative burden, legislators will now consider consolidating these distinct rules into an omnibus regulation set to be published in 2025.

Against this backdrop, ESMA released the European Common Enforcement Priorities (ECEP) Statement for 2024. Among other enforcement priorities in 2025, ESMA has clarified that companies preparing sustainability statements under the ESRS must provide transparent disclosures on the materiality assessment processes including stakeholder engagement and connections to due diligence. Additionally, the ECEP statement highlights the importance of establishing “connectivity” between sustainability and financial statements. ESMA has further specified details under the ESRS Disclosure Requirements (DR) on the content and presentation of information, underscoring the inclusion of value chain information with a proviso of transition reliefs. Finally, ESMA reiterates the importance of mandatory use of Article 8 Taxonomy templates, accurate reporting on eligibility and alignment with environmental objectives, and consistency between Taxonomy disclosures and transition plans. In the ECEP, ESMA has encouraged financial sector issuers to disclose estimates of Taxonomy alignment when sufficient data is unavailable. Additionally, on 29^th November, the European Commission reinforced its call for simplifying the agenda by publishing FAQs that clarify the technical screening criteria for activities covered under the Taxonomy’s Climate and Environmental Delegated Acts. The FAQs aim to enhance the usability of the classification framework by revisiting key concepts including the do no significant harm (DNSH) principle to ensure that eligible economic activities do not conflict with the environmental objectives outlined in the delegated acts.

As one of the EU’s top supervisory authorities, ESMA is responsible for centralizing disclosed information, including both financial and non-financial data. On 29th October 2024, ESMA, along with EIOPA and EBA, released the final report on the draft Implementing Technical Standards for the European Single Access Point (ESAP), which facilitates user access to sustainability information.

EFRAG publishes revised ESRS for SMEs

The guidance document provides “non-authoritative support” to companies required to disclose transition plans under the ESRS framework. This disclosure requirement is cross-cutting, embedded in related EU regulations such as the CSDDD and EU Taxonomy, as well as international frameworks and standards. The guidance provides that companies must disclose credible science-based targets aligned with the 1.5°C goal of the Paris Agreement and outline concrete measures to reduce their carbon footprint across business operations. Additionally, covered entities must disclose investment plans that support portfolio decarbonization and funding for these plans, including EU Taxonomy-aligned CapEx. Overall, the guidance underscores the importance of integrating climate transition plans into the broader corporate strategy, with explicit support from governance bodies, ensuring alignment between sustainability objectives and corporate planning. Once targets are set, companies must ensure that they are tracking their progress in implementing transition plans and take corrective action if they fall behind. The guidance also addresses the interconnectedness of climate and nature, requiring disclosure of how transition plans might impact workers, communities, and ecosystems, and how they may depend on adaptation actions.

EIOPA calls for higher capital requirements for fossil fuel assets

EIOPA has published a new report recommending higher capital requirements for fossil fuel-based assets, following a mandate to assess the potential for a dedicated prudential treatment of assets or activities that significantly impact environmental or social objectives, or harm them. The report argues that the additional capital requirements for fossil fuel assets on European insurers’ balance sheets accurately reflect the high risks associated with these assets, based on a risk-based analysis of data and stakeholder feedback from EIOPA’s Discussion Paper and public consultation. The report addresses three key areas: market risks linked to climate transition, the impact of climate risk prevention measures on non-life underwriting risks, and the treatment of social risks. Specifically, EIOPA suggests increasing capital requirements by up to 17% for fossil fuel-related stocks and introducing a capital charge of up to 40% for fossil fuel bonds. The report has been submitted, and the Commission will consider its implementation.

Spain transposes CSRD into national law

The Spanish Council of Ministers approved the transposition of two European directives, including the Corporate Sustainability Reporting Directive (CSRD), which standardizes the reporting and verification of sustainability information for companies. The new laws require large companies and listed SMEs to report on sustainability, with independent verification and include measures to simplify accounting obligations for some companies by adjusting size thresholds in response to inflation.

ESAs publish third report on PAI disclosures

ESAs have jointly published the second report on PAI disclosures under SFDR. The report examines the quality of disclosures published by 30 June 2023, regarding the reference period from 1 January 2022 to 31 December 2022. The report outlines improvements and clarifications for PAI reporting, aiming to enhance consistency and transparency for financial market participants. It includes detailed guidelines on how firms should disclose environmental, social, and governance (ESG) impacts, ensuring alignment with the EU’s sustainability goals. The recommendations also aim to streamline reporting and reduce the burden on firms while increasing investor access to relevant ESG data.

Key Areas: Clarifications on indicators and methodologies for ESG impacts.
Streamlined Reporting: Guidance to ease reporting for market participants.
Alignment with EU Goals: Enhances alignment with EU sustainability objectives.
Timeline: Final recommendations will be implemented in 2025, influencing upcoming reporting cycles.

United Kingdom

FCA publishes best practices under the SDR investment labelling regime

The FCA has released guidance for firms applying for Sustainability Disclosure Requirements (SDR) labels, focusing on promoting transparency and preventing greenwashing in sustainable investment products. This builds on the previously published examples of good and poor practices for pre-contractual disclosures. The guidance outlines expectations for firms to clearly articulate the sustainability objectives of their products, the methodologies used to achieve these objectives, and measurable targets for tracking performance.

Key highlights include:

Clarity and Transparency: Firms must avoid vague or overly complex language and ensure investors can easily understand how sustainability characteristics are embedded in the investment process.
Alignment with SDR Labels: Products applying for labels such as “Sustainable Focus” or “Sustainable Improvers” must demonstrate clear evidence of their sustainable investment approach, supported by robust methodologies and tangible outcomes.
Robust Metrics and Evidence: Firms are encouraged to provide specific metrics, data, and case studies to substantiate claims, ensuring alignment with SDR’s core principles.
The FCA has emphasised the importance of embedding these practices into firm processes to improve trust and comparability in sustainable investments.

UK FRC revises stewardship code

The Financial Reporting Council (FRC) recently launched a consultation on proposed updates to the UK Stewardship Code, aimed at strengthening the framework’s focus on sustainable outcomes and responsible investment practices. Key areas of focus include improved reporting transparency, clearer ESG impact evidence, and aligning stewardship with emerging global standards. The consultation seeks input from stakeholders to refine expectations on stewardship practices and is open until February 2025. The consultation is intended to refine how asset managers, owners, and service providers report and implement stewardship activities.

UK Financial Reporting Council unveils 2025 Taxonomy suite

The UK Financial Reporting Council (FRC) has released its 2025 Taxonomy Suite, aimed at enhancing digital reporting for entities using UK GAAP, EU-adopted IFRS, and the UK Single Electronic Format (UKSEF) for ESEF filings. This update introduces improved tagging for key disclosures, supporting more accurate, transparent, and comparable digital financial statements. Enhanced taxonomies also align with recent UK regulatory requirements, ensuring consistency in reporting across diverse sectors. This suite is essential for companies adapting to evolving financial reporting standards in the UK.

UK TPT releases final report on transition guidance

The UK Transition Plan Taskforce’s (TPT) final report reviews progress on climate-related transition planning and sets out a detailed roadmap for further implementation. Key upcoming steps include refining disclosure standards, sector-specific guidance, and a “comply or explain” regulatory approach. In early 2025, the TPT will release updated guidance for financial institutions and corporations, focusing on clear, measurable actions for emissions reduction aligned with UK’s net-zero by 2050 goal. The taskforce emphasises the need for scalable and transparent transition strategies across sectors to support the UK’s climate targets.

North America

California climate rule survives first legal challenge

California’s progressive climate disclosure laws recently survived major legal pushback with a California judge rejecting the U.S. Chamber of Commerce’s request to block its implementation on constitutional grounds. This marks a precedent for corporate climate reporting legislation which is still being contested at the federal level in the US. On September 27^th, 2024, California Governor Gavin Newsom signed Senate Bill 219 (SB 219) into law, merging and amending SB 253 (Climate Corporate Data Accountability Act) and SB 261 (Climate-Related Financial Risk Act). The two climate bills, commonly referred to as the California Climate Accountability Package, introduced the most extensive emissions disclosure requirements in the U.S. SB 253 requires all public and private entities doing business in California with over $1 billion in revenue to annually disclose their GHG emissions, including value chain emissions by 2026. SB 261 mandates companies with over $500 million in revenue to disclose climate risks, in line with the recommendations of the Taskforce for Climate-related Financial Disclosure (TCFD), by 2026.

Canada ends consultation on ISSB-aligned sustainability disclosure standards, plans adoption by Q4 2024

The Canadian Sustainability Standards Board (CSSB) completed its 90-day consultation on the adoption of ISSB standards on June 10, 2024. Following this consultation, the CSSB is working to finalize the standards by the end of Q4 2024. In parallel, the Government of Canada announced plans to mandate climate-related disclosures for large federally incorporated companies through amendments to the Canadian Business Corporations Act (CBCA). This initiative will complement efforts by the Canadian Securities Administrators (CSA), which is revising its proposed National Instrument on climate-related disclosures for publicly traded companies.

CAPSA publishes final Risk Management Guideline for pension funds

The Guidelines clarify that pension plan administrators may violate their fiduciary duties if they fail to identify and appropriately address ESG risks in a way that aligns with their plan’s specific circumstances and investment principles. To carry out their duties in line with the Guidelines, CAPSA has suggested a proactive approach—using a risk management framework to identify, evaluate, manage, and monitor material risks.

Pakistan to phase in ISSB adoption

The Securities and Exchange Commission of Pakistan (SECP) has launched a survey to gather public input on the phased adoption of IFRS Sustainability Disclosure Standards (IFRS-S1 and IFRS-S2) in Pakistan. The standards, covering sustainability and climate-related disclosures, are recommended by the Institute of Chartered Accountants of Pakistan. Adoption will begin in 2025, with subsequent phases in 2026 and 2027. The SECP aims to align Pakistan’s markets with global practices, enhance transparency, and support sustainable business practices.

RBI launches climate data repository

The Reserve Bank of India (RBI) is creating the Climate Risk Information System (RB-CRIS) to enhance climate risk assessments for financial institutions. This system will bridge gaps in available data, which is often fragmented and inconsistent. RB-CRIS will consist of two parts: a publicly accessible directory of climate data sources, and a restricted portal providing processed, standardised data for regulated entities. The data portal will be gradually rolled out in phases. The initiative, announced in October 2024, is part of RBI’s broader strategy to strengthen financial system resilience against climate-related risks.

SEBI Consults on Ease of Doing Business for ESG Rating Providers

The Securities and Exchange Board of India (SEBI) released a consultation paper proposing measures to ease operations for ESG Rating Providers (ERPs). The focus is on streamlining regulations, enhancing transparency, and lowering barriers for new entrants. The goal is to improve the credibility of ESG ratings, aligning them with global standards, and facilitating easier business practices for ERPs in India. Stakeholders are encouraged to submit their feedback on these proposals. The call for feedback closed on 15^th November 2024.

Thailand releases Taxonomy Phase 2

The Thailand Taxonomy Board has launched Phase 2 of the Thailand Taxonomy for public consultation, focusing on sustainable business practices. The consultation period runs from October 28, 2024, to January 10, 2025. The Thailand Taxonomy Phase II aims to extend its scope to four key sectors: manufacturing, agriculture, waste management, and construction. It will provide a framework for businesses to align with climate change mitigation goals. This phase, which builds on Phase I’s focus on energy and transportation, will include criteria for reducing greenhouse gas emissions. This phase aims to refine the criteria for green activities, supporting the alignment of Thailand’s financial sector with environmental sustainability goals. Feedback from stakeholders is encouraged to ensure the framework meets broad economic and environmental objectives. More information is available on their official website.

