As organizations gear up for a fresh reporting year, regulators and standard-setting bodies are actively working to provide enhanced guidelines, with the aim of facilitating the disclosure of usable sustainability information.
Early this year, the Global Reporting Iniative (GRI) announced a series of updates including a new Biodiversity Standard, Mining Sector Standard and interoperability considerations for GHG emissions for companies applying GRI and ISSB standards. These initiatives aim to ease the reporting burden for entities and offer comprehensive guidance to improve the availability of consistent and comparable sustainability information. Once the reporting process is complete, auditors and experts in the field are tasked with verifying the credibility of sustainability information, which presents its own set of ethical challenges. Recognizing this, the International Ethics Standards Board for Accountants (IESBA) released Exposure Drafts on global standards for ethical considerations in sustainability reporting and assurance.
Moving to EU news, regulators maintained the ambitious policy momentum in the ESG realm. On 5th February, the EU Council and Parliament reached a provisional agreement on an ESG ratings regulation, creating a lighter-touch regime for small providers. In the banking and financial services sector, the EBA launched a consultation on draft guidelines on the management of ESG risks for the active supervision and management of risks as a measure of resilience.
Building on previous efforts, the European Financial Reporting and Advisory Group (EFRAG) also released exposure drafts to facilitate the implementation of a simplified standard for listed SMEs and non-listed SMEs. Separately, EU lawmakers announced a delay in the adoption of sector-specific standards for the implementation of the European Sustainability Reporting Standards (ESRS), from 2024 to 2026. Members of the European Parliament (MEPs), as evidenced by the approval of the Greenwashing Directive on January 17, 2024. We observe that EU regulators have so far exhibited a high standard for establishing a rules-based system to efficiently allocate capital towards sustainable economic activities. Recently, the Platform on Sustainable Finance’s published a- ‘compendium of market practice’ – which underscored the legitimacy of the EU sustainable finance framework.
Sustainability regulation can progress on several fronts, including the enhancement of existing rules. We see this in the UK, with the Financial Reporting Council (FRC) taking measures to enhance existing ESG reporting rules by updating its Corporate Governance Code for listed companies. In North America, Canadian regulators announced the next steps towards the adoption of localized ISSB standards.
In Asia-Pacific, we examine a range of policy measures supporting alignment with international standards and rules. Australia’s government is consulting on mandatory climate-related reporting standards which would be consistent with the IFRS S2 Climate-related Disclosures. In Hong Kong, the Green and Sustainable Finance Cross-Agency Steering Group announced plans to further sustainable finance initiatives this year and revealed a roadmap for the adoption of IFRS Sustainability Disclosure Standards that is in the works.
This month’s ESG Policy Digest highlights regulators’ efforts to demystify and streamline the sustainability reporting process, particularly for first-time reporting entities, while also working towards establishing best practices for entities already engaged in ongoing reporting. Collaborative initiatives, such as the one between GRI and ISSB highlight the need for standard-setters to streamline reporting criteria. The global policy landscape continues to evolve, with regulators exemplifying a broader trend towards alignment with international standards and model ESG reporting regulations.
International
IFRS GRI publish GHG Emissions Reporting Guidelines
In a new joint publication, the IFRS Foundation and GRI have outlined interoperability considerations for companies disclosing Scope 1, 2 and 3 GHG emissions using GRI and ISSB standards. The analysis includes a mapping table with a comprehensive comparison of GHG emissions metrics, illustrating a high degree of alignment between the two disclosure frameworks. These insights can enhance reporting efficiency for companies by identifying cross-cutting requirements between GRI: 305 Emissions and IFRS S2 Climate-related Disclosures.
