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ESG regulations have recorded a sharp increase over the past decade, and this trend is only expected to continue. Navigating the complex landscape of existing and forthcoming regulations can be daunting, particularly given the array of acronyms such as SFDR, CSRD, NFRD, and others.
Here are some key ESG regulations that will be essential to monitor in 2024:
Sustainability Disclosure Requirements (SDR) (The UK Financial Conduct Authority (FCA)) & The Sustainable Finance Disclosure Regulation (SFDR EU)
Both regulations are aimed at enhancing transparency in the sustainable investment market and address greenwashing. Additionally, they provide essential tools to promote sustainable investment practices and contribute to the broader global effort of aligning financial systems with sustainability goals.
The UK Sustainable Disclosure Regulation (SDR) targets issuers of bonds and shares listed on a UK-regulated market, as well as UK-based investment managers. Its objective is to provide investors with comprehensive, consistent, and comparable sustainability data from both issuers and investment managers to empower investors to make informed decisions.
Under SDR, financial products will be labelled based on investment objectives and on the level of sustainable investments, however instead of a hierarchy the labels will reflect the desires of different consumer preferences: Sustainable Focus, Sustainable Improvers and Sustainable Impact.
While SDR focuses on intentionality, SFDR categories introduce a hierarchy of sustainability and a classification system, where funds will be classified under articles 6,8 or 9, depending on their characteristics and level of sustainability:
- Article 6: Funds without a sustainability scope
- Article 8: Funds that promote environmental or social characteristics
- Article 9: Funds that have sustainable investment as their objective
The EU taxonomy is a framework which allows financial and non-financial companies to share a common definition of economic activities executed in the EU that can be classified as environmentally sustainable.
Investments are evaluated on five criteria:
- Contribution to mitigating climate change
- Ability to adapt to climate change
- Alignment with circular economy principles
- Impact on pollution
- Effect on water and their impact on biodiversity
Large companies must now report on their alignment and publicly disclose the degree their turnover fulfils the EU Taxonomy criteria.
The Corporate Sustainability Reporting Directive (CSRD)
The Corporate Sustainability Reporting Directive (CSRD) is an EU regulation replacing existing Non-Financial Reporting Directive (NFRD) will affect around 50,000 of large EU-listed entities including businesses, banks, and insurance companies. The objective of this regulation is to help stakeholders, such as investors, consumers and policymakers, to evaluate non-financial performance of large companies.
It will affect EU companies that meet two of the following three conditions:
- €40 million in net revenue,
- €20 million in assets,
- or 250 or more employees.
Non-EU based will be affected by the CSRD if they have considerable activity in the EU, including a physical presence: net revenue of €160 million in the EU for each of the last two consecutive years and a listed EU subsidiary that generated a net turnover greater than €40 million in the preceding year.
Companies will be required to disclose information on sustainability topics, including:
- Environmental matters: Encompassing the establishment of any science-based targets and comprehensive climate risk-related reporting
- Social responsibility: Covering information about the treatment of employees, and the communities where they operate
- Respect for human rights: Sharing their human rights standards, and those from their partners and suppliers
- Anti-corruption measures: What is in place in relation to corruption and bribery
- Board diversity: The diversity in leadership, including age, gender, educational and professional background
Under newly introduced concept of double materiality, reporting entities will now need to include in their reports how environmental and social matters affect their own development and what impact their operations have on the environment and society.
The Corporate Sustainability Due Diligence Directive (CSDDD)
The directive on corporate sustainability due diligence (CSDDD) imposes obligations on companies, to mitigate negative impacts on human rights and the environment, such as child labour, slavery, pollution, and deforestation. Businesses will be required to integrate “due diligence” into their policies and risk-management systems, outlining their approach, processes, and code of conduct; and adopt a plan ensuring their business model complies with limiting global warming to 1.5°C.
The legislation applies to EU companies with over 500 employees and a global turnover exceeding 150 million euros, extending to non-EU companies with equivalent turnover in the EU. (The obligations will also apply to companies with over 250 employees and with a turnover of more than 40 million euro if at least 20 million are generated in one of the following sectors: manufacture and wholesale trade of textiles, clothing and footwear, agriculture including forestry and fisheries, manufacture of food and trade of raw agricultural materials, extraction and wholesale trade of mineral resources or manufacture of related products and construction.)