Chinese stock exchanges table sustainability disclosure standards

Chinese stock exchanges have proposed new sustainability disclosure rules, introducing a double materiality framework. The draft outlines 21 reporting areas, including governance, environmental impact, and social aspects, and asks companies to select sector-specific metrics. These rules aim to enhance transparency in sustainability reporting and align with international standards. Companies will need to disclose both their environmental impact and how sustainability issues affect their financial performance. This initiative is part of China’s broader efforts to integrate ESG factors into its capital markets.

Concerns Raised Over New Zealand’s Scope 3 Reporting and Transition Plan Changes

New Zealand’s proposed amendments to its climate reporting framework, including Scope 3 emissions disclosures, have raised concerns among stakeholders. While the proposed changes have garnered broad support, particularly for transition plans, there is a push for greater alignment with the International Sustainability Standards Board (ISSB). The amendments aim to refine the country’s climate reporting rules, ensuring they meet global standards while addressing investor needs and fostering greater transparency.

Africa & Middle East

Tanzania approves adoption of ISSB standards within a localised context

The National Board of Accountants and Auditors of Tanzania (NBAA) has approved the adoption of the International Sustainability Standards Board (ISSB) Sustainability Reporting Standards, which will be implemented in Tanzania from January 1, 2025. The ISSB-aligned disclosure regime will be mandatory for Public Interest Entities (PIEs). While the adoption is not yet mandatory for Public Sector Entities, the NBAA has encouraged them to apply the current sustainability standards in preparation. This move aligns Tanzania with global sustainability reporting practices and aims to enhance transparency and accountability in sustainability disclosures.

IFRS publishes state of adoption report. Read more
EU Commission launches targeted consultation on the functioning of the EU securitisation framework. It is open for comments until 4 December. Read more
IAASB rolls out new sustainability assurance 5000 requirements. Read more

ESG Book manages the world’s largest repository of sustainability reporting provisions with over 3,000 regulations across more than 80 jurisdictions globally. If there is a recent ESG regulatory development we have missed, we would like to hear from you and invite you to contribute below. Click here to access the ESG Regulatory Provisions Contributor Form.

The Political Climate

4th November 2024

As the US gears up for a historic election this November, we reflect on the differing realities under each President and the how the makeup of Congress could potentially shape climate and ESG legislation in a polarized political landscape. While climate and ESG issues aren’t explicitly “on the ballot”, we examine some of the key policies and initiatives that are at stake in the upcoming election and present predictions on how these will fare in the long-term based on the election outcome.

To read the full article, click here

ESG Policy Digest: October 2024

30th October 2024

Help Shape the Future of CSRD and ISSB Reporting

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In this monthly edition of the Policy Digest, we explore regional policy developments spanning the entire lifecycle of non-financial reporting – from ESG data to the verification and assurance of sustainability reports.

In North America, Canada announced plans for the development of a sustainable investment taxonomy and to make mandatory climate disclosures for large and federally incorporated private companies. The two sustainable finance initiatives are designed to bolster the broader effort to mobilise private sector capital in support of the country’s transition to a net zero economy. Meanwhile in the US, California consolidated its climate disclosure laws into Senate Bill 219 (SB 219), effectively cementing the 2026 deadline for climate reporting for large companies operating in the state. The progress in sustainability reporting marks a significant breakthrough, especially in California, the world’s fifth largest economy by gross domestic product (GDP) and home to many of the largest Fortune 500 companies.

Across the Atlantic, the European Commission has opened infringement procedures by issuing formal notices to 17 Member States, urging them to ensure the timely transposition of the Corporate Sustainability Reporting Directive (CSRD) in preparation for the first reporting deadline in 2025. Throughout Europe, regulators focused on validation of sustainability reporting – the EU’s top auditing oversight body released guidelines on limited assurance of the European Sustainability Reporting Standards (ESRS) reports, while the French authority- Haute Autorité de L’Audit (H2A) – issued standards for the verification of sustainability information produced under the CSRD and Taxonomy Regulation. The EU’s real challenge lies in the implementation of binding sustainability regulation affecting global stakeholders. To address this, the Commission recently proposed a one-year delay in the implementation of the European Deforestation Regulation (EUDR) and issued guidance with aims to achieve the environmental outcomes, while considering varying capacities and levels of preparedness.

In the Asia Pacific region, Hong Kong took centre stage this month as regulators emphasised high alignment with the International Sustainability Standards Board (ISSB) standards. In addition, a new voluntary code of conduct for ESG ratings and data products providers was launched to enhance transparency around sustainability ratings, scores and data.

At a practical level, these global regulatory initiatives are designed to substantially improve the reliability of sustainability reports and credibly strengthen certification and verification audits through a procedural system of checks and balances.

NORTH AMERICA

California climate disclosure laws consolidated under SB 219

On September 27, 2024, California Governor Gavin Newsom signed Senate Bill 219 (SB 219) into law, merging and amending SB 253 (Climate Corporate Data Accountability Act) and SB 261 (Climate-Related Financial Risk Act). The two climate bills, commonly referred to as the California Climate Accountability Package, introduced the most extensive emissions disclosure requirements in the U.S. SB 253 requires all public and private entities doing business in California with over $1 billion in revenue to annually disclose their GHG emissions, including value chain emissions by 2026. SB 261 mandates companies with over $500 million in revenue to disclose climate risks, in line with the recommendations of the Taskforce for Climate-related Financial Disclosure (TCFD), by 2026.

The recently enacted SB 219 amends SB 253 by extending the California Air Resources Board’s (CARB) deadline to promulgate implementing regulations by six months, from January 1, 2025, to July 1, 2025. Reporting entities will still be required to prepare and disclose Scope 1 and 2 emissions in 2026, based on 2025 data even official guidance from CARB is not available in the interim. However, SB 219 allows CARB to specify a schedule for the disclosure of Scope 3 emissions, which was previously mandated to be disclosed 180 days after the Scope 1 and 2 emissions reports. The amendments also authorise subsidiaries to submit consolidated reports at the parent company level and decouple filing fees from the annual reporting fee under both SB 253 and SB 261.

SB 219 is landmark piece of legislation with widespread implications due to the size of California’s economy, which is currently the fifth largest in the world and is expected to overtake Germany as the fourth largest by the end of the year. SB 253 is estimated to apply to over 5,000 companies, 80% of which are privately held. Regulatory bodies and private stakeholders have raised several concerns about the implementation of SB 253 and SB 261, particularly for private entities. These concerns include the risk of double-counting emissions between suppliers and public entities, the potentially prohibitive compliance costs for private companies, and the requirement for private firms to disclose sensitive information, which could undermine their competitive advantage. Despite the importance of these regulations, the twin bills consolidated under SB 219 continue to face litigation due to the broad scope of entities covered. The final requirements and implementation timeline remain uncertain, as they may be affected by a pending lawsuit filed on January 30, 2024, in the U.S. District Court for the Central District of California. The lawsuit challenges the legality of SB 253 and SB 261 under the First Amendment, arguing that these laws overstep state regulatory authority beyond the scope of the federal Clean Air Act.

Read More.

Canada launches sustainable investment taxonomy and expands mandatory climate disclosures for federally incorporated companies

The Government of Canada has announced plans to develop a made-in-Canada sustainable finance taxonomy aimed at mobilising private investment to support the country’s net-zero goals. The Taxonomy will serve as a critical tool for investors, banks, and asset managers alike to identify both green and transition investments. Under the new Taxonomy, qualifying green activities will encompass low or zero-emission technologies such as green hydrogen, solar, and wind energy, while transition activities will focus on decarbonising emission-intensive sectors critical for the net-zero transition, such as lower-emission steel production.

The framework for classifying green and transition activities will be based on scientifically credible, Paris-aligned pathways. Initially, the Taxonomy will concentrate on six hard-to-abate sectors: electricity, transportation, buildings, agriculture, manufacturing and extractives, including natural gas, with a focus on significantly decarbonising existing operations. Canada’s Taxonomy is scheduled for development within 12 months and will be interoperable with global taxonomies to promote cross-border green financial flows. This initiative is part of the government’s broader efforts, as confirmed in the 2023 Fall Economic Statement and Budget 2024, to launch both a sustainable investment taxonomy and mandatory climate disclosures.

As part of the Taxonomy development, Canada has also announced the expansion of mandatory climate disclosures under the Canada Business Corporates Act for large, federally incorporated private companies. The scope and applicability of the regulation has not yet been formalised. However, the Canadian government has confirmed that small- and medium sized businesses will be exempt and can opt-in to disclose climate-related financial information. Canada has already imposed mandatory climate reporting for financial institutions and separately, is set to finalise ISSB-aligned sustainability disclosure standards.

Read More.

EUROPE

European Commission initiates infringement procedures on CSRD Implementation

The European Commission has issued formal notices to 17 Member States for missing the 6 July, 2024 deadline to transpose the Corporate Sustainability Reporting Directive (CSRD) into national law. Formal letters were sent to Belgium, Czechia, Germany, Estonia, Greece, Spain, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Poland, Portugal, Romania, Slovenia and Finland, directing them to respond and finalise the transposition within two months. The Commission has noted that the delay in transposition undermines harmonised reporting and investor decision-making. Under the EU’s infringement procedure, the Commission can initiate legal action against any Member State that does not adhere to EU laws, beginning with a formal notice. This will be followed by a reasoned opinion necessitating compliance, and potentially a referral to the court for penalties.

Read More.

EU Commission creates guidelines for limited assurance of sustainability reports

The EU Commission, on 30 September 2024, released guidelines for limited assurance on sustainability reporting. The Committee for European Oversight and Auditing Bodies (CEOAB) provides a framework for conducting assurance engagements in line with the Corporate Sustainability Reporting Directive. The Guidelines explicitly state that it “should be read in conjunction with any national rules applicable to assurance on sustainability reporting” and does not supersede national level requirements issued by the relevant national competent authorities (NCAs).

The CSRD requires large companies subject to the Non-Financial Reporting Directive (NFRD) to prepare sustainability statements according to the ESRS from 2025. These statements must undergo limited assurance by statutory auditors or other independent assurance service providers (IASPs) in accordance with a national standard until a more comprehensive EU wide standard is adopted by 1 October, 2026. The non-binding guidelines emphasise the importance of auditors’ professional judgment and critical assessment of both qualitative and quantitative sustainability data. Auditors are required to verify that sustainability information meets ESRS standards, follows a process of double materiality, and is free from material misstatements. While the limited assurance framework is in place, a shift to reasonable assurance is expected by October 2028, pending a feasibility study.

The European Commission will likely adopt the International Standard on Sustainability Assurance 5000 (ISSA 5000), which was recently approved by the IAASB on 20 September 2024. The ISSA 5000 standards are expected to be finalised in December 2024 with final guidance and application materials set to release in early 2025.

Read more

France releases national standard for ESRS auditing

France’s top authority for auditing – Haute Autorité L’Audit – has published guidelines for the certification of sustainability information under the Corporate Sustainability Reporting Directive (CSRD) and Article 8 of the Taxonomy Regulation. The document outlines the processes for conducting limited assurance audits and assessing compliance with the European Sustainability Reporting Standards (ESRS) through the lens of double materiality. The guidelines emphasise the verifier’s responsibilities to ensure that the entity’s process for preparing and publishing sustainability information complies with the ESRS. Additionally, a verifier must evaluate the accuracy and relevance of the sustainability information published, ensuring that sustainability statements are not misleading. The guidelines have been developed to ensure consistency across the EU, in line with the CEAOB and international audit standards and will be revised once the European limited assurance standard is published (expected by October 2026). It covers detailed steps for verifiers, including collaboration with auditors, use of external experts, understanding the entity’s governance structure, and assessment of internal control systems related to sustainability reporting.