GRI launches new Biodiversity 2024 Standard
On 24th January, GRI launched a revised version of GRI 304: Biodiversity 2016 which aligns with international best practices and key intergovernmental instruments in biodiversity. GRI notes that the significance of monitoring, assessing and disclosing biodiversity-related risks was underscored by the adoption of the Kunming-Montreal Global Biodiversity in 2022. The new GRI 101: Biodiversity 2024 differs in its scope from GRI 304, covering new and complementary disclosure requirements such as supply chain, direct drivers of biodiversity loss, location-specific information. Overall, the standard emphasizes site-level reporting and supports alignment with TNFD and the UN Convention on Biological Diversity. GRI 101: 2024 was launched against the backdrop of increasing focus on nature-related financial disclosures. It will come into effect on January 1st 2026, however organizations can adopt it earlier. Companies can provide information on relevant biodiversity information on a voluntary basis as GRI has not established baseline disclosure requirements.
GRI launches sector-specific mining standard
The GRI Mining sector program introduces standards for 40 sectors, emphasizing those with major impacts, including site-specific disclosures for biodiversity, waste, and water. It recommends gender-sensitive human rights due diligence, sector-specific health and safety measures, and community engagement, including seeking consent from Indigenous Peoples. Detailed disclosures are required for involuntary resettlement and artisanal mining impacts on the environment and communities.
IESBA initiates consultation on ethics standards to enhance sustainability reporting
The International Ethics Standards Board for Accountants (IESBA) initiated a public consultation on two Exposure Drafts (EDs) outlining global standards on ethical considerations in sustainability reporting and assurance. As reporting entities prepare to comply with global sustainability disclosure regulations, these drafts seek to consider the ethical matrix within which the reporting process is embedded. One of the drafts focuses on International Ethics Standards for sustainability assurance and the other addresses the use of external experts. With increasing demand for sustainability information across various sectors, the consultation provides a feedback loop for key actors in the sustainability reporting ecosystem, including regulators, investors and accountants. The IESBA encourages feedback by May 10, 2024, for the Sustainability Assurance ED and by April 30, 2024, for the External Expert ED. This initiative is part of a broader push for the robust implementation of sustainability rules by regulators and standard-setters alike. So far, it has received support from the International Organization of Securities Commissions (IOSCO) – a leading organization in the global financial regulatory landscape.
Europe
EU Council and Parliament reach agreement on ESG ratings regulation
On 5 February 2024, the Council and Parliament reached a provisional agreement on a regulation for the oversight of ESG ratings providers. The purpose of the regulation is to increase transparency in ratings and scoring methodologies, verify integrity in operations of providers and prevent potential conflicts of interest. As the ESG reporting landscape matures, European regulators aim to underscore the importance of investor confidence in ESG ratings to scale sustainable finance and transition initiatives in the EU. The provisional agreement clarifies which ESG ratings and products fall under the scope of the regulation and explains exemptions for authorization by the European Securities and Markets Authority (ESMA). As the regulation focuses largely on the supervision of EU-based providers, the agreement also looks at territorial scope and what constitutes operating in the EU. In parallel, the Council and Parliament have added conditions for the recognition of non-EU providers. The agreement goes a step further by incorporating amendments from the Sustainable Finance Disclosure Regulation (SFDR) establishing requirements for financial market participants and advisers to disclose methodologies on their websites if ESG ratings are used as part of marketing communications. The agreement also includes guidelines for weighting of ESG factors for a single rating as well as separate E, S and G ratings. A sticking point of the negotiations during the trilogue was stringency of rules for small providers. In conclusion, the Council and Parliament agreed to introduce a lighter-touch regime and optional registration for three years for small undertakings and proportional supervisory fees. These providers will have to comply with basic transparency requirements and adhere to certain governance principles.
