Quick Take on the ESG Regulatory Landscape in 2024: Part 1 – Europe
A Guide for Companies and Market Participants
Regulation is increasingly shaping how the corporate world and the financial sector must integrate environmental, social, and governance (ESG) considerations into business practices. Knowing that sustainability and ESG topics will continue to be front and center in 2024, in Part 1 in this series on what to expect, we highlight a few anticipated changes to regulatory frameworks in the European Union (EU), the United Kingdom (UK), and Switzerland.
Part 2 of this series highlights a few anticipated changes to regulatory frameworks in the United States and Asia-Pacific markets as well as broader international trends.
What’s happening in the EU in 2024?
The EU is recognized as a global leader in sustainable finance regulation. EU legislators have taken note of the lessons learned when implementing the first wave of sustainable finance regulation and they are looking to further harmonize non-financial reporting expectations.
Several well-known EU sustainable finance frameworks could be amended in 2024 and new sustainability-related regulations and guidance are likely to be issued:
- Sustainable Finance Disclosure Regulation (SFDR)
- SFDR regulatory technical standards (RTS)
Depending on outcomes of two consultations (see public and targeted consultations), amendments could address the SFDR’s effectiveness in addressing greenwashing and could see a suggestion to replace the existing Article 6, 8 and 9 classifications. The information gathered by the consultations will inform a comprehensive assessment of the SFDR. The ESAs have suggested several changes to the RTS that could imply the addition of new social Principal Adverse Impacts (PAIs), new disclosures in relation to GHG reduction targets, upgrades to the DNSH concept to the environment and society; simplification of the pre-contractual and periodic disclosure templates for financial products and other technical adjustments.
Not known if or when SFDR amendments will be proposed. By March 3, 2023: The EU Commission must decide if it will advance the SFDR RTS amendments proposed by the European supervisory authorities (ESAs).
New environment-related taxonomy screening criteria (TSC) start to apply
The EU’s taxonomy aims to scale up sustainable investment.
The new TSC define criteria for activities that make a substantial contribution to the EU taxonomy’s non-climate objectives (biodiversity, pollution prevention, water and marine resources, and circular economy).
January 1, 2024: New TSC will start to be phased in for financial and non-financial companies.
Corporate Sustainability Due Diligence Directive (CSDDD) is expected to be finalized
The proposed CSDDD requires companies to conduct environmental and human rights due diligence on their own activities, on their subsidiaries’ activities, and on the value-chain operations carried out by companies they have established business relationships with.
The financial sector is partially covered by the political agreement reached in December 2023. Firms in the financial sector must implement a plan to align with the 1.5°C warming goal of the Paris Agreement, with potential scope expansion pending a thorough impact assessment.
First half of 2024: The final version will be adopted and published in the Official Journal of the European Union, coming into effect 20 days later.
In 2026: Member states are given two years to transpose the CSDDD into national law.
First wave of companies start to apply the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD)
The CSRD aims to ensure that there is adequate, publicly available information on the risks that sustainability issues present to entities as well as information on entities’ impacts on people and the environment.
Companies reporting under the CSRD will use the ESRS to determine the content of their sustainability reports.
January 2024: The ESRS will apply to certain companies’ 2024 sustainability reports (filed in 2025).
January 2024: The European Financial Reporting Advisory Group (EFRAG) intends to issue an exposure draft of simplified ESRS for listed small and medium-sized enterprises.
Q3/Q4 2024: EFRAG will advise the EU Commission on using XBRL (eXtensible Business Reporting Language) to report sustainability information.
Moreover, the EU is likely to introduce transparency requirements for ESG rating and scoring companies to ensure that they mitigate any conflicts of interest inherent to their business models. Besides, the European Securities and Markets Authority (ESMA) issued a public statement regarding forthcoming guidelines for fund names which will now be published in Q2 2024 to accommodate reviews of sectoral funds legislation such as the UCITS Directive and AIFM Directive.
Notes on France and Germany
Momentum has been gathering behind laws that require corporations to be more accountable for protecting human rights and preventing damage to the environment. A couple of examples that precede the EU’s CSDDD are France’s duty of vigilance law, which has required companies to conduct human rights and environmental due diligence since 2017, and Germany’s Corporate Due Diligence in Supply Chains Act, which entered into force in January 2023.