Read more

EU proposes one-year delay to the implementation of the EU Deforestation Regulation (EUDR)

The proposed delay would make the EUDR effective from December 2025 for large companies and June 2026 for micro and small enterprises. The Commission proposed postponing the implementation of the law after global partners expressed concerns about their readiness to comply. The EUDR is a key legislative reform to address nature-related risks in the supply chain. The law bans the sale of deforestation-linked products in the EU, imposing due diligence obligations on companies and suppliers dealing with commodities such as palm oil, cattle, soy, coffee, cocoa, timber, and rubber, along with by products. Since the EUDR’s adoption in 2023, suppliers have called for guidance and measures to promote fair participation and strengthen their capabilities to meet the standards, ensuring a more balanced impact on small-scale producers.

On 26 September 2024, the Commission released guidance to clarify key concepts and definitions, including traceability obligations and product scope, to ensure consistent interpretation of the law by companies and enforcement authorities. Additionally, the Commission and the European External Action Service have introduced a strategic framework for international cooperation on the EU Deforestation Regulation. This framework outlines five priority actions, such as support for smallholders, eight key principles, including a human rights-centered approach, and various implementation tools like dialogue and financing. A new IT system for due diligence statements will be operational by December, and the Commission is enhancing international cooperation through transparent country benchmarking to classify deforestation risk. The Commission has urged the European Parliament and the Council to approve the extension by the end of the year.

Read more

ASIA-PACIFIC

HKICPA publishes exposure drafts for Hong Kong sustainability reporting standards

The Hong Kong Institute of Certified Public Accountants (HKICPA) has proposed new sustainability disclosure standards supporting “full convergence” with the ISSB standards. The proposed standards – HKFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and HKFRS S2 Climate-related Disclosures (HK EDs) – will apply to publicly accountable entities such as listed companies, banks, fund managers, insurance firms, and Mandatory Provident Fund trustees. Hong Kong’s Vision Statement, released earlier this year, outlined interoperability as a key policy priority to promote consistency and comparability of sustainability reporting for Hong Kong businesses. The HKICPA is seeking public feedback on the proposed standards, with the consultation period open until 27 October, 2024. The standards are expected to come into effect in August 2025.

Read More.

Hong Kong introduces industry-led voluntary code of conduct for ESG rating and data product providers

A working group of investors and data providers, sponsored by the Hong Kong Securities and Futures Commission (SFC), have published a voluntary Code of Conduct (CoC) for ESG ratings and data products providers in Hong Kong. This code aims to establish a globally consistent framework for ESG ratings and data providers operating in the country, promoting transparency, governance, and quality in their services. The Code is aligned with the International Organization of Securities Commissions’ (IOSCO) recommendations and focuses on key principles, including governance, quality, conflict of interest management, transparency, and stakeholder engagement. Providers opting into the Code are required to complete a self-evaluation, embed the Code into their operations, and publish a self-attestation within six months for ratings providers and one year for data providers. The International Capital Market Association (ICMA) will oversee the Code’s maintenance and publish the name of the signatories to the code. However, ICMA is not responsible for investigating or confirming adoption. This voluntary code is considered a lighter-touch approach to enhancing transparency among ESG ratings and data providers.

Hong Kong joins regional peers, including Singapore, Japan and South Korea, in introducing a principles-based CoC for the self-regulation and attestation of ratings and data providers’ practices and processes. Thus far, India and the European Union are the only jurisdictions imposing mandatory regimes for the regulation of ESG ratings and data providers.

Read More.

Other News and Resources

The World Bank Group and the IFRS Foundation will partner to promote the adoption of ISSB standards in emerging markets and developing economies (EMDEs). Read More.
The International Auditing and Assurance Standards Board (IAASB) approved the International Standard on Sustainability Assurance 5000 (ISSA 5000). Read more
GFANZ publishes Draft Guidance on ‘Transition-Informed’ Indexes. Read more

*ESG Book manages the world’s largest repository of sustainability reporting provisions with over 2,800 regulations across more than 80 jurisdictions globally. If there is a recent ESG regulatory development we have missed, we would like to hear from you and invite you to contribute below.

Click here to access the ESG Regulatory Provisions Contributor Form.

ESG Policy Digest: September 2024

26th September 2024

September’s edition of the Policy Digest features key regulatory developments surrounding the global baselines set by the EU Corporate Sustainable Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB) Standards.

In the EU, the European Financial Reporting Advisory Group (EFRAG) has finalised the format and presentation of sustainability statements with the XBRL taxonomy for the first set of European Sustainability Reporting Standards (ESRS). The digital taxonomy allows reporting entities to tag their sustainability statements in a machine-readable XBRL format, improving accessibility of decision-useful information for investors. Meanwhile, the German FNG label has proposed a three-way split of the label to keep up with market demands and regulatory developments. The label will be divided into three distinct categories – a values label, a transition label, and a sustainability label.

In the UK, the Financial Conduct Authority (FCA) has proposed a delay in the implementation of its investment labelling regime – the Sustainable Disclosure Requirements (SDR). The SDR naming and marketing rules have extended the deadline for firms to meet the regulatory criteria, reflecting a pragmatic approach to supporting compliance.

Turning to Asia-Pacific, Australia is progressing toward the establishment of a comprehensive sustainable economic framework with significant regulatory advancements. The country has implemented mandatory ISSB-aligned climate-related disclosures and an interim report on the development of its sustainable finance taxonomy, both key pillars of its national sustainability agenda. Progressing the adoption of IFRS standards further in the region, Singapore has announced timelines for the incorporation of the standards in its sustainability reporting regime.

Meanwhile, in the US, the outlook for ESG legislation remains uncertain, driven by ongoing political polarisation. In Missouri, a District Court ruled the state’s anti-ESG disclosure law unconstitutional, while in California, legislators are advocating for the timely implementation of corporate climate disclosure laws, rejecting an extension period proposed by the Newsom administration. At the federal level, the US Securities and Exchange Commission (SEC) recently approved new standards to regulate audit quality, modernise practices and strengthen accountability through the use of emerging technologies. Despite progress in rulemaking, however, the Commission’s commitment to enforcing ESG regulation is now in question, with the recent dissolution of the SEC’s Climate and ESG Enforcement Task Force signalling a potential shift in direction amid mounting legal challenges and industry opposition.

Finally, in South America, the Chilean financial regulator, Comisión para el Mercado Financiero (CMF), has issued a consultation proposing the adoption of the ISSB standards. Chile is among a list of Latin American countries, including Brazil and Costa Rica, that have committed to adopt the ISSB standards, further aligning the region with international sustainability frameworks.

These developments reflect a concerted push from global regulators to promote the harmonisation of reporting standards and frameworks. With the foundations for sustainability reporting increasingly in place, the challenge is now around how financial institutions and companies navigate this ever more complex world of ESG regulatory compliance.

EUROPE

EFRAG publishes XBRL taxonomy for set 1 of ESRS

On August 30^th, 2024, the European Financial Reporting Advisory Group (EFRAG) published a digital taxonomy for the first set of the European Sustainability Reporting Standards (ESRS), which will enable users to digitally tag their sustainability statements in a machine-readable XBRL format. EFRAG has simultaneously released an XBRL Taxonomy for Article 8 disclosures. The ESRS Taxonomy facilitates standardisation and comparability of ESRS statements by providing ‘tags’ for every datapoint and dimensional disaggregation defined in the disclosure requirements. Specifically, the advanced tagging of narrative disclosures will enhance the usability of ESRS statements for key users including investors. Companies may voluntarily mark-up sustainability disclosures in accordance with the XBRL Taxonomy until it is adopted by way of an amendment to the Delegated Regulation on the European Single Electronic Format (ESEF). Read More.

German FNG Label to be split into three separate label categories

The FNG label has introduced a significant update, proposing a split into three distinct label categories—Values, Transition, and Sustainability—as part of a methodological approach aligned with recent legislative changes on the continent. The new labels reflect FNG’s commitment to maintaining a high-quality standard for sustainable investments. To obtain the FNG label, funds must meet the minimum mandatory criteria proposed for the voluntary labels. The proposed Values label requires at least 50% of assets to be allocated to values-oriented investment strategies in line with existing FNG Seal Exclusions. The Transition label requires 80% of assets to be focused on climate, sociological or ecological transitions and apply the climate transition benchmark exclusions. And the Sustainability label is aligned with Paris-aligned benchmark exclusions and ESMA’s fund labelling guidelines. The labels will continue to have the star ratings system to allow funds to be put into individual categories. These changes bring greater transparency and consistency with evolving regulatory frameworks and market demands. A public consultation will take place in December 2024, with the new labels set to launch next year. Read More.

UNITED KINGDOM

FCA provides limited extension for compliance with SDR naming and marketing rules

The FCA announced it plans to delay implementing its Sustainability Disclosure Requirements regulation (SDR) which came into effect on 31^st July 2024. The SDR and four investment labels (Sustainability Focus, Sustainability Improvers, Sustainability Impact and Sustainability Mixed Goals) are part of a package of measures for asset managers, including a naming and marketing rule, and an Anti-Greenwashing Rule (AGR) which applies to all FCA-authorised firms in the UK. The FCA has confirmed that it will extend the deadline to comply with the naming and marketing rule to 2^nd April 2025 for firms that have submitted a completed application for amended disclosures by 1^st October, 2024, and currently use terms such as ‘sustainable,’ ‘sustainability,’ or ‘impact’ in their fund names. The “temporary flexibility” allows firms additional time to meet the criteria specified in the naming and marketing rule. The AGR which took effect in May 2024 will, however, still apply to all funds in scope. Read More.

ASIA-PACIFIC

Australia’s mandatory climate disclosure regime to come into effect in January 2025

On 9^th September 2024, the Australian Federal Parliament passed a law establishing mandatory climate-related disclosures aligned with the ISSB standards. The AASB will now incorporate both non-mandatory sustainability-related disclosure (ASRS 1) and a mandatory climate-related disclosure (ASRS 2), reversing its earlier decision to only incorporate mandatory climate disclosures. Key changes to the legislation to adopt the ISSB-aligned standards include a requirement to disclose information relating to climate scenario analysis using both the low (1.5°) and high (2.5°) climate scenario analysis. Reporting will encompass the entire value chain, providing comprehensive transparency on climate impact and management. The AASB will set a phased approach for assurance requirements with ‘end state’ reasonable assurance for all climate disclosures becoming mandatory from 2030. Read More.

Australia releases interim report on the development of its sustainable finance taxonomy

On 10^th September 2024, Australia’s Department of Treasury released an interim report on the development of a sustainable finance taxonomy that aims to provide common definitions for sustainable economic activities and direct private investment towards the country’s net-zero transition plan. Initiated in July 2023, this taxonomy forms a key component of the government’s sustainable finance agenda. The interim report gives an overview of the taxonomy’s progress, including recommendations from the Taxonomy Technical Expert Group (TTEG) and technical screening criteria for priority sectors focused on climate change mitigation. It also offers an analysis of the alignment between taxonomy deliverables and policy objectives set out in the Terms of Reference and a summary of stakeholder consultations, outlining the stakeholders involved, the frequency of engagement, and key insights from the discussions. Read More.

SGX RegCo announces timeline for incorporation of IFRS sustainability disclosure standards

The Singapore Exchange Regulation (SGX RegCo) has announced that it will start incorporating the IFRS sustainability disclosure standards into its sustainability reporting framework from FY 2025. The regulator has published an implementation roadmap with baseline reporting practices starting in 2025, when all listed companies will be required to disclose their Scope 1 and 2 GHG emissions and integrate climate-related information into their sustainability reports. The roadmap mandates that the primary components of the sustainability report, including material ESG factors, be disclosed from 2026. The regulator has also recognised proportionality of burden, providing a phased implementation plan for smaller issuers grappling with the methodological complexities of Scope 3 reporting. Larger market-cap companies, on the other hand, must report Scope 3 emissions on a mandatory basis, aligning their climate reporting with the IFRS Standards from FY2026. Read More.

