It has been a busy few months for regulators of ESG across the globe. Levels of ESG knowledge continue to rise too, together driving the agenda to a more sophisticated and nuanced place, especially in Europe. Here we summarise the latest ESG developments across Europe, the UK, the US and more broadly, for the last quarter.
Europe
SFDR
The EU is continuing its long process of consideration around the future of Sustainable Finance Disclosure Regulation (SFDR). Since June we’ve had recommendations and opinions from the European Parliament (EP), the European Securities and Markets Authority (ESMA) and the European Supervisory Authorities (ESAs).
The European Parliament’s study criticised the use of the SFDR as a de facto labelling regime, noting its complex and unintuitive disclosure requirements and emphasising investors’ struggle to differentiate between Article 8 and Article 9 funds. The EP is calling for adjustments to SFDR including simplifying product labels, enhancing the interaction between SFDR and other disclosure rules, expanding the scope of Principle Adverse Impacts (PAIs), and improving the information infrastructure.
The ESA’s meanwhile have proposed changes to SFDR including new “Sustainable” and “Transition” labels for financial products, alongside a new, prescriptive definition of “sustainable investment” and simplified disclosures for retail investors.
Finally ESMA has proposed that all financial products disclose basic sustainability information, including key performance indicators such as GHG emissions, biodiversity impact, EU Taxonomy alignment, and human and labour rights. This recommendation could extend sustainability reporting to Article 6 funds. Additional recommendations include using the EU Taxonomy as a common sustainability reference, completing the taxonomy for all sustainable activities, defining transition investments, creating a product categorisation system, improving ESG data consistency, and testing policies with consumers and industry.
It’s now up to the Commission to digest these recommendations and decide on the future of SFDR.
CSRD
Over on the corporate side, the Corporate Sustainability Reporting Directive (CSRD) is causing a fair bit of concern for larger companies. With reports due in early 2025 from the first wave of companies needing to apply the rules, many are only just realising the sheer scale and scope of the undertaking. To help clarify things, the EU Commission has released a set of FAQs covering the Directive’s scope, specifying which European Sustainability Reporting Standards (ESRS) sets companies should use and how to handle estimates when complete value chain information is unavailable. The ESRS set out a series of disclosures for companies complying with CSRD.
The European Financial Reporting Advisory Group (EFRAG) has also published a Compilation of Explanations for the European Sustainability Reporting Standards (ESRS), which it has helped to produce. In addition to guidance on reporting requirements, structured by ESG categories, this provides detailed answers to various ESRS-related questions and includes explanations of how governance ESRS standards relate to business conduct.
The ESAs have published their Final Report on greenwashing in the financial sector, following a 2022 request from the European Commission. In it they define greenwashing as misleading sustainability-related statements or actions. ESMA is also planning to develop greenwashing risk indicators, deploy supervisory technology, and establish a Common Supervisory Authority for sustainability integration in 2024.
UK
SDR
Following on from the publication of its Sustainability Disclosure Requirements (SDRs) in December 2023, the UK’s Financial Conduct Authority (FCA) recently updated its webpage with a “Sustainability disclosure and labelling regime” section for funds using labels under the Sustainability Disclosure Requirements (SDR). This details how firms should notify the FCA about label use and apply for changes to fund names, aims, or policies.
As of 31 May 2024, all FCA-authorised firms must follow an anti-greenwashing rule, ensuring fair, clear, and non-misleading sustainability claims. Some UK asset managers must now assess products for sustainability labels, meet naming and marketing requirements, and prepare necessary disclosures.
Labour
The new Labour government came to power promising increased spending on renewables, a publicly owned energy company, and support for decarbonising high-carbon sectors. So far we’ve seen the establishment of the government-backed Great British Energy company and an announcement to introduce new legislation in 2025 to regulate ESG rating providers, bringing them under the oversight of the Financial Conduct Authority (FCA). The new law intends to enhance transparency in ESG ratings and address existing concerns about inconsistent ESG evaluations, currently lacking supervision by market or securities regulators.
