A day doesn’t seem to go by without there being another sustainability regulation announcement. This article is a whistle-stop tour around selected jurisdictions and provides an update on what has happened in the past few months, what is to come, and what these developments mean for firms.
In summary, reporting on sustainability issues is growing rapidly as more countries introduce standards requiring firms to explain their sustainability risks and opportunities. From early adopter countries, we can see that following the introduction of sustainability disclosure requirements will be firms disclosing how they’ll transition and decarbonize their activities through transition plans. Running concurrent to all of this is the development of an international standard for sustainability assurance engagements. This standard will form the basis for sustainability assurance in multiple jurisdictions and will provide a springboard for jurisdictions to accelerate mandatory assurance of sustainability information.
Europe
Recent sustainability developments in Europe principally provided firms with clarifications and guidance on regulations that were already issued. There is a particular focus on the Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS), which are dominating firms’ time; so, the following documents are essential reads:
- The European Commission FAQs on the CSRD provides useful clarifications on topics such as:
- Scope of the CSRD
- Conditions that must be met for European subsidiaries within the scope of the CSRD to be exempted from reporting requirements when the parent company is a non-EU undertaking
- Interactions with the EU Taxonomy Regulation, i.e., Article 8 disclosures
- Interaction of the CSRD with the Sustainable Finance Disclosure Regulation (SFDR)
- The European Securities and Markets Authority (ESMA) statement is aimed at preparers of firms, and their auditors, who are in the first and second tranches of CSRD implementation, i.e.,reporting for the 2024 or 2025 reporting period. The statement highlights areas that are deemed to be particularly relevant for first-time application of the ESRS, including:
- The resources that preparers and auditors must draw on
- An acknowledgment that implementing CSRD is the start of a multiyear learning curve, but that does not relieve firms and auditors of their responsibilities to ensure compliance with the ESRS
The document covers examples such as having appropriate governance arrangements, information systems and internal controls, and ensuring a robust, double materiality assessment.
- The EFRAG publication1 includes a fourth batch of questions and answers (Q&A) on the application of the ESRS. These Q&A items are being published on a regular basis to support preparers and stakeholders with implementation of ESRS. For each question, EFRAG provides references to and extracts from the standards on which its explanations are based.
- An EFRAG study2 containing preliminary practices and issues observed in the implementation of the ESRS is also available. The study focuses on four topics:
- Double-materiality assessment
- Data points to be reported
- The value chain
- Organizational approach to ESG reporting
The study enables firms to understand preliminary practices undertaken by firms and the main challenges arising from them.
For more details on each of these four European announcements, please see our monthly newsletter on financial and sustainability reporting.
Although European sustainability publications are dominated as of late by those focusing on implementing standards, this summer marked the ratification and entering into force of the Corporate Sustainability Due Diligence Directive (CSDDD). Competent authorities have until July 2026 to transpose the directive into national law. There will be phased introduction of the CSDDD from July 2027.
It is unclear when the Sustainable Finance Disclosures Regulation (SFDR) 2.0 will come to be and what it will entail. With the European parliamentary elections occurring in the early part of Summer 2024 and the inauguration of the new European Commission scheduled for December 1, there has been a pause regarding existing consultations. Nonetheless, the summer saw a flurry of material with the European Commission providing a summary of the responses to its SFDR assessment consultation and the European Supervisory Authorities (ESAs) providing a joint opinion on the assessment of the SFDR. Below are key findings from these documents related to SFDR 2.0:
- There is support for a product classification system, aka labelling regime, but there is uncertainty over how that should be designed. For example, it could be formed around the existing terms (Article 8 and Article 9) or be based on a new classification system, possibly like the U.K.’s investment labels regime.
- Recommendation for a form of “transition” category within that labelling regime.
- Recommendation for a sustainability indicator to illustrate to investors the sustainability features of a product on a scale.
- Support for setting uniform disclosure requirements for financial products offered in the EU and additional disclosures for products making sustainability claims.
- There are different views about the relevance of the SFDR entity-level
United Kingdom
2024 is dominated by asset managers focusing on implementing the Sustainability Disclosure Requirements (SDR) and investment labels regime and regulated financial services firms reviewing their processes and procedures to ensure they do not fall foul of the anti-greenwashing rule. Both the SDR and anti-greenwashing rule started to take hold in Q2 2024, with the SDR having a series of implementation dates for different components of the regime. The key deadline is December 2, 2024, although a recent Financial Conduct Authority (FCA) announcement provides some funds with longer times to implement the naming and marketing rules in limited circumstances.
In contrast to Europe, where the focus has been on producing guidance on previously introduced regulations, the U.K. sustainability regulations landscape could be summarized as, “be prepared for a wave of new regulations on the horizon.” Key announcements that the market is waiting for include:
- What a U.K.-endorsed version of the International Financial Reporting Standard (IFRS) Sustainability Disclosure Standards S1 and S2 will look like. This is expected to be announced in summer 2025. The previous and current U.K. governments have been strong supporters of the development of global sustainability standards to enable comparable sustainability information. The FCA is expected to follow shortly after the government announcement with a consultation applying these U.K.-endorsed standards to listed companies.
- Which firms will have to prepare transition plans and what will they have to prepare? The UK Transition Plan Taskforce (TPT) produced a set of recommendations in late 2023 for credible transition plan documents. The FCA has already announced that they will consult on guidance setting out their expectations for listed firms’ transition plans and that they will develop their guidance with reference to the TPT material. That consultation is likely to be around the same time as the FCA’s consultation on U.K.-endorsed Sustainability Disclosure Standards, i.e., summer 2025. Still, the question remains how the TPT recommendations may be incorporated into U.K. legislation more broadly and how the recommendations will apply beyond listed firms. The new Labour Party government included in its manifesto that it will mandate U.K.-regulated financial institutions—including banks, asset managers, pension funds, and insurers—and FTSE 100 companies to develop and implement credible transition plans.