NORTH AMERICA

Missouri District Court strikes down anti-ESG disclosure rules in recent ruling

In 2023, the US state of Missouri enacted a law requiring securities firms and professionals to obtain written consent from clients before incorporating ESG factors into investment advice, with a disclaimer that such advice may not solely focus on financial returns. While the rule was part of Missouri’s broader stance against ESG investing, it is worth noting that the federal Employment Income and Retirement Security Act of 1974 (ERISA) allows fiduciaries to consider ESG factors in investment decisions. The United States District Court for the Western District of Missouri has now issued a permanent injunction and ruled the state law unconstitutional, citing federal preemption and First Amendment violations. This ruling could set a precedent in other states with similar anti-ESG regulations across the US. Read More.

California’s state legislature pushes for timely implementation of climate disclosure laws

Following the Newsom administration’s proposed amendments in June to the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261), which included a two-year implementation delay, state legislators have passed related amendments (SB 219) to support the timely enforcement of the climate disclosure laws. SB 219 provides a six-month extension from January 1, 2025, to July 1, 2025, for the California Air Resources Board (CARB) to finalise the Climate Corporate Data Accountability Act (SB 253). CARB will have the authority to determine the timeline for Scope 3 emissions disclosures, while keeping the 2027 reporting start date unchanged. Additionally, the Board may allow consolidated reporting under SB 253 at the parent level, exempting subsidiaries. Importantly, SB 219 preserves the reporting timelines established in the original bills. California Governor Gavin Newsom has until 30^th September 2024 to sign or veto the proposed amendments to climate disclosure laws featured in SB 219. Read More.

US SEC approves benchmarks to regulate quality of audits

The US Securities and Exchange Commission (SEC) has approved the new Public Company Accounting Oversight Board (PCAOB) audit standards adopted by the Board in May 2024. The approved standard (AS 1000) sets out general responsibilities of the auditor in conducting an audit, while adding other amendments to the PCAOB standards. The standards seek to modernise and consolidate audit practices, increasing alignment with new technologies and enhancing accountability on registered accounting firms to manage, control and monitor audit quality to ensure investor protection. Additionally, the Commission also approved amendments to Audit and Evidence (AS 1105) and the Auditor’s Response to the Risks of Material Misstatement (AS 2301) to regulate technology-assisted analysis in auditing procedures. The standards and related amendments will be effective from December 2024 and apply to smaller audit firms a year later from December 2025. The new standards address deficiencies in audits of public companies identified from a 2022 survey which inspected 157 firms and found that 40% of the audits lacked quality and evidence to support their claims. Read More.

LATIN AMERICA

Costa Rica publishes consultation on the adoption of ISSB standards

Chilean regulator, the Comisión para el Mercado Financiero (CMF), has issued a consultation proposing to adopt the IFRS S1 and IFRS S2 standards in the country. Earlier in 2021, the CMF had issued rule NCG N°461 requiring listed companies to report sustainability and governance related disclosures, with phased implementation from 2023 to 2025. The regulator has now decided to reconcile existing disclosure requirements with the ISSB standards, to promote internationally consistent sustainability reporting. The CMF’s does not expect any significant changes to the existing law following the proposed consultation. Mainly, the proposed regulation sets a revised timeline for the adoption of the standards in 2026 with first mandatory reporting expected in 2027. Latin America is leading the way in the adoption and use of the ISSB standards, with Costa Rica recently joining the ranks of others in the region including Brazil, Chile and Bolivia. Read More.

OTHER NEWS & RESOURCES

IFVI and GRI to collaborate to advance sustainable growth through measurement and application of corporate impacts. Read More.

ESG Policy Digest: August 2024

20th August 2024

The August 2024 edition of the ESG Policy Digest covers a wide range of policy tools and solutions emerging worldwide to power sustainability-driven capital markets. At the international level, the Global Reporting Initiative and the Taskforce on Nature-related Financial Disclosures (TNFD) are refining reporting standards with an interoperability mapping resource to support alignment across both frameworks. The International Accounting Standards Board (IASB) proposed adding eight illustrative examples to the International Financial Reporting Standards (IFRS) as guidance to support consistency in reporting of climate-related uncertainties in financial statements.

The SBTi announced plans to review the Corporate Net Zero Standard by year’s end, following a recent analysis highlighting the limited effectiveness of carbon offsets. Furthermore, voluntary carbon markets are undergoing further scrutiny as the Integrity Council for the Voluntary Carbon Market (ICVCM) recently restricted the use of its Core Carbon Principles (CCP) label, citing failure to meet the ‘additionality’ criteria required by the label under existing renewable energy methodologies.

In the EU, regulators are prioritising the development of resources to enhance and streamline sustainability reporting. The European Commission has published FAQs on the implementation of the Corporate Sustainability Reporting Directive (CSRD), including guidance on the scope and applicability of the European Sustainability Reporting Standards (ESRS) and clarification on how the CSRD interacts with the Sustainable Finance Disclosure Regulation (SFDR). Meanwhile, The European Securities and Markets Authority (ESMA) has published recommendations for the evolution and effective functioning of various legislation under the Sustainable Finance Regulatory Framework.

In the U.K., the HM Treasury confirmed that legislation to regulate ESG ratings providers is on the horizon.

The U.S., in contrast, has reached an impasse as the Securities and Exchange Commission’s (SEC) faces legal challenges to its climate disclosure rule, resulting in delayed implementation. Moving south to Latin America, Costa Rica launched its Sustainable Finance Taxonomy on 14 August to provide a framework for mobilising financial flows toward achieving the country’s climate change goals.

In the Asia Pacific region, the Reserve Bank of India’s (RBI) Deputy Governor announced plans to release guidance on climate scenario analysis and stress testing based on the Basel Committe on Banking Supervision principles for climate-related risks. And lastly, New Zealand’s financial regulator – the Financial Markets Authority (FMA) – issued a consultation on proposed guidance for climate reporting entities (CREs) regarding the inclusion of climate statements in disclosure documents under the new climate-related disclosures (CRD) regime.

These recent global regulatory updates reflect significant advancements at both international and domestic levels in sustainability reporting standards and frameworks, addressing emerging challenges around practical implementation. Although standards and regulations may vary on the basis of ambition, there remains continued emphasis on achieving a common reference point to promote interoperability across the sustainability reporting landscape.

INTERNATIONAL

GRI and TNFD unveil joint interoperability mapping outlining alignment in Disclosure Recommendations

The Global Reporting Initiative (GRI) and the Taskforce on Nature-related Financial Disclosures (TNFD) have jointly released an interoperability mapping resource which illustrates cross-cutting requirements and metrics across the TNFD Disclosure recommendations and the GRI Standards. Reporters can use a correspondence table to identify equivalent datapoints and achieve high alignment with the TNFD recommendations, as well as the GRI Standards. The mapping provides a detailed overview of the overlaps in concepts, definitions, and disclosure metrics. Additionally, the TNFD has integrated the GRI Standards’ impact materiality focus into its flexible LEAP approach, designed to assess nature-related risks and opportunities through both an impact and financial materiality lens. Conversely, GRI 101 references the TNFD’s LEAP approach for evaluating nature and biodiversity-related risks.

ISSB outlines plans for enhanced framework interoperability, maintenance and implementation

The International Sustainability Standards Board (ISSB) convened on 24–25 July, detailing key developments in Agenda papers 2, 6 and 9. Agenda Paper 2 outlines plans to enhance interoperability between ISSB standards and other major frameworks such as ESRS and GRI, along with initiating research on biodiversity, ecosystems and human capital related risks and opportunities. Agenda paper 6 introduces a phased approach for developing exposure drafts to amend the SASB Standards. Meanwhile, Agenda paper 9 highlights upcoming updates on the implementation of IFRS S1 and S2 following the Transition Implementation Group (TIG) meeting in September 2024.

IASB launches consultation on illustrative examples to enhance reporting of climate-related uncertainties in financial statements

In developing these examples, the IASB worked closely with the ISSB to strengthen connections between the information an entity provides in financial statements and the information it provides in sustainability-related financial disclosures. The Exposure Draft outlines eight illustrative examples to help companies effectively disclose financial positions and performance by guiding materiality assessment, assumptions and disaggregation of information in the context of climate-related risks and other uncertainties. The IASB has proposed the illustrative examples be incorporated as guidance in accompanying IFRS Accounting Standards. Stakeholders are invited to submit feedback until the consultation period closes on 28 November 2024.

SBTi releases new findings on carbon offsets amid review of the Corporate Net-Zero Standard

The SBTi has published four technical outputs which will inform the revision of the Corporate Net-Zero Standard including findings from a third-party review which found carbon credits to be ‘mostly’ ineffective. This marks a reversal from the SBTi’s earlier opinion in April on allowing companies greater use of carbon offsets in target-setting. Currently, companies are only allowed to use offsets after achieving their targets by directly reducing emissions. In addition to the findings, the SBTi released a Scope 3 discussion paper which explores the practical challenges associated with Scope 3 target setting and value chain decarbonization. The SBTi invites feedback from stakeholders on the discussion paper and announced that a consultation on a draft Corporate Net-Zero Standard will be launched by Q4 2024.

ICVCM restricts use of CCP label for renewable energy carbon credits

The Integrity Council for the Voluntary Carbon Market (ICVCM) has announced that carbon credits issued under existing renewable energy methodologies, which represent nearly a third of the voluntary carbon market, will not be eligible to receive the Core Carbon Principles (CCP) label. According to the ICVCM, the credits fail to meet the “additionality” criteria in the CCP label’s core principles, which mandates that emissions reduction and removals must occur without relying on financial incentives arising from carbon credits revenues. Established in 2021 to set global standards for carbon credits, the ICVCM created the CCP label to set benchmarks for credibility, integrity and transparency in carbon markets.

EU publishes FAQs to clarify sustainability reporting under the CSRD

On 7 August 2024, the European Commission released a set of frequently asked questions (FAQs) to help streamline sustainability reporting, minimising administrative and compliance burden for companies. As the CSRD adds sustainability reporting provisions to the Accounting Directive and Transparency Directive, the guidance document clarifies relevant legal provisions and disclosures, including Article 8 Taxonomy disclosures, for reporting entities. The FAQs provide a detailed explanation to determine ESRS applicability and a timeline for the application of reporting requirements. It also illustrates examples where certain undertakings may be exempt from an obligation to publish sustainability statements when a consolidated report is available. In the final section, the Commission has clarified the interaction between the CSRD and Sustainable Finance Disclosure Framework (SFDR). Financial market participants can assume that any indicator reported as non-material by an investee company subject to the CSRD does not contribute to the corresponding principal adverse impacts in SFDR disclosures, meaning that such investments do not need to be included in the numerator of the relevant SFDR impact indicator.

EFRAG Releases Study on Early Implementation of ESRS

The analysis of ESRS early adoption in the STOXX Europe 600 reveals that only 8% of firms have shared a detailed materiality assessment, with Climate Change and Workforce being universally material topics. While many companies are still grappling with the preparation of ESRS-compliant reports, the study indicates progress in areas such as data reporting in the value chain, enhancing clarity on the use of matrices and tables for reporting and standardizing topic granularity. The study is based on interviews with 28 large EU-based companies across eight sectors and is a “state of play report” not meant to set implementation guidance for the European Sustainability Reporting Standards (ESRS).