ESG Ratings
This build upon the FCA introduction of a voluntary code of conduct for ESG ratings at the beginning of the year. Chancellor Rachel Reeves has asked the Treasury to respond quickly to an industry consultation on ESG ratings, with a view to bringing in new legislation next year.
UK Stewardship Code
Finally, the Financial Reporting Council (FRC) has announced revisions to the UK Stewardship Code application process, focusing on five priority areas: Purpose, Principles, Proxy Advisors, Process, and Positioning. These changes aim to support the UK capital markets, reduce reporting burdens, and improve stewardship outcomes. Key revisions include reducing annual reporting requirements, allowing the reuse of previous reports, and clarifying outcome expectations. The adjustments will be effective from 31st October 2024 and are expected to ease the application process for signatories.
US
SEC climate rules
Back in April, the U.S. Securities and Exchange Commission (SEC) announced its decision to pause the roll out of its new climate rules, amid a series of legal challenges, including from 25 Republican state attorneys general and the U.S. Chamber of Commerce. The original rules introduced in March 2024, would require companies to report on and address climate risks, the financial impact of severe weather, and, in some instances, greenhouse gas emissions. Opponents argued the rules would be overly burdensome and exceed the SEC’s mandate. The SEC has now filed a brief in front of the Court of Appeals, defending its climate disclosure rules as necessary for investor protection and transparency. It insists they are within its authority and essential for providing consistent and comparable information to investors. The outcome of the case could significantly impact future corporate climate disclosures.
California’s climate legislation SB 253 and SB 261
California’s greenhouse gas emissions reporting requirements are set to forward as intended after a proposal to delay the new laws has failed. New climate-related legislation, SB 253 and SB 261, will come into effect from January 2025 with the first reports due from 2026. In 2027 the legislation will expand to require the disclosure of Scope 3 emissions as well as Scope 1 and 2. Companies operating in California with revenue greater than $500m will also be required to make disclosures on climate-related financial risks. The Governor’s Department of Finance proposed a budget-related bill including language which would have delayed the implementation by two years and reduced the scope. However, the version of the budget-related bill that passed did not include the two-year reporting delay, although does extend the deadline for regulators to craft emissions disclosure rules to 2025.
Global Updates
TNFD
The Task Force on Nature-Related Financial Disclosures (TNFD) is progressing at pace. Building on the original TNFD recommendations and LEAP assessment approach, the TNFD has released additional guidance for financial institutions focused on applying its recommendations and disclosure metrics. The guidance incorporates feedback from a global consultation process which ended in March 2024. Its key areas include applying TNFD recommendations, understanding the TNFD metrics architecture, using final TNFD disclosure metrics, referencing sectors for exposure metrics, and mapping SFDR Principal Adverse Impact metrics to TNFD core metrics. There are also resources on nature-related issues and an overview of the TNFD’s disclosure and metrics guidance.
ISSB
In May, the IFRS Foundation released the Inaugural Jurisdictional Guide for adopting the ISSB Standards, aimed at helping jurisdictions design and plan their adoption or broader use. The guide establishes a global baseline for sustainability disclosures in capital markets, promoting consistent and comparable climate and sustainability-related information. It outlines various approaches for integrating ISSB Standards with existing legislation and policy. Additionally, the IFRS Foundation’s Regulatory Implementation Programme provides tools, educational materials, and capacity-building support for jurisdictions. These developments are significant steps towards harmonising financial and sustainability reporting standards, likely leading more jurisdictions to adopt these standards for better alignment in sustainability reporting.
TISFD
Following in the wake of the TCFD (Task Force on Climate-Related Financial Disclosures) and TNFD (Task Force on Nature-Related Financial Disclosures), the Taskforce on Inequality and Social related Financial Disclosures (TISFD) is now seeking to address inequality and social issues. The Task Force plans to launch in September 2024, with a view to developing the framework, iterating and formally launching between then and September 2026.