UK ESG frameworks in 2024
Near the end of 2023 the UK made a flurry of announcements about its development of sustainability-related policies that apply to its financial sector. In 2024, we expect:
Phased-in application of the Sustainability Disclosure Requirements (SDR)
The SDR policy statement aims to improve trust and transparency for sustainable investment products by creating common standards, terminology, and accessible product classification and labels.
It establishes four labels for financial products (Sustainability improvers, Sustainability focus, Sustainability impact and Sustainability mixed goals) to help investors and consumers differentiate between sustainability objectives and investment approaches and includes an anti-greenwashing rule that applies to firms authorized by the UK Financial Conduct Authority (FCA).
Q1 2023: The FCA will finalize guidance on applying the SDR’s anti-greenwashing rule.
Q1 2024: The FCA will consult on altering the scope of the SDR to potentially apply to portfolio managers.
May 31, 2024: The SDR’s anti-greenwashing rule enters into force.
July 31, 2024: firms can apply the SDR’s investment labels and the related disclosure requirements become mandatory.
December 2, 2024: The SDR’s naming and marketing rules (and accompanying disclosure requirements) enter into force.
Unknown: The FCA intends to expand the application of the SDR to include overseas funds and pension products.
Resources to supplement the Transition Plan Taskforce (TPT) disclosure framework will be developed
The TPT is looking to advance good practice for robust and credible transition plan disclosures through its disclosure framework released in October 2023. The task force was set up by the UK’s treasury ministry.
Q1 2024: The TPT plans to update its guidance on implementing the disclosure framework.
UK Sustainability Disclosure Standards (SDS) will be finalized
The UK is working to develop SDS for companies’ baseline reporting on sustainability- and climate-related risks. The SDS will likely form the foundation of future legislation related to reporting on sustainability matters, including climate change.
Q3/Q4 2024: The UK SDS are expected to be published by mid-2024 and
January 1, 2025: The SDS are expected to come into effect.
Development of a UK green taxonomy
A UK-specific green taxonomy would seek to improve understanding of the impact of firms’ activities and investments on the environment and support the UK’s transition to a sustainable economy.
The Green Technical Advisory Group (GTAG) published its final advice for developing a UK-specific taxonomy in October 2023.
2024: A consultation on the UK’s taxonomy is expected.
Developments related to non-financial reporting in Switzerland
While Switzerland is known for favoring a self-regulatory approach, 2024 will be a year of new reporting expectations coming into effect for some companies:
Code of Obligations – non-financial reporting
The Swiss Code of Obligations includes a requirement for certain companies to report on environmental issues, including CO2 targets, social issues, personnel issues, respect for human rights, and the fight against corruption.
2024: In-scope companies will issue their first non-financial reports, covering the 2023 financial year.
Mid-2024: The Federal Council is expected to propose amendments to the Code of Obligations to align its expectations with the EU’s CSRD.
Code of Obligations – climate reporting
Also part of the Code of Obligations, the Ordinance on Climate Disclosures requires companies to report the impact of climate change on their operations as well as the company’s impact on the climate (i.e. double materiality). This disclosure is to follow the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
January 1, 2024: The Ordinance on Climate Disclosures comes into effect.
2025: Companies start publishing certain TCFD-aligned information as part of their non-financial reporting, covering the 2024 fiscal year.
Financial institutions’ use of the Swiss Climate Scores will be reviewed
Published by the Federal Council, the Swiss Climate Scores are recommended disclosures on investment products and portfolios’ alignment with the 1.5°C warming goal of the Paris Agreement.
2024: The Federal Department of Finance (FDF) and the State Secretariat for International Finance plan to review how financial institutions are applying the Swiss Climate Scores.
2025: A new version of the Swiss Climate Scores will come into effect, replacing the previous version.
A principles-based anti-greenwashing ordinance could be issued
In December 2022 the Federal Council communicated its position on preventing greenwashing in the financial sector. It clearly states expectations regarding claims about sustainability characteristics and objectives of financial products.
Q3 2024: The FDF plans to prepare a consultation draft of a principles-based ordinance to implement the Federal Council’s position on preventing greenwashing in the financial sector.