ESMA proposes long-term enhancements to the EU Sustainable Finance Framework

The European Securities and Markets Authority (ESMA) has published an Opinion on the Sustainable Finance Regulatory Framework, recommending long-term improvements to enhance the framework’s effectiveness and prevent greenwashing. ESMA suggests that the EU Taxonomy should become the sole reference point for assessing sustainability across all major sustainable finance legislation. Recommendations for improvements include extending the EU Taxonomy to cover all activities that could substantially contribute to environmental sustainability. ESMA has suggested that the Sustainable Finance Framework could evolve further by providing clarity on concepts such as transition investments, mandating sustainability disclosures for all financial products, creating a product categorization system, regulating ESG data products, and conducting consumer and industry testing before implementing new policies. It is also recommended that legislative progress on the social taxonomy resume.

UK to regulate ESG ratings providers in 2025

This new regulation will focus on enhancing transparency and establishing governance systems for providers. Earlier this year, the UK’s Financial Conduct Authority (FCA) launched a voluntary code of conduct for ESG ratings providers and data products, and the former government had announced that it would explore regulation in this area to bolster the UK’s Green Finance Strategy. The HM Treasury has been tasked with a review of a proposed regime for ratings providers and will introduce formal legislation to regulate ESG ratings providers by 2025.

US SEC begins legal battle defending the corporate climate disclosure rule

In March 2024, the U.S. SEC adopted the climate disclosure rule, which mandates that listed registrants disclose Scope 1 and 2 emissions starting in 2025. Although the final rule was watered down by dropping the Scope 3 disclosure requirement, it still faced multiple legal challenges, with critics arguing that it imposes an excessive compliance burden on companies and signifies an overreach of the SEC’s regulatory authority. This pushback has led to nine consolidated lawsuits filed in the U.S. Eighth Circuit of Appeals. In response, the SEC temporarily stayed the rule in April and will delay implementation while reviewing all legal petitions. The Commission is now defending the climate risk disclosure rule in court, citing “substantial investor demand” for consistent and comparable climate-related information. The SEC has stated that it is well within its congressionally granted authority to mandate material information for informed investing and voting decisions. Additionally, the SEC has addressed in court concerns about estimated compliance costs by presenting findings on the rule’s economic effects, demonstrating that it supports cost-effective and decision-useful disclosures for investors.

Costa Rica launches Sustainable Finance Taxonomy

Costa Rica has launched a Sustainable Finance Taxonomy to classify economic activities and assets that make a significant contribution to the country’s climate change objectives. The Taxonomy focuses on climate change mitigation and adaptation activities across eight priority sectors including electricity, gas, steam and air conditioning supply, construction, transportation, manufacturing, solid waste and emissions capture, water supply and treatment, Information and communication technology (ICT) and land use (agriculture, livestock and forestry). The Taxonomy will be used and tested in the financial sector to mobilise flows towards green projects and assess portfolio exposure to climate-related risks.

RBI to issue additional guidance on climate-related risks

Deputy Governor of RBI, Rajeshwar Rao, has confirmed plans to release guidance on how to conduct scenario analysis, stress testing and management of climate change risks. The guidance will be based on the Basel Committe on Banking Supervision principles. The new guidance reinforces the RBI’s goals to establish a ‘robust regulatory and supervisory framework’ to ensure the preparedness and resilience of the financial sector in the context of climate change. In February 2024, the RBI published a draft Disclosure Framework for climate-related risks (‘guidelines’) to mandate disclosures by regulated entities (REs) on the TCFD pillars of governance, strategy, risk management and metrics and targets. And, recently, the country’s Finance Minister announced an upcoming ‘climate finance’ Taxonomy – a classification framework for investments that significantly contribute towards climate change mitigation and adaptation.

New Zealand FMA releases guidance for climate-reporting entities

The Financial Markets Authority (FMA) has issued a consultation on proposed guidance for climate reporting entities (CREs) regarding references to climate statements in disclosure documents under a new climate-related disclosures (CRD) regime. The guidance covers the content and presentation of climate-related information under Product Disclosure Statements (PDS), Other Material Information (OMI) on the offer register on disclose for their financial products, any Statements of Investment Policies and Objectives (SIPO), and annual reports. The FMA has opened feedback on the guidance until 30 August 2024.

Financial Stability Board (FSB) releases stocktake on nature-related risks Read More.
Stock Exchange of Thailand partners with FTSE Russell to update ESG ratings methodology. Read more
ASIFMA issues recommendations for ISSB adoption across Asia. Read more
NGFS Report on Nature-related Financial Risks: a Conceptual Framework to guide Action by Central Banks and Supervisors available now. Read more
Science Based Targets Networks shares manual for corporates. Read more

ESG Policy Digest: July 2024

18th July 2024

Global regulators and standard setters are actively working to unravel the complexities of the ESG ‘alphabet soup’ while addressing the practical challenges related to the quality and credibility of sustainability data.

The Global Reporting Initiative (GRI) is collaborating with EU regulators to clarify how GRI Standards can serve as a foundation for sustainability reporting in the EU. The International Financial Reporting Standards (IFRS) Foundation is committed to fulfilling the promise of the ‘global baseline’ and will consider the importance of transition plan disclosure for investors as part of its two-year work plan. Meanwhile, with regulators looking to determine the credibility of net zero strategies and plans, the International Organization for Standardization (ISO) has offered a solution with an independently verifiable net zero standard set to launch in 2025. And to enrich the reporting toolkit, the Taskforce for Nature-related Financial Disclosures (TNFD) has also provided tailored guidance for eight ‘real economy’ sectors.

In the EU, the spotlight remains on the implementation and transposition of the Corporate Sustainability Reporting Directive (CSRD). The European Securities and Markets Authority (ESMA) has issued guidelines on the enforcement and supervision of CSRD reporting by national competent authorities. In an accompanying Public Statement, ESMA called for transparency on CSRD ‘transition reliefs’ designed to give issuers some leeway due to data limitations. First-time reporting entities are on the lookout for information about all aspects of the CSRD, including double materiality. To address these knowledge gaps, the Authority for Financial Markets (AFM) in Netherlands has articulated a systematic approach to the double materiality process.

In Switzerland, the Federal Council is taking measures to ensure that voting on corporate sustainability reports is binding. The Federal Council has also proposed changes to the Swiss Code of Obligations to ensure consistent sustainability reporting in line with the CSRD and other prominent reporting frameworks. Following a prolonged phase of pushback, the EU has published the Corporate Sustainability Due Diligence Directive (CSDDD) in the Official Journal of the European Union. The CSDDD could however displace or water down an existing German supply chain due diligence law, legal experts warn. And on the topic of greenwashing, the European Supervisory Authorities (ESAs) have highlighted room for improvement and made recommendations to enhance various aspects of the Sustainable Finance Disclosure Regulation (SFDR).

The United States may be a unique case where states such as California exceed the requirements of the federal Securities and Exchange Commission (SEC) Climate Rule. In October 2023, lawmakers in California approved legislation to advance quantitative and qualitative reporting of climate-related risks but have recently proposed amendments to delay the implementation of these rules by two years.

Finally, in Asia-Pacific, Australia dropped plans to introduce differentiated sustainability reporting standards and align more closely with the International Sustainability Standards Board (ISSB) global baseline. Australia’s chief competition regulator has also drafted a guide to inform businesses about legal risks and compliance requirements for sustainability collaborations under competition law.

The updates in this month’s Policy Digest provide a snapshot of key policy priorities for regulators. As elections take place around the world, with uncertain implications for climate and ESG regulation, there is significant work underway to promote globally consistent and harmonised sustainability reporting.

INTERNATIONAL

GRI publishes FAQs on ESRS interoperability and double materiality assessment

The FAQs confirm a high level of compatibility between the GRI Standards and the ESRS. Where possible, the European Financial Reporting Advisory Group (EFRAG) has aligned ESRS disclosure requirements with concepts and definitions from the GRI. To facilitate this transition, interoperability and mapping tools have been published to assist GRI users in preparing for ESRS reporting starting in 2025. The GRI has also launched a new GRI-ESRS Linkage service in collaboration with EFRAG and jointly developed educational resources with a focus on training and capacity building. The CSRD’s double materiality approach requires companies to report on both business risks and broader impacts, allowing the use of equivalent standards like GRI and ISSB, which could help companies meet CSRD requirements and benefit those affected by its extraterritorial reach. Read more

ISSB to consider transition plan disclosure guidance

At London Action Climate Week, the International Financial Reporting Standards (IFRS) Foundation announced a two-year work plan to deliver harmonised corporate sustainability reporting. As the sustainability disclosure landscape evolves through regulation and voluntary initiatives, the IFRS Foundation will play a crucial role in creating standardised approaches and practices for the disclosure of high quality, comparable disclosure information. The standard-setter is exploring additional aspects of disclosure as transition plans become increasingly relevant and decision useful information for investors. Tailored guidance on transition plan disclosure would not impact the structure of the IFRS S2 Climate-related Disclosures but rather enhance the application and use of the standard. Read more

TNFD releases guidance on nature-related reporting for eight sectors

The TNFD released sector-specific guidance, including recommended disclosure metrics, to assist companies and financial institutions with nature-related reporting. Organizations in eight “real economy” sectors—aquaculture, biotechnology and pharmaceuticals, chemicals, electric utilities and power generators, food and agriculture, forestry and paper, metals and mining, and oil and gas—can utilize tailored guidance for nature-related disclosures. TNFD has provided additional guidance for financial institutions, assisting banks, insurers, reinsurers, asset managers, asset owners, and development finance institutions in issuing nature-related disclosures. Read more

ISO to launch Net Zero Standard in 2025

The new Net Zero Standard is expected to launch in November 2025 at the COP30 conference. ISO’s net zero standard will provide ‘clarity, credibility and trust’ to organizations’ targets and strategies to achieve net zero. The process will build upon the Net Zero Guidelines by creating an independently verifiable net zero standard suitable for organizations of all sizes, sectors and geographies. Read more

EUROPE

ESMA releases Guidelines on the Enforcement of Sustainability Information (GLESI) and Public Statement on ESRS application

The purpose of the Guidelines is to establish uniform and robust supervisory approaches on sustainability reporting. National authorities may use these recommendations to align with the Corporate Sustainability Reporting Directive (CSRD) and accompanying ESRS framework as well as the Article 8 of the Taxonomy Regulation. ESMA will continue to monitor the application of sustainability reporting practices and GLESI in 2025. In addition to these Guidelines, ESMA has issued a Public Statement on the first time application of ESRS with the aim to support large issuers progressing through a ‘learning curve’ during the initial reporting period. In the Public Statement, ESMA has also called for transparency on transitional reliefs in CSRD to accommodate issuers who may not meet the data requirements of ESRS. Read more

AFM releases 10 waypoints to clarify CSRD double materiality process

Dutch regulator Authority for Financial Markets (AFM) has published guidance on CSRD double materiality assessment to support companies that will start to report from 2025. The 10 waypoints provide a circular pathway to conduct double materiality analysis emphasising transparency throughout the process that begins with stakeholder engagement, proceeded by due diligence to identify materially relevant sustainability topics. The double materiality concept integrates both financial materiality – how sustainability-related issues affect a company’s financial performance and impact materiality – which emphasises a company’s impact on the environment and the society. Read more

Swiss Federal Council clarifies binding vote on the CSRD

On 29^th May, 2024, the Swedish Parliament voted to adopt a bill to transpose the CSRD into national law. As large Swedish companies prepare to align with the EU wide regulation, the Federal Council in Sweden has clarified, through a new proposal, that the vote to approve sustainability reports at annual general meetings will be binding and not consultative. The new rules would also regulate the quality of sustainability information disclosed by entities by requiring verification from an auditor or ‘conformity assessment body’. Accreditation adds a layer of credibility, mirroring the EU’s limited assurance mandate for CSRD reports. As well, the Federal Council of Switzerland has opened a consultation until October 17, 2024, proposing changes to non-financial reporting obligations under the Swiss Code of Obligations to align with international sustainability standards, including the CSRD, requiring more entities to report on environmental, human rights, and corruption risks, and allowing them to choose between ESRS or equivalent alternatives, with mandatory assurance for reports. Read more

