2024 ESG Regulatory Landscape
2024 ESG Regulatory Landscape
A guide for Market Participants and companies
Sustainability reporting regulations are evolving worldwide to promote consistency and transparency. Presently, both the EU and the US are at the forefront of initiatives aiming to standardize the collection and reporting of ESG data.
With a significant 155% increase in ESG regulation over the past decade, investors and asset managers must adapt to an evolving and complex regulatory landscape. To ensure you stay informed, here are some key ESG regulations in 2024 that are worth noting.
European Union:
For financial institutions:
SFDR
SFDR was introduced to prevent greenwashing and increase transparency with regard to the sustainability reporting of companies and investors. Thus, it comprises specific disclosure rules aimed at making the sustainability profile of investment products more easily comparable and better understood by end financial market participants (FMPs).
| Deadlines | Obligations | Challenges |
|---|---|---|
June 30, 2024: deadline for reporting on the classification of sustainable funds in Articles 6, 8, and 9. | Asset Managers must classify their sustainable funds into three categories: Article 6, 8, and 9. This classification is based on the level of integration of sustainability risks and objectives. | Requires a framework to help qualify a sustainable investment that allows environmental or social contribution assessment, DNSH analysis and corporate governance best practices assessment. Only investments that clearly fulfill the above criteria through a robust analysis framework can be classified as sustainable. For private equity, it also requires collecting information that is not necessarily disclosed. |
2025: Potential amendments, with changes to current disclosures from Articles 6, 8, and 9 to Categories A, B, C, and D. | These new categories are still being studied, and they aim to provide clearer, more detailed disclosures on sustainability. | Requires a more detailed assessment of positive contributions for Category A, detailed assessment of how companies mitigate their significant negative impacts for Category B, and the need for metrics to quantify sustainability progress over time for Category D. |
European Union Taxonomy
The EU Taxonomy regulation is a classification system that helps companies and investors identify “environmentally sustainable” economic activities to make sustainable investment decisions. It aims to help scale up investments in projects and activities that are most needed for the transition and necessary to reach the objectives of the European Green Deal.
| Deadlines | Obligations | Challenges |
|---|---|---|
January 2024: initial disclosures on activities aligned with amended climate change objectives, and eligible for new objectives (contributing to sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems) | Financial institutions must report the share of their assets or investments eligible and aligned to EU Taxonomy (Green Asset Ratio, Green Investment Ratio, Banking Book Taxonomy Alignement Ratio) | Requires the collection of EU Taxonomy data from issuers of assets |
January 2026: first reporting on the alignment of activities to the objectives mentioned above | Financial institutions must report the share of their assets or investments aligned to EU Taxonomy (Green Asset Ratio, Green Investment Ratio, Banking Book Taxonomy Alignement Ratio) for all environmental objectives | Requires the collection of EU Taxonomy data from issuers of assets |
CSDD
Under the current agreement, the financial sector will be temporarily excluded from the scope of the directive about the due diligence of their clients. Banks, pension funds, insurers and investment firms will have to implement climate change transition plans and adopt appropriate remuneration schemes. There will be a review clause for possible future inclusion of the financial sector based on a sufficient impact assessment.
For non-financial companies:
CSRD
The CSRD is a European directive on sustainability reporting. It aims to provide transparency that will help investors, analysts, consumers, and other stakeholders better evaluate EU companies’ sustainability performance as well as the related business impacts and risks.
| Deadlines | Obligations | Challenges |
|---|---|---|
January 2025: first reporting on FY 2024 | Companies must report identified material topics following ESRS standards regarding impacts, risks and opportunities management, metrics, and targets. | Requires a robust double materiality analysis of their value chain to gain an in-depth understanding of what is material for them and focus on their most strategic issues. |
CSDD
The Corporate Sustainability Due Diligence Directive establishes a corporate due diligence duty. This Directive aims to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address the adverse impacts of their actions, including in their value chains inside and outside Europe.
| Deadlines | Obligations | Challenges |
|---|---|---|
2024: expected adoption 2027: expected regulation implementation" | Companies must identify, bring to an end, prevent, mitigate, and account for negative human rights and environmental impacts in their operations, subsidiaries and value chains | Requires a value chain risk analysis based on double materiality assessment of procedures in place and their effectiveness. |
United Kingdom:
For financial institutions:
SDR
The UK SDR is a forthcoming set of regulations designed to oversee sustainability disclosure obligations for financial market participants in the United Kingdom.