EFRAG proposes Sustainability Reporting Standards for SMEs
EFRAG has released exposure drafts proposing sustainability reporting standards for small and medium-sized enterprises (SMEs) in line with the EU’s Corporate Sustainability Reporting Directive (CSRD). The drafts include the Exposure Draft for listed SMEs (ESRS LSME) and the Exposure Draft for the voluntary reporting standard for non-listed SMEs (VSME). The Exposure Draft on ESRS LSME addresses public-interest SMEs, including those listed on regulated markets, and is designed to be effective from January 1, 2026, with a two-year opt-out option. The second ED on VSME offers a voluntary reporting tool for non-listed SMEs to respond efficiently to sustainability information requests. Both drafts are part of EFRAG’s efforts to support SMEs in unlocking sustainable finance and are open for public consultation until May 21, 2024, including a field test that focuses on feasibility, costs, challenges, benefits, and suggested improvements. Concurrently, EFRAG has published two working papers on ESRS sector-specific standards SEC1 and SEC2. SEC1 highlights standards for high impact sectors including agriculture, financial institutions and mining and SEC2 outlines a general approach to sector-specific ESRS and considers interoperability with GRI, Pillar 3 and other reporting frameworks.
EU delays adoption of sector specific ESRS
EU lawmakers agreed for a two-year extension in the adoption of sector specific ESRS for the implementation of CSRD rules. The decision to allow a breathing period for the adoption of ESRS was highlighted in the 2024 Commission Work Programme released last year. The proposed delay was agreed upon by MEPs, despite the CSRD mandate to finalize sector specific standards by the end of June 2024. Sector-specific standards are expected to add clarity on reporting topics for companies based on their industry and sector. However, the rationale to delaying the adoption of these standards was based on the assessment of regulators that companies would face undue regulatory and compliance burden in the near-term. The new proposal also contains a recommendation to delay ESRS disclosure for non-EU companies operating in the EU who were initially set to start reporting in 2028. During this 2-year timeframe, companies can focus on the disclosure of the first set of ESRS and the EFRAG can also develop new standards
EBA releases draft guidelines on the management of ESG risks
The European Banking Authority has launched a consultation on ‘Guidelines on ESG risks management’. These guidelines seek to establish minimum standards and methodologies for identifying, monitoring, measuring and managing ESG risks. The EBA has recommended a range of measures for managing ESG risks including robust data processes and varied methodologies such as exposure-based, portfolio-based and scenario-based approaches. According to the guidelines, institutions must conduct materiality assessments and identify ESG risks systematically, over short, medium and long-term horizons, including a time horizon of at least 10 years. To ensure the resilience of institutions, EBA calls for the integration of ‘forward-looking’ ESG risks into institutions’ strategies, policies, risk management framework and internal controls. Notably, the regulator has identified environmental factors as a primary risk impacting other financial risk categories. The draft Guidelines were developed in line with the EBA’s roadmap on sustainable finance and will address the mandate of setting specific climate-related scenarios. These guidelines outline the necessary tools and plans to address transition risks as the EU accelerates its ambitious plans to become a climate neutral economy.
EU finalizes rule to ban greenwashing
Members of the European Parliament (MEPs) have approved a new directive aimed at improving product labeling and prohibiting misleading environmental claims, addressing issues like greenwashing and premature obsolescence of goods. The directive seeks to protect consumers by adding misleading marketing practices to the EU’s list of banned commercial practices. The rules include a ban on general environmental claims without proof, regulation of sustainability labels based on official certification schemes, and the promotion of goods with extended guarantees through a new harmonized label. The directive also prohibits unfounded durability claims and prompts to replace consumables prematurely. The law, which aims to promote transparency in marketing and combat throwaway culture, is expected to change the way Europeans make purchasing decisions. The directive awaits final approval from the Council before being published in the Official Journal, with member states having 24 months to transpose it into national law. The directive will work in conjunction with the upcoming green claims directive, which will provide more detailed conditions for using environmental claims.
The Platform on Sustainable Finance publishes its report on the ‘compendium of market practices’
The Platform on Sustainable Finance, an advisory body to the European Commission, has released a report on a compendium of market practices related to the EU sustainable finance framework. The report highlights the effective adoption of the EU sustainable finance tools, such as the EU taxonomy and the European Green Bond Standard, by various market stakeholders. These tools are being utilized for setting transition strategies, structuring financial transactions, and reporting sustainability efforts. The report includes case studies for different stakeholder groups and emphasizes the positive impact of the EU sustainable finance framework on the ground. The report identifies challenges and recommends peer-to-peer recommendations to enhance the framework’s value. The Platform on Sustainable Finance will present the report in a webinar, and the EU Commission will collaborate with the Platform to monitor tool uptake and provide guidance for effective implementation.