CSDDD published in the Official Journal of the European Union

On 5th July 2024, the Corporate Sustainability Due Diligence Directive (CSDDD) was published in the Official Journal of the EU. This directive is a key piece of legislation setting mandatory obligations for companies to address their negative impacts on human rights and the environment, clearing a major hurdle towards the implementation of the new law. The CSDDD requires companies to prevent and end or mitigate potential or actual harm to human rights and the environment, such as child labour and biodiversity loss. It also requires remediation of actual adverse impact caused. The regulation will apply in stages, depending on a company’s turnover and employee count. In the first stage, companies with over 5000 employees and 1500 million euros turnover will have 3 years to comply with CSDDD. Member States are required to impose penalties for non-compliance, which may include fines of up to 5% of a company’s net turnover. Read more

German supply chain regulation may be replaced early with EU CSDDD

Germany plans to reduce the scope of its national supply chain due diligence legislation (LkSG), decreasing the number of firms impacted by the LkSG from 5200 to fewer than 1000. Replacing the LkSG with the CSDDD could violate EU law as legal experts note provisions of the CSDDD that prohibit lowering existing protections. The CSDDD will be fully effective from 2027 and Member States will have two years from the date of enforcement to transpose the directive into national law. Read more

ESAs propose enhancements to SFDR framework and new ‘transition product’ category

The Joint Statement from the European Supervisory Authorities – the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and ESMA – have recommended enhancements to the Sustainable Finance Disclosure Regulation (SFDR) to improve transparency and investor protection. Key proposals include a categorisation system for financial products, defining “Sustainable” and “Transition Product” categories, with minimum sustainability thresholds. The statement emphasises the need for clearer definitions of sustainable investments under Article 2(17) of the SFDR, urging the EU Commission to align it with the EU Taxonomy. Additionally, it suggests improvements in the disclosure framework for principal adverse impacts, government bonds, and simplification of pre-contractual disclosures. The ESAs also call for restrictions on the use of sustainability-related terms in product naming to combat greenwashing and ensure that product names accurately reflect their sustainability profile. Read more

UNITED STATES

California may delay implementation of climate disclosure rules

On June 28, 2024, the Newsom administration proposed amendments to California’s climate emissions disclosure and financial risk reporting laws, signalling its commitment to address concerns with the current legislation. Key proposed revisions include a two-year delay for the implementation of both SB 253 and SB 261, allowing the California Air Resources Board (CARB) more time to develop regulations; modifications to Scope 3 emissions reporting to allow CARB to set specific disclosure schedules; consolidation of emissions reporting at the parent company level; and granting CARB discretion in contracting with nonprofit reporting organizations. These amendments are still subject to negotiation, with State Senator Scott Wiener opposing the changes. Negotiations are expected to continue through July and possibly into August. Read more

ASIA-PACIFIC

Australia to use ISSB standards as the baseline for sustainability disclosure regime

Australia is shifting its sustainability standards to align more closely with the International Sustainability Standards Board (ISSB) standards, moving beyond a climate-only focus. This change follows significant feedback from the investor community and the financial sector, emphasising the need for comprehensive sustainability reporting. The AASB has indicated plans to adopt IFRS S1 voluntarily as reported by Responsible Investor, however climate disclosures will be mandatory. The reversal of Australia’s decision to deviate from the ISSB standards may be a lesson learned for global regulators tasked with the delicate balancing act between interoperability and meeting local needs. Read more

Australia initiates consultation on draft guide on Sustainability Collaborations

The ACCC’s draft guide on Sustainability Collaborations aims to inform businesses about potential legal risks arising from collaborations to achieve positive environmental outcomes. The Australian Competition & Consumer Commission (ACCC) is the top authority that ensures compliance with the Consumer & Competition Act 2010. Businesses may seek official authorisation from the ACCC to ensure that these agreements are in compliance with competition law. Read more

Other News & Resources

WBCSD publishes report on avoided emissions. Read more
NGFS releases complementary reports on nature-related risks. Read more

ESG Policy Digest: June 2024

18th June 2024

The June 2024 edition of the Policy Digest explores latest international updates including the International Financial Reporting Standards (IFRS) Foundation’s new Guide to support the jurisdictional adoption and use of the IFRS S1 and S2 standards, and the Global Reporting Initiative’s (GRI) proposed changes to labour and employment standards.

In the European Union, legislation progressed on several fronts with the adoption of the Corporate Sustainability Due Diligence Directive (CSDDD) and Net-Zero Industry Act. ESG disclosure remains a top supervisory priority for EU regulators, who are pivotal in providing entities subject to reporting rules with essential tools for capacity-building and ensuring effective supervision. A recent development in this realm was the European Securities and Markets Authority (ESMA) Final Report on Greenwashing, which presented recommendations aimed at enhancing the supervisory activities of National Competent Authorities (NCAs) and reducing greenwashing risks. In parallel efforts to enhance sustainability reporting, the European Financial Reporting Advisory Group (EFRAG) finalised Materiality Assessment Implementation Guidance (MA IG 1) for the European Sustainability Reporting Standards.

Meanwhile, the UK government confirmed that it will postpone the endorsement of its sustainability reporting framework to Q1 of 2025. Next year, the government will also decide whether to make climate reporting mandatory for listed entities in the UK by 2026.

Our North America update this month features the White House’s new initiative to promote voluntary carbon markets. This measure reflects the Biden administration’s commitment to catylse climate action.

Moving to the Asia-Pacific region, China laid the foundation for ISSB-styled corporate disclosure standards by 2030. India’s Securities and Exchange Board of India (SEBI) proposed updates to its Business Responsibility and Sustainability Reporting (BRSR) Framework by shifting from reasonable assurance to assessment, and in Hong Kong, the International Capital Markets Authority (ICMA) introduced a draft Code of Conduct for ESG ratings and data providers.

Stay informed with these crucial updates and many others that are shaping global sustainability practices today.

International

IFRS Foundation publishes Inaugural Jurisdictional Adoption Guide to support the adoption and use of ISSB standards

The IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and S2 Climate-related Disclosures define the global baseline for sustainability reporting and are gaining traction across global jurisdictions. Ensuring the consistency and comparability of sustainability disclosures is a key priority for regulators, but this must be balanced with national considerations. The IFRS Foundation’s Guide has defined jurisdictional approaches for the adoption or incorporation of the ISSB standards ranging from full transposition to ‘functionally aligned’ outcomes. Along with this, the IFRS Foundation plans to publish ‘high-level jurisdictional profiles’ which will include information on the pathway to adopt or use the standards, existing regulations for sustainability-related disclosures and an up-to-date status on jurisdictional approaches.

GRI updates labour standards for greater workplace transparency and workers’ rights

The Global Reporting Initiative (GRI) recently updated its labour-related standards to enhance how companies report on their impact on workers and increase transparency regarding labour practices and human rights in the workplace. This initiative includes revising standards such as “GRI 402: Labor/Management Relations,” “GRI 401: Employment,” and “GRI 202: Market Presence.” The proposed disclosure standards cover employment factors, including non-standard employment types, data privacy and hiring and turnover metrics. Other revisions relate to employee conditions, policies and practices including remuneration issues, working hours, skill development, retention, gender pay gaps, and social protection. GRI also announced two additional consultations within the next year. These will focus on reporting aspects concerning career development, workers’ rights, and protections, leading to updates across a total of 11 GRI standards.

Final CSDDD agreement reached

The CSDDD – the EU’s supply chain due diligence law – was finally adopted on 24^th May, 2024. The Directive requires companies to prevent and address the risk of adverse impacts on human rights and the environment linked to business activity. The final text incorporates changes to the scope of the regulation and implementation timeline. Large companies (over 5,000 employees and €1,500 million turnover) will have to comply with CSDDD by 2027, followed by medium sized companies (over 3,000 employees and €900 million turnover) by 2028. Companies with 1,000 employees and €450 million turnover will have until 2029 to comply. The regulation is expected to directly impact approximately 5,400 EU companies. It will also affect franchising or licensing deals in the EU as well as non-EU companies.

EU Council adopts Net Zero Industry Act

The European Council has given final approval to the Net Zero Industry Act to scale investments in net-zero technologies. The regulation will simplify the permit granting process for eligible projects and facilitate market access to renewables by implementing sustainability and resilience criteria in public procurement. Additionally, the Act will support carbon capture utilisation and storage projects. The EU is targeting an increase in manufacturing capacity of net-zero technologies to roughly 40% of the EU’s deployment needs.

ESAs jointly publish Final Report to end Greenwashing

The report provides advice on greenwashing risks and calls for the effective supervision of sustainability disclosures. In particular, the text highlights the importance of market participants substantiating sustainability claims clearly and without misleading information. ESAs have emphasised the role of competent authorities in supervising compliance and the need for effective cooperation among authorities to ensure adherence to key legal provisions such as the Taxonomy Regulation, the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD). The report also promotes standardisation and machine-readability of sustainability reports.

EFRAG finalises ESRS Materiality Assessment Implementation Guidance

The implementation guidance IG 1 offers a practical materiality assessment process for organisations and clarifies underlying concepts and their interplay (such as financial and impact materiality) through examples. IG 1 also includes FAQs to facilitate the effective disclosure of sustainability-related impacts, risks and opportunities under ESRS. The final version of IG1 has a new section underscoring the need for transparency in reporting significant issues within subsidiaries. It clarifies that serious problems in a subsidiary, like human rights violations, should be considered important for the whole company.

UK government updates timeline for final sustainability reporting framework

The Department of Business and Trade announced a delay in the creation of the UK Sustainability Reporting Standards (SRS), previously slated for release in July 2024. According to the UK government, the decision to create the standards will be finalised by Q1 of next year. The delayed timeline is to provide businesses, especially first-time reporting entities, additional time to gather input on reporting requirements. The UK’s top watchdog – the Financial Conduct Authority (FCA) – will determine the mandatory application of standards for listed companies. The UK will also consider mandatory climate reporting from 2026, however this will be decided in the second quarter of next year.

White House publishes Fact Sheet on Voluntary Carbon Market Principles

On May 28^th, 2024, the Biden-Harris administration issued a Joint Statement on Voluntary Carbon Markets Joint Policy Statement and Principles. The statement provides an overview of the current state of voluntary carbon markets (VCMs) and their potential. It also outlines voluntary principles that U.S. market participants are encouraged to adopt to support the development and operation of carbon credit markets. The Joint Statement highlights that many crediting methodologies have so far failed to produce the claimed results in decarbonisation. To address these issues, best practices include improved standards, tracking systems, and market infrastructure to enhance credit transparency, quality, and market participation, supported by renewed civil society, corporate, and government efforts.

China set to implement ISSB-styled corporate disclosure standards by 2030

China’s Ministry of Finance launched a consultation on Corporate Sustainability Disclosure Standards: Basic Principles, marking the first step towards establishing an ISSB-based disclosure regime. Feedback and opinions on the draft standards can be submitted up until 24^th June 2024. The draft standards aim to standardise the disclosure of corporate sustainability information by gradually phasing in mandatory reporting for Chinese companies. The Ministry of Finance hopes to develop ‘unified national standards’ including climate standards by 2027 and by 2030 require all listed and non-listed entities and small and medium sized enterprises (SMEs) to adopt the standards.