- An update to the Prudential Regulation Authority’s (PRA) Supervisory Statement SS3/19 on managing climate risk. Previously, the PRA announced that the update will be published in H2 2024. However, with the announcements on U.K.-endorsed sustainability disclosure standards and the application of transition plans not being expected until summer 2025, do not be surprised if the SS3/19 update is delayed until then, so that the updated statement can align with those documents.
- The publication of the FCA policy statement extending the SDR and investment labels regime to firms providing portfolio management services. The FCA stated at its recent Annual Public Meeting that the implementation date will now be in Q2 2025. Given this announcement, it is expected that the policy statement may be published sometime before Christmas 2024.
In contrast to the standards, there is little clarity on when the U.K. will publish its long-awaited Green Taxonomy.
United States
There is ongoing debate in the U.S. about environmental, social, and governance (ESG) considerations. In recent years, state legislators introduced numerous bills designed to limit lending and investments that consider ESG factors. Despite a decreasing success rate, bills and resolutions have been introduced in 29 states over the past few years, including Florida, Texas, and West Virginia. This situation is creating legal and operational challenges for companies operating in multiple states.
While the SEC’s climate-related disclosure rule has stayed pending resolution of legal challenges, lawsuits opposing the California climate disclosure laws have not prevented the legislative process from continuing in the state, nor other states from proposing similar legislations.
California Climate Reporting Requirement
To recap, California passed three pieces of climate reporting legislation in 2023:
- Senate Bill 253 (SB 253) requiring annual greenhouse gas (GHG) emissions reporting for U.S. companies doing business in California and generating more than $1 billion in revenue globally. Scope 1 and 2 emissions reporting starts in 2026 for FY 2025 and Scope 3 emissions reporting starts in 2027 for FY 2026;
- Senate Bill 261 (SB 261) requires a biennial climate risk report aligned with Task Force on Climate-Related Financial Disclosures (TCFD) for U.S. companies doing business in California and generating more than $500 million in revenue globally. Initial disclosure is by January 1, 2026; and
- Assembly Bill 1305 requires reporting for companies selling voluntary carbon offsets (VCOs) or using VCOs to make emissions claims.
In response to a proposed two-year implementation delay for SB 253 and SB 261 by California Governor Gavin Newsom, California Senate Bill 219 was signed into law on September 27, 2024. This slightly amends the previously passed climate-related disclosure laws but does not postpone the implementation timelines.
The California climate laws were in part a response to the slow pace of progress made through federal regulations, i.e., the SEC’s climate-related disclosure rule.
SEC Climate-Related Disclosures
In March 2024, the SEC adopted a rule to enhance and standardize climate-related disclosures for investors. This rule requires SEC reporting companies to disclose climate-related risks, governance and risk management processes, the financial effects of severe weather events and other natural conditions, and GHG emissions.
Both the California climate laws and the SEC’s climate-related disclosure rule were met with several lawsuits, claiming a lack of authority to rule over climate-related matters and that the rules are disproportionate, especially for smaller organizations.
Australia
The landscape in Australia moved swiftly in the past year, emphasizing that reporting on climate-related risks is now a top priority for firms to consider. The notable developments are:
- The introduction of mandatory climate reporting, with the law receiving Royal Assent in September 2024. The first reporting period will start on January 1, 2025 for the largest entities, with two further implementation tranches thereafter based on firm-size criteria.
- Climate reporting will be in accordance with Australian Accounting Standards Board (AASB) S2 Climate-related Disclosures. These are closely aligned with the IFRS Supervisory Disclosure Standard S2. In a late change to its original proposals, the AASB also introduced a voluntary standard for reporting on wider sustainability matters, aligned with IFRS S1.
- Climate reporting will be audited in a phased approach. In September 2024, the Auditing and Assurance Standards Board (AUASB) issued a consultation on the timeline for audits and reviews of information in sustainability reports.
Global Sustainability Standards
At the time of writing, 23 jurisdictions have either adopted or are consulting on adopting the IFRS Sustainability Disclosure Standards, or local variants of those regulations.3 We expect this number to accelerate over the next few years as sustainability reporting becomes more prominent and the norm.
Another major step that will accelerate the adoption of sustainability reporting is having robust assurance requirements. The International Auditing and Assurance Standards Board (IAASB) approved its International Standard on Sustainability Assurance (ISSA) 5000 in September 2024 and expects to publish the standard towards the end of the year after completion of due process and oversight. The standard is suitable for all sustainability topics and reporting frameworks, may be implementable by all assurance practitioners, and will address both limited and reasonable assurance engagements.
As requirements for sustainability reporting and assurance expand and evolve, the challenges for cross-border financial institutions will be ascertaining which regulations apply, e.g., the EU’s CSRD can have global application, and implementing processes and systems to deal with differences across those regulations.
If you have any questions or need assistance, please contact a professional at Forvis Mazars.
- 1 “EFRAG Releases New ESRS Q&A Explanations Covering the January-July 2024 Period,” efrag.org, July 26, 2024.
- 2“EFRAG Releases Study on Early Implementation of ESRS: Insights from Selected EU Companies for Q2 2024,” efrag.org, July 25, 2024.
- 3“Responsible Investor launches ISSB Adoption Tracker,” responsible-investor.com, February 12, 2024.