“ 2024 is when the CSRD begins to bite. We expect to see businesses within and outside the EU grapple with the implementation challenges brought by the CSRD through this year and beyond. At the same time, many clients see a chance in collecting additional data in a more structured way, as it also provides them with relevant information for their strategic positioning. ”
Thomas Voland, Partner in Germany in ESG and EU law explains: "The EU's Corporate Sustainability Reporting Directive, or CSRD, moves the dial for non-financial reporting. It applies from 2024, with reporting deadlines being phased in over the next few years, depending on the listing of a company on a regulated EU market and on the size of the company. Already we are seeing large undertakings heavily involved in preparing their CSRD-compliant sustainability reports, the first of which are due in 2025. The sustainability reports must also include detailed information as required by the Taxonomy Regulation." And it is not just EU businesses that are affected. The extraterritorial effect of the CSRD means that non-EU businesses may also be caught, especially if they have subsidiaries or branches in the EU, imposing significant reporting burdens. Voland says: "2024 is when the CSRD begins to bite. We expect to see businesses within and outside the EU grapple with the implementation challenges brought by the CSRD through this year and beyond. At the same time, many clients see an opportunity in collecting additional data in a more structured way, as it also provides them with relevant information for their strategic positioning."
Outside the EU, there are other sustainability reporting regimes in the pipeline. In the UK, several significant developments are on the horizon, including endorsem*nt of the International Sustainability Standards Board (ISSB) Sustainability Disclosure Standards, Financial Conduct Authority (FCA) consultations on changes to the climate-related disclosure listing rules and transition plan disclosures, plus the publication of the delayed UK Green Taxonomy, which is now expected in the summer of 2024. Kate Norgett, London-based Director of Corporate Governance, says: "UK companies should keep a watchful eye on these developments, as although they will not apply to 2024 reporting, it may be appropriate to consider whether changes need to be implemented over the coming months in order to be able to report as and when these requirements come into force."
Increased reporting and disclosure requirements are not solely a European or UK phenomenon. In the US, the long-awaited Securities and Exchange Commission (SEC) climate-related disclosure rules were finally adopted on 6 March 2024, albeit in narrower form than initially proposed, and California has enacted its own sweeping disclosure legislation.
In the Asia-Pacific region, there are several proposals in the pipeline, including in China. Its three main exchanges recently published draft rules adopting requirements for large listed companies to disclose on ESG governance and strategy, along with metrics on energy transition plans. There are also proposed disclosures on how a company's operations impact on the environment and society, and on their contribution towards the United Nations Sustainable Development Goals. It is notable that the disclosures that would be required under the draft rules are not limited to climate, and that there is a double materiality approach. This is akin to the EU model. Interestingly, key climate information includes scope 1, 2 and 3 emissions, which is a different approach than recently adopted by the US SEC.
In Japan, Hong Kong, Singapore and Australia, mandatory climate-related disclosures are being proposed for large businesses and financial institutions from 2024. The draft Australian proposals are broadly aligned with ISSB and Task Force on Climate-related Financial Disclosures(TCFD). Nadia Kalic, a corporate Partner in Sydney, says: "The move to introduce a set of standardised mandatory requirements should provide investors with greater transparency and accountability when it comes to assessing climate-related financial risks and opportunities, including in their M&A transactions, as well as post completion in the development and implementation of climate-related KPIs and plans." Naomi Griffin, a contentious regulatory and disputes Partner in Sydney, adds a note of caution: "Although the Australian regime is broadly similar to several other regimes, there are a number of key differences, including on the assessment of materiality. We expect one of the key issues international businesses will be grappling with this year to be comparability between regimes, as they strive to 'compare and contrast' global reporting requirements."
Despite the implementation headaches, some businesses are embracing voluntary reporting frameworks – without the regulatory impetus – such as the Task Force on Nature-related Financial Disclosures (TNFD) which was published in September 2023. Here too, businesses would be advised to keep a watching brief, as some countries, including the UK and Australia, have signalled that what is now a voluntary framework may, in due course, become mandatory.
This shines a light on one of the core issues: in an evolving reporting landscape, with many 'known unknowns', how should businesses ensure global alignment while at the same time mitigating risk? Ty'Meka Reeves-Sobers, an environmental Partner based in Houston, notes: "As companies increasingly go on record through voluntary and mandatory climate and sustainability reporting, regulators, NGOs, and activist shareholders will scrutinise those disclosures for regulatory compliance, greenwashing, and opportunities for mission-driven litigation. It is therefore important that companies review their climate and sustainability disclosures through a risk and compliance lens."