SEBI proposes changes to the BRSR Framework

In 2021, India’s top financial regulator introduced mandatory sustainability reporting for the top 1,000 listed companies by market capitalisation under the BRSR. SEBI has since released a Consultation Paper on the Recommendations of the Expert Committee for Facilitating Ease of Doing Business with respect to BRSR. The consultation paper summarises key changes including the definition of value chain, a new leadership indicator related to green credits and replacing the term assurance with assessment. By substituting the terms assurance with assessment, SEBI will allow companies to choose between assessment and reasonable assurance for FY2023-2024 disclosures. For reports FY2024 onwards, disclosures shall be subject to assessment. The rationale to require assessment instead of assurance is to alleviate the compliance burden for companies and facilitate ease of doing business.

International Capital Markets Authority (ICMA) publishes draft Hong Kong Code of Conduct for ESG ratings and data providers

A draft code of conduct for ESG ratings and data providers was released on 17^th May, 2024. The voluntary code of conduct (VCOC) is based on the recommendations of the International Organization of Securities Commissions’ (IOSCO) and focuses on comparability and international interoperability. The VCOC contains six principles and follows the IOSCO structure to ensure four key outcomes – good governance, systems and controls, management of conflicts of interest and transparency. Guidance for the practical application and interpretation of each principle ensures that providers have the appropriate policies and procedures in place to ensure high quality and reliability of product offerings. ESG ratings providers will have a 6-month implementation period, while data providers will have 12 months to comply. By signing up, providers will have to make information on their data and ratings methodologies publicly available.

Qatar Central Bank publishes sustainability strategy for the financial sector. Read more
GRI launches XBRL Taxonomy. Read more
National Stock Exchange (NSE) publishes FAQs on BRSR Core. Read more
Network for Greening the Financial System (NGFS): Sustainable and responsible investment in central banks’ portfolio management: Practices and recommendations. Read more

ESG Policy Digest: May 2024

20th May 2024

In this month’s Policy Digest, we observe efforts to enhance interoperability and establish equivalence for sustainability reporting across jurisdictions. The International Financial Reporting Standards (IFRS) Foundation and the European Financial Reporting Advisory Group (EFRAG) released the much-awaited interoperability guidance to help streamline reporting processes for companies applying both the International Sustainability Standards Board (ISSB) standards and the European Sustainability Reporting Standards (ESRS).

In Europe, legislators are in the final stages of implementing the Basel III framework which will enhance the focus of ESG risks in the prudential framework. Following a consultation on the implementation of Sustainable Finance Disclosure Regulation (SFDR), the European Commission released a summary report which revealed ‘no clear preference’ for overhauling the classification system versus maintaining the status quo with minor enhancements to the Article 8 and 9 product categories and criteria. The EU’s top securities markets regulator meanwhile introduced an important means to address greenwashing through guidelines on the proper use of ESG and sustainability-related terms in fund names.

Taking its own measures to protect end-investors from greenwashing risks, the U.K. Financial Conduct Authority (FCA), in a recent consultation, proposed extending the requirements of the Sustainability Disclosure Requirements (SDR) regulation to portfolio management services. Currently the SDR only applies to retail investors. As a follow up to the release of the Anti-Greenwashing Rule (AGR) for all FCA-authorised firms, the financial regulator also released a non-handbook guidance illustrating best practices for product communication.

Across the Atlantic, the U.S. Environmental Protection Agency (EPA), unveiled the updated methane emissions reporting rule to address gaps in reporting and enhance data collection for oil and gas facilities exceeding emissions thresholds. Although a seemingly unremarkable development, this reflects the Inflation Reduction Act’s (IRA) knock-on effect in other areas of federal regulation.

In Asia-Pacific, the Hong Kong Monetary Authority (HKMA) celebrated the launch of the Sustainable Finance Taxonomy whose development was ‘guided by the principles of interoperability, comparability and inclusiveness’. Meanwhile, Australia implemented its own sustainability classifications for certified financial products, setting standards for sustainable investment labels and furthering market transparency. Through these initiatives, regulators around the world are emphasising the urgent imperative for ESG standardisation in the private sector which holds the key to unlock and catalyse financial flows into sustainable and climate-resilient investments.

International

IFRS and EFRAG publish Interoperability guidance

On May 2nd, 2024, the IFRS Foundation and EFRAG jointly published interoperability guidance to help streamline the ISSB and ESRS disclosure process for reporting entities. It aims to minimise the reporting and compliance burden for entities disclosing against both the ISSB and ESRS frameworks. Overall, the guidance illustrates a high degree of alignment between both standards, particularly climate-related disclosure standards. The interoperability guidance can be utilised to better understand where disclosure requirements intersect and are equivalent. While there is greater focus on enabling compliance with climate-reporting requirements across both sets of standards, the guidance also includes information on general reporting requirements, interoperability of materiality, presentation and disclosures for sustainability topics beyond climate. The guidance is an important tool for improving efficiency in sustainability reporting as it allows users to cover as many points of disclosure as possible if at least one set of standards (ESRS or ISSB) has been completed. Read more

Europe

European Parliament set to implement Basel III standards

The European Parliament has finally passed the EU Banking Package with key amendments to the Capital Requirements Regulation (CRR3) and the Capital Requirements Directive (CRD). This marks an important milestone in the full implementation of Basel III reforms which would establish and enhance the assessment of ESG risks in the prudential framework. CRD amendments also require institutions to integrate ESG risks when assessing the value of collateral. Once this starts to apply from January 1, 2025, financial institutions will have to disclose ESG risks including physical risks and transition risks in accordance with technical standards developed by the European Banking Authority (EBA). Banks will also have lower risk weight for exposures to the EU Emissions Trading System (ETS). Read more

SFDR Summary Report indicates split over new category system

The European Commission published a Summary Report highlighting key takeaways from the targeted consultation on the implementation of SFDR initiated on 14 September 2023. The report shows that 80% of respondents agree that SFDR’s objective to enhance transparency through sustainability disclosures is relevant. Additionally, there is consensus on maintaining consistency across key pieces of legislation under the sustainable finance framework including the EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD) and SFDR. Over half of the respondents support uniform disclosure requirements for all financial products as a means for investors to accurately identify sustainable and unsustainable assets across European markets. However, 77% of respondents expressed limitations in the effectiveness of the framework due to various issues including unclear legal concepts and definitions and lack of disclosure data. The 2023 consultation proposed either converting Article 8 and 9 into formal product categories with clear and concise criteria or creating a new categorisation system that does not incorporate underlying concepts embedded in the SFDR framework. The Summary Report reveals that there is no clear preference between the two options, making it a complex task for regulators and market participants to chart a course of action. Read more

European Securities and Markets Authority (ESMA) releases finalised guidelines on the use of ESG and sustainability-related terms in fund names

The final report addresses greenwashing risks and aims to protect investors from overstated and misleading claims by regulating the use of ESG or sustainability-related terms in fund names. ESMA has retained the minimum 80% threshold for sustainable investment to meet the environmental/ social characteristics or sustainability objective. Key changes include removing the 50% sustainable investment threshold following feedback from stakeholders stating that the definition of sustainable investments under Article 2(17) SFDR is unclear and ambiguous. Instead, ESMA has introduced a commitment to invest meaningfully in sustainable investments. The guidelines further clarify exclusions criteria for different terms. Social and governance terms, along with transition-related terms, are grouped together, meaning funds with those terms in their names must apply Climate-Transition Benchmark (CTB) exclusions (tobacco cultivation and production, controversial weapons related activities, UNGC or OECD violations). The justification made here is that funds with social and governance terms promoting social or governance characteristics could be too restricted in the universe by fossil fuel exclusions. Funds with environmental and sustainability-related terms will, however, be subject to Paris-Aligned Benchmarks (PAB) exclusion criteria. ESMA is giving existing funds a transitional period of 6 months to comply or explain. New funds will have to use the guidelines with immediate effect. Read more

United Kingdom

FCA proposes expanding the scope of the UK SDR to include portfolio management services

Recently, the FCA launched a consultation on a new proposal to extend SDR to portfolio managers. Currently, only retail investors are within the scope of the regulation. The new proposal would extend the requirements to firms that manage a group of investments for consumers, with a focus on wealth management services for individuals and model portfolios for retail investors. The SDR and investment labels were part of a package of measures for asset managers including a naming and marketing rule and the Anti-Greenwashing Rule (AGR) which also applies to all FCA-authorised firms in the UK. Under the AGR, firms must communicate the sustainability characteristics of products and services fairly, clearly and consistently so as not to be misleading. Alongside the new proposal, the FCA also released a nonhandbook guidance on AGR which provides examples of best practices for product communication and emphasises the importance of evidence-based claims. The guidance confirms that the AGR does not supersede existing rules on fund names and that it aims to complement consumer protection laws and guidance from authorities like the Competition and Markets Authority (CMA) and the Advertising Standards Authority (ASA). With the release of the guidance, the FCA also confirmed that the AGR will come into effect on 31^st May 2024. Read more

United States

US EPA updates Methane Emissions Reporting Rule

The final rule updates methane emissions reporting requirements for natural gas and petroleum systems under the U.S. Greenhouse Gas Reporting Program. Part of the final rule is the ‘Super-Emitter Program’ which requires owners and operators of facilities to report emissions exceeding 100 kg per hour to help ‘close the gap between observed methane emissions and reported emissions’. The EPA has also updated the Reporting Program by enhancing the collection of data to establish the total volume of pollution caused by the oil and gas industry. The EPA’s enhanced measurements of emissions will serve as a basis for calculating the waste fee for facilities with methane emissions above a certain threshold defined by the Methane Emissions Reduction Program (MERP) created under the Inflation Reduction Act (IRA). Read more

Asia-Pacific

Hong Kong Monetary Authority launches Taxonomy

The Hong Kong Taxonomy will serve as a new classification system for environmentally sustainable economic activities aiming to facilitate green finance flows. It will help guide investors on how to identify and classify activities that can be considered green and avoid investment in activities that have a negative impact. Currently, there are 12 economic activities under 4 sectors – power generation, transportation, construction and water and waste management – within the scope of the Taxonomy. There is also supplemental guidance on using the standardised framework, including thresholds and criteria to be considered eligible under the Taxonomy. The Hong Kong Taxonomy is designed to enable interoperability of global Taxonomies and is compatible with the Common Ground Taxonomy (CGT), EU Taxonomy, ASEAN Taxonomy and the Climate Bonds Taxonomy (CBT) established in Mainland China. In the next iteration of the Taxonomy, regulators plan to include transition activities and additional sectors. Read more

Australia introduces sustainability classifications for certified products

In May 2024, the Responsible Investment Association of Australasia established three fund labels – responsible, sustainable and sustainable plus and includes criteria for each label. The sustainability classification system specifies that firms must align investment activities with the sustainability objective. There is a minimum threshold of 80% sustainable investments in line with the stated objective for single asset portfolios to achieve the ‘sustainable’ label. Whereas multi-asset portfolio must have a minimum of 50% sustainable investments. ‘Sustainable plus’ funds must meet additional requirements and incorporate sustainability objectives as binding criteria in their documentation. Australia is also considering legislation to establish minimum standards for marketing investment products as sustainable. This proposed regime would cover all managed investment and superannuation products marketed to retail clients, aiming to standardize sustainability terminology and require upfront and ongoing disclosure against sustainability criteria. The reform is expected to start in 2024. Read more

Other News & Resources

Federal Reserve Board publishes results of 2023 climate scenario analysis exerc Read more
Japan’s Financial Services Agency (FSA) working on climate scenario analysis in the banking sector. Read more
EFRAG updates ESRS Sector Classification to align with other reporting frameworks such as GRI, SASB. Read more

ESG Policy Digest: April 2024

16th April 2024

Reflecting on headlines from the past month, there was a stark contrast between litigation in the United States aiming to strike down the climate disclosure rule and another ruling from Europe’s top court agreeing with 2,000 Swiss women that governments have human rights obligations to combat the adverse effects of climate change. Against this backdrop, global regulators must steadfastly maintain the founding principles of sustainability regulation.