Currently, the UK SDR is limited to UK financial products and firms. The FCA, however, has expressed the possibility of expanding the rules’ scope in the future. Over 450 investment funds and 1,500 asset managers, managing 10.6 trillion GBP worth of assets, may fall under the scope of the UK SDR.
| Deadlines | Obligations | Challenges |
|---|---|---|
May 31, 2024: Anti-greenwashing rule and guidance comes into force July 31, 2024: Firms can begin to use labels, with accompanying disclosures December, 2 2024: Naming and marketing rules come into force with accompanying disclosures December 2, 2025: Ongoing product-level and entity-level disclosures for firms with AUM > £50bn December 2, 2026: Entity-level disclosures rules extended to firms with AUM > £5bn" | Financial institutions must disclose at both the product level and the firm level. There are new restrictions around the naming and marketing of investment products and a new opt-in labeling regime for sustainable investment products The four product labels are voluntary and non-hierarchical but mutually exclusive: 'Sustainability Focus' 'Sustainability Improvers' 'Sustainability Impact' 'Sustainability Mixed Goals' | A label/ products must meet the specific and general qualifying criteria for each label – and make associated disclosures. A - Sustainable focus: Assets with this label are those that are sustainable for people and/or the planet. Funds must maintain a high level of sustainability, meaning they must use a robust, evidence-based standard that is an absolute measure of environmental and/or social sustainability. B - Sustainable improvers: Assets with this label category are those that may not be sustainable now, with an aim to improve their sustainability for people and/or planet over time. Asset managers will be expected to obtain robust evidence for selecting those assets and show a measurable improvement on the funds’ ESG performance. C - Sustainable impact: Assets aiming to make measurable contributions to environmental or social results. Financial products must have a specific sustainable outcome as their objective. Requires firms to collect and maintain KPIs that are credible, rigorous, and evidence-based to measure environmental and/ or social sustainability. " |
Canada and USA:
For companies:
US SEC Climate-related Disclosures
The proposed SEC rules on climate-related disclosures aim to enhance transparency in the financial sector regarding climate risks and opportunities. These regulations intend to require issuers to disclose their exposure to climate-related risks, the impact of such risks on their financial performance, their strategies for managing these risks, as well as relevant metrics such as emissions data.
| Deadlines | Obligations | Challenges | |
|---|---|---|---|
Expected in April 2024: publication of the final rule. | Public companies must report on greenhouse gas emissions and climate-related financial metrics and disclosures. The rules align with some aspects of ISSB standards. Disclosure will be phased in for large issuers first, then all issuers | Requires a material climate-related risks analysis among the value chain to determine whether the company needs to disclose it. |
Canada Supply Chain Act
The Canada Transparency on Supply Chains Act mandates reporting on the risks of forced labor and child labor in supply chains. This legislation applies to medium to large entities operating in Canada.
| Deadlines | Obligations | Challenges |
|---|---|---|
May 31, 2024: first disclosure, and it must reference the activities undertaken during the entity’s or government institution’s previous financial year. | Large Canadian companies must report on an annual basis their efforts to reduce forced and child labour in their supply chains. | Requires a supply chain risk analysis based on double materiality and an assessment of procedures in place and their effectiveness to understand where to focus efforts. |
For financial institutions:
US SEC Names Rule Expansion
The Securities and Exchange Commission (SEC) has adopted amendments to the Investment Company Act’s “Names Rule” to prevent misleading investment fund names. The changes require funds with suggestive names to adopt an 80 percent investment policy, undergo quarterly reviews, and comply with enhanced prospectus disclosure.
| Deadlines | Obligations | Challenges |
|---|---|---|
January 2024: regulation implementation Janurary 2026: fund groups with net assets of $1 billion or more will have 24 months to comply with the amendments, and fund groups with net assets of less than $1 billion will have 30 months to comply. | Funds with certain ESG-related terms in their names must invest 80% of assets accordingly and define the terms in their prospectuses. | Requires the identification of companies that contribute positively to social and/or environmental sustainable objectives. |
International
For companies:
ISSB S1 (general requirements for sustainability disclosure) and S2 (climate)
The International Sustainability Standards Board (ISSB) is a global organization dedicated to developing and promoting sustainability reporting standards, under the umbrella of the IFRS Foundation. The ISSB released its two first standards in 2023, which are designed to facilitate informed decision-making by investors and other stakeholders, fostering transparency and accountability in assessing the long-term sustainability performance of organizations. The ISSB sustainability disclosure standards are voluntary but are expected to be adopted in jurisdictions around the world, which will make them mandatory.
| Deadlines | Obligations | Challenges |
|---|---|---|
Companies can begin reporting from financial year 2024 First reporting expected in 2026 in UK, expected mandatory reporting in Canada in the upcoming years | Companies must disclose on governance, strategy, risk management, and metrics/targets related to sustainability and climate risks and opportunities. The standards align with the TCFD framework. | Requires an ESG financial materiality assessment. |
Despite regional differences, there is a general trend towards global standardization and interoperability of ESG standards.
Currently, the most advanced portfolio-related KPIs are climate-focused, but ESG reporting is set to become more granular, with sector specificity and greater inclusion of social and governance data.
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