United Kingdom
UK FRC updates the 2018 Corporate Governance Code
The UK Corporate Governance Code for 2024, effective from 2025, has been updated with a focus on Board Leadership and Company Purpose, Division of Responsibilities, Composition, Succession and Evaluation, Audit, Risk and Internal Control, and Remuneration. Operating on a ‘comply or explain’ basis, the Code includes changes such as a new provision (Provision 29) requiring boards to declare the effectiveness of material internal controls. A new Principle encourages companies to report on outcomes and activities. The Code applies to companies with a premium listing on the London Stock Exchange. The 2024 Code will be in effect for financial years beginning on or after January 1, 2025, with Provision 29 applicable from January 1, 2026.
North America
Canada to open consultation on sustainability disclosure standards adoption
In March 2024, the Canadian Sustainability Standards Board (CSSB) plans to initiate a consultation on the initial sustainability standards for Canada, referred to as CSDS 1 and CSDS 2. Canada has been progressing towards aligning its standards with the global baseline since the introduction of the IFRS Standards last year. The CSSB collaborates with the International Sustainability Standards Board (ISSB) to promote the adoption of ISSB standards in Canada, address pertinent Canadian issues, and ensure compatibility between ISSB and future CSSB standards. The Canadian Securities Administrators (CSA) are overseeing the development of climate-related disclosure requirements for reporting issuers in Canada. CSA staff intend to conduct additional consultations to adopt disclosure standards based on ISSB Standards, with necessary modifications for the Canadian context.
Asia Pacific
Australian Treasury proposes mandatory climate-related disclosure rule
The Australian government unveiled Exposure Drafts on a new legislation proposing mandatory requirements for large and medium sized companies and financial institutions to disclose their climate-related risks and opportunities. Importantly, the legislation would enforce mandatory reporting of greenhouse gas emissions across the value chain. The legislation would apply to public companies and large proprietary companies meeting specific size thresholds. Scope 3 emissions reporting are likely to be phased-in as the proposed law also introduces assurance requirements for climate-related reporting. The consultation period is open until 9th February.
Hong Kong confirms plans to further sustainable finance initiatives this year
In a recent regulatory update, Hong Kong’s Green and Sustainable Finance Cross-Agency Steering Group outlined three key initiatives to capitalize on sustainable finance opportunities in the Asia-Pacific Region’s low-carbon transition. The group, co-chaired by the Hong Kong Monetary Authority and the Securities and Futures Commission, is developing a roadmap for the local adoption of International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards. Additionally, they plan to leverage technology for sustainability reporting, showcasing green fintech use cases, and enhancing their website with digital tools. The Steering Group is also prioritizing the development of transition finance, aiming to broaden the local taxonomy and collaborate with regional and international partners for capacity building, thereby reinforcing Hong Kong’s role as a leading sustainable finance hub.
China amends Company Law to protect small and medium shareholders
China has adopted revisions to its Company Law aimed at enhancing corporate governance structures. The amendments focus on strengthening the role of the board of directors, specifying the responsibilities and authority of independent directors, and encouraging the establishment of specialized committees. The changes also introduce provisions related to the protection of shareholders’ rights and interests, emphasizing transparency and accountability in corporate decision-making processes. These revisions reflect China’s commitment to improving corporate governance practices and aligning with international standards to foster a more robust business environment.
Other News and Resources
- UNPRI releases new guidance on corporate governance and human rights. Read more
- TNFD announces early adopters. Read more
- Financial Services Agency (FSA) establishes dialogue on enhancing sustainability investment products. Read more
- FSA publishes annual booklet introducing best practices in financial disclosure. Read more
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