Despite Europe’s exemplary track record in terms of shaping sustainability disclosure, there remain some cases, such the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), where legislative consensus is hard to reach. However, in March, the directive was revived after legislators reached an agreement on a limited scope that would only affect the largest businesses in Europe. The European Parliament also advanced an EU-wide certification scheme for carbon farming and carbon removal technologies.

Following a request for Technical Advice from the Commission, the European Securities and Markets Authority (ESMA) launched a consultation on transparency in credit ratings methodologies incorporating ESG factors. In France, lawmakers are doubling down on climate priorities by introducing a compulsory shareholder vote on transition plans reported under the Corporate Sustainability Reporting Directive (CSRD). The reporting boundaries for ESRS S1 (subsidiaries) were further defined in April by the European Financial Reporting Advisory Group (EFRAG), while in parallel, EFRAG released amendments to the materiality assessment guidance.

Across the pond, the U.S. Securities and Exchange Commission (SEC) is at the centre of a legal battleground as several Republicans states challenge the climate disclosure rule, consolidating lawsuits in the United States Court of Appeals for the Eight Circuit. In contrast, Canadian regulators are forging ahead as planned with the proposed set of Canadian Sustainability Disclosure Standards (CSDS).

In Asia-Pacific, Japan and China are framing the adoption of international standards for sustainability reporting in a localised context. The Sustainability Standards Board of Japan (SSBJ) has released exposure drafts for the transposition of ISSB-aligned standards with certain jurisdictional exemptions. Meanwhile, China is following the EU’s lead in adopting a double materiality approach for sustainability reporting, as confirmed by the latest guidelines for sustainability reporting released by the Shanghai Stock Exchange. Furthermore, in the banking and financial sector, India’s central bank – the Reserve Bank of India (RBI) – published a draft disclosure framework for reporting climate risks.

Regional updates in Africa and the Middle East this month cover Saudi Arabia’s latest policy tool – the green financing framework – for the efficient allocation of capital towards sustainable investments. In Kenya, the central bank is proposing a series of reforms, including higher capital requirements for banks that lag in terms of managing climate risks. These efforts and many more signify a global push from regulators to contextualise the adoption of international standards, such as the International Financial Reporting Standards (IFRS 1 and 2), to align with national priorities and economic growth objectives.

Europe

EU Council reaches decision on the CSDDD

The latest draft of the EU’s supply chain due diligence law narrows the scope of the regulation to apply to only the largest organisations doing business in Europe, with over 1,000 employees and over 450 million euros in annual turnover. In effect, 70% of companies that were previously covered under the legislation will now be exempt. CSDDD implementation will be staggered over the next few years based on employee and turnover thresholds. In the first phase, companies with over 5,000 employees and a turnover exceeding 1.5 billion Euros must comply within three years. The amended version of the CSDDD also eliminates the need for separate climate transition plans for companies already complying with the CSRD to ensure consistency. The CSDDD will undergo further deliberation in the European Parliament before being enacted into law. A decisive vote is essential to ensure the due diligence law successfully passes and is implemented.

EU Parliament approves ‘world’s first’ certification scheme for high-quality carbon removal

The European Parliament adopted a provisional agreement with Member States for a framework that may be used voluntarily to certify carbon farming and carbon removal technologies. The certification framework outlines qualifying criteria for carbon farming such as restoring forests and soils, avoiding soil emissions and specifies rules for carbon capture and minimum requirements for binding carbon in durable products (35 years). The aim of the regulation is to track compliance with the applicable EU-wide standards, crack down on greenwashing and ensure credibility to the certification process. This voluntary initiative can potentially unlock financing for innovative carbon removal technologies, thereby supporting the growth of a low-carbon economy. The European Commission plans to establish an EU-wide registry in four years to provide greater transparency on certified carbon removals.

ESMA initiates consultation to enhance transparency of ESG factors within credit ratings methodologies

ESMA is consulting on proposed amendments to the Credit Ratings Agencies Regulation (CRAR) following a request for Technical Advice from the European Commission last year. The proposed amendments would require CRAs to disclose ESG factors incorporated in credit rating methodologies. Specifically, CRAs must list quantitative and qualitative ESG factors, where these are considered in the methodology, and provide a rationale for using these factors to determine creditworthiness. Overall, the proposal emphasises transparency by requiring CRAs to publicly disclose the full scope of judgement within methodologies, data sources and other underlying characteristics used in the credit ratings process. The consultation will be open until December 2024.

France tables amendments to generalise ‘Say on Climate’ for companies reporting under CSRD

French legislators have recently put forward two amendments to a bill which would make it mandatory for listed companies reporting under CSRD to submit climate transition strategies to shareholders. Shareholders would receive two resolutions on climate transition strategy and the implementation of climate transition strategy. If either resolution is rejected, it would directly result in a 50% reduction in company director bonuses. The amended version of the bill aims to facilitate dialogue between companies and investors that should be made aware of credible plans and targets for meeting climate commitments.

EFRAG publishes amendments to materiality assessment guidance

EFRAG’s Sustainability Technical Expert Group (TEG) approved the draft Materiality Assessment Implementation Guidance (MAIG) with adjustments, adding new sections and FAQs addressing group and subsidiary considerations. The guidance stresses the need for diverse methodologies in group materiality assessments, indicating aggregation may not fit all sustainability issues. The draft clarifies evidence sourcing and impact assessment methods, notably for environmental concerns. ESRS 2 disclosure requirements on management awareness of material impacts are highlighted. The draft now moves to EFRAG’s Sustainability Reporting Board for final review.

US SEC pauses implementation of climate disclosure rule

After facing several legal challenges from states and business groups, the SEC has voluntarily stayed the adoption of the climate disclosure rule. The Commission acknowledges that lawsuits have created ‘regulatory uncertainty’ for affected companies and therefore plans to resume implementation after establishing the validity of the rule in a court of law. The SEC argues that it has the authority as an independent financial regulator to require the disclosure of investor-useful information. In March, the Commission finalised the much-awaited rule after two years of debate and deliberation. The regulation requires registrants to report greenhouse gas emissions (Scope 1 and 2) and other climate-related financial information. Despite repeatedly facing roadblocks, the rule signifies a significant advancement in reinforcing international norms of sustainability reporting established under the European Sustainability Reporting Standards (ESRS) and the ISSB standards. It also follows California’s example of progressive rulemaking for the disclosure of material climate-related risks. Read more

Canada opens consultation on sustainability disclosure standards adoption

On March 13^th, 2024, the Canadian Sustainability Standards Board CSSB released two exposure drafts: the CSDS 1 General Requirements and CSDS 2 Climate-related Disclosures replicating the structure of the ISSB standards. The CSSB also released further details on additional considerations for the Canadian context. Once finalised, these standards will be voluntary. The CSSB offers temporary relief in multiple ways – first, by suggesting the standards take effect a year later than the ISSB’s (2025 onwards), second – by allowing companies to focus on climate-related disclosures and extending the requirement to furnish details by two years (2026), and lastly, providing an additional year for Scope 3 emissions disclosure.

Japan releases draft ISSB aligned sustainability reporting standards

The SSBJ issued three exposure drafts (EDs) aligned with ISSB sustainability disclosure standards. These drafts incorporate key elements from the IFRS S1 General Requirements and IFRS S2 Climate-related disclosures and offer jurisdiction-specific exemptions. The SSBJ has divided IFRS S1 into two parts: a ‘Universal Sustainability Disclosure Standard’ and a ‘Theme-based Sustainability Disclosure Standard No.1’. The Universal clarifies central concepts embedded in the IFRS framework while Disclosure Standard No.1 contains ‘core’ reporting content in IFRS S1. The third draft, ‘Theme-based Sustainability Disclosure Standard No.2’, focuses on climate-related reporting following ISSB’s IFRS S2 guidelines. The SSBJ has opened consultation on the EDs until July 31st, 2024. These proposed standards build upon Japan’s previous regulatory initiatives to promote and enhance mandatory sustainability reporting over time. The FSA expects to finalise rules by 2025 to align with regional peers like Malaysia, Singapore and Australia in harmonising global sustainability disclosure.

China finalises double materiality guidance as part of listing rules

Chinese stock exchanges have upheld the concept of Double Materiality in their recently released final guidelines, signaling a positive move towards integrating ESG factors into corporate reporting. Key highlights of the guidelines include provisions on stakeholder engagement, with specific articles emphasising engagement protocols, as well as a clear definition of stakeholders encompassing various groups affected by a company’s activities. Notably, the guidelines do not mandate third-party assurance, offering flexibility in reporting mechanisms. Additionally, an Annex provides an index of 21 topics for reference, streamlining reporting processes and ensuring comprehensive coverage of ESG aspects. This development reflects a significant step forward in aligning Chinese corporate reporting practices with global sustainability standards and underscores a growing commitment to transparent and responsible business practices.

India’s central bank releases Disclosure Framework on Climate-related Financial Risks

The Reserve Bank of India (RBI) has incorporated the four thematic TCFD pillars (governance, strategy, risk management, metrics and targets) into the framework and set forth baseline and enhanced disclosure requirements for each pillar. Covered entities can provide information on a voluntary basis relating to policies and procedures for identifying, monitoring and mitigating climate-related financial risks and opportunities. Metrics and targets can also be used to assess exposure to climate risks. This can include Scope 1, 2 and 3 GHG emissions and specific targets to measure alignment with climate commitments. The RBI has specified that the guidelines are applicable to all scheduled commercial banks (excluding local area banks, payments banks and regional rural banks), all Tier-IV Primary (Urban) Co-operative Banks (UCBs), all all-India financial institutions, and all top and upper layer non-banking financial companies.

Saudi Arabia launches green finance framework

Saudi Arabia has become the second country in the region after Oman to publish a sustainability finance framework. The Green Financing Framework focuses on enabling sustainable funding for climate mitigation and adaptation measures. It delineates eight types of projects eligible for funding through green bonds, including renewable energy, energy efficiency, sustainable transport, climate adaptation, carbon capture and storage, green hydrogen, emissions reduction across industries, and sustainable water management practices. Additionally, the framework organises projects across key environmental objectives including sustainable management of natural resources and land use, pollution prevention and control and biodiversity. Two committees in the Ministry of Finance (MoF) will be tasked with the assessment of eligible projects based on the degree of negative or positive impact.

Kenya announces plan to raise capital requirements for banks exposed to climate risks

The Central Bank of Kenya (CBK) is currently working on a policy measure that would penalise banks for poor management of climate risks by levying higher capital requirements. In parallel, the central bank has announced that it will release ISSB aligned standards of reporting for banks. The CBK will release more details on the “second phase of reforms” for the banking and financial sector, which include a Green Taxonomy and other regulatory initiatives to promote financial market stability.

GRI and TNFD announce interoperability guide slated for Q2 2024. Read more
UK Transition Plan Taskforce releases sectoral guides. Read more
UN completes draft report on ESG index and data provider human rights responsibilities. Read more

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The SEC’s Climate Rule*

20th March 2024

On March 21st, 2022, the United States Securities and Exchange Commission (SEC) released a draft rule for the Enhancement and Standardization of Climate-Related Disclosures for Investors. The passing of the SEC climate rule on March 6th, 2024, is a landmark moment in U.S. climate policy and sets a precedent for future legislation on sustainability-related financial reporting in the U.S. But what does this mean for companies and investors?

To read the full report, click here