For businesses of all types, it is essential to develop an understanding of the broad and rapidly evolving ESG landscape globally. The ESG regulatory framework encompasses both soft and hard laws across various practice areas and multiple sectors. From due diligence to sustainable investing, regulators in different jurisdictions are strengthening efforts to enhance transparency for companies and their supply chains. They are also addressing investors’ demands for more comprehensive, comparable, and publicly verifiable sustainability-related information. We have identified one of the most significant emerging international regulations and trends that should shape the future of the ESG landscape.

On 25 July 2024, the EU Directive on Corporate Sustainability Due Diligence (Directive 2024/1760) came into effect. This Directive aims to promote sustainable and responsible corporate practices within companies’ operations and throughout their global value chains. The new regulations require companies within its scope to identify and address adverse human rights and environmental impacts resulting from their activities both within and outside Europe.

Basic Due Diligence Duties for Companies:

• Integrating due diligence into corporate policies and risk management systems.
• Identifying adverse human rights and environmental impacts in the company’s operations, as well as those of its subsidiaries and business partners in the chain of activities.
• Addressing negative impacts that have been, or should have been, identified, where necessary in the order of prioritization.
• Suspending or terminating a business relationship as a measure of “last resort” when all other actions have failed, and where severe impacts are at stake, only if these impacts outweigh the foreseeable negative consequences of disengagement.
• Engaging with stakeholders.
• Establishing and maintaining a complaints and notification procedure.
• Monitoring the effectiveness of due diligence measures.
• Communicating publicly on due diligence according to the Corporate Sustainability Reporting Directive and the European Sustainability Reporting Standards (with some exceptions).

Which companies are covered by the EU Directive?

Large EU limited liability companies & partnerships:
Approx. 6,000 companies with more than 1000 employees and a net world turnover of more than EUR 450 (in any sector).

Large non–EU companies:
Approx. 900 companies (of a legal form comparable to LLC/partnerships) with a turnover of more than EUR 450 million generated in the EU.

The Directive contains provisions to facilitate compliance and limit the burden on companies, both in scope and in the value chain.

SMEs:

Micro companies and SMEs are not covered by the scope of Directive. However, the they may be impacted as direct or indirect business partners in the chain of activities of large companies in scope.

https://commission.europa.eu/business-economy-euro/doing-business-eu/sustainability-due-diligence-responsible-business/corporate-sustainability-due-diligence_en

The Sustainable Finance Disclosure Regulation (SFDR), which came into effect in 2021, aims to enhance transparency and comparability of sustainability disclosures within the financial services sector. It applies to both financial market participants (FMPs) and financial advisers (FAs) operating within the European Union. Financial market participants and financial advisers are required to provide detailed disclosures related to sustainability risks, including the disclosure of how environmental, social, and governance factors are integrated into their investment processes. Also, the SFDR also mandates to include information about how their remuneration policies align with the integration of sustainability risks and advice.

Regulation – 2019/2088 – EN – SFDR – EUR-Lex (europa.eu)

Effective in 2023, the CSRD modernizes and strengthens the rules concerning social and environmental information that companies must report broadening the existing Non-Financial Reporting Directive (NFRD). A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability. A significant innovation lies in the inclusion of non-EU companies that have a significant activity on EU territory. The “double materiality” of information is reflected in the requirement to include in the management report both how sustainability issues affect the company’s performance and how the company itself impacts people or the environment. The first companies will have to apply the new rules for the first time in the 2024 financial year, for reports published in 2025.

Directive – 2022/2464 – EN – CSRD Directive – EUR-Lex (europa.eu)

In force from 2023, the ESRS specify the information that an undertaking shall disclose about its material impacts, risks, and opportunities in relation to environmental, social, and governance sustainability matters. The standards cover the full range of environmental, social, and governance issues, including climate change, biodiversity, and human rights. These regulations will not only be enforceable on EU-based companies but also, starting in 2024, to large non-EU companies trading in the EU market.

Delegated regulation – EU – 2023/2772 – EN – EUR-Lex (europa.eu)

Introduced in 2022, the CSDDD is a proposed legislative framework that aims to establish a mandatory due diligence requirement for companies operating within the European Union. This directive is intended to address and mitigate adverse impacts on human rights and the environment resulting from business activities. The duty will apply to a company’s operations, its subsidiaries, and its value chains inside and outside Europe.In addition, certain large companies need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement. Directors are incentivized to contribute to sustainability and climate change mitigation goals.

EUR-Lex – 52022PC0071 – EN – EUR-Lex (europa.eu)

On March 6, 2024, the Securities and Exchange Commission (SEC) took significant steps by adopting rules aimed at enhancing and standardizing climate-related disclosures for public companies and in public offerings. These final rules will require that registrants provide information about climate-related risks that have materially impacted their business strategy, results of operations, or financial conditions, or are reasonably likely to do so. Additionally, the rules mandate certain disclosures related to severe weather events and other natural conditions in a registrant’s audited financial statements. The goal is to provide investors with comprehensive and reliable information about the financial effects of climate-related risks and their management.

https://www.sec.gov/news/press-release/2024-31
https://www.sec.gov/files/rules/final/2024/33-11275.pdf

The Organization for Economic Co-operation and Development (OECD) has recently published the Global Corporate Sustainability Report 2024. The sustainability dataset used for this analysis covers over 14,000 companies listed on 83 markets. These companies collectively represent a staggering total market capitalization of USD 90 trillion.

Key Findings:

• Worldwide, nearly 9,600 publicly traded companies revealed sustainability-related data in 2022 or afterward. These companies, accounting for 86% of the global market capitalization, have attracted increased attention from investors due to the growing urgency in addressing climate-related risks and opportunities, particularly regarding greenhouse gas (GHG) emissions. Approximately two-thirds of the companies disclosing sustainability information by market capitalization have their sustainability disclosures externally assured by a service provider. Additionally, around 70% of companies, ranked by market capitalization, disclosed a target for reducing GHG emissions, with almost half of them aiming for the year 2030.
• Climate change is acknowledged as a financially consequential risk for publicly traded companies, encompassing 64% of the global market capitalization. Companies exposed to risks associated with climate change, human capital, and data security typically exhibit larger market capitalization in contrast to companies confronting other sustainability-related risks, such as ecological impacts or human rights concerns.
• An examination of the top 100 publicly listed companies with the highest disclosed greenhouse gas (GHG) emissions globally reveals that institutional investors possess the largest portion of equity (41%), while the public sector also holds a significant stake, accounting for 18% of the equity. The distribution of ownership becomes especially crucial when assessing investors’ capacity to drive the transition toward a low-carbon economy through effective engagement strategies.
• Notably, in Delaware, the number of private Public Benefit Corporations (PBCs) increased from 207 in 2021 to 332 in 2023, while the count of listed PBCs doubled from 7 to 14. Similarly, in France, the number of private sociétés à mission rose from 502 in 2021 to 1,276 in 2023, with publicly listed sociétés à mission growing from 3 to 8 during the same period.
• More than half of the global market capitalization is represented by companies that have established committees tasked with overseeing sustainability risks and opportunities. In the United States, around 75% of companies, based on market capitalization, have dedicated sustainability committees. Similarly, in Asia (excluding China and Japan), Europe, and other advanced economies, over 50% of companies have such committees. Moreover, nearly 3,000 companies, amounting to 53% of the global market capitalization, have boards of directors responsible for overseeing climate-related matters, with notably higher proportions observed in Europe, Japan, and the United States. About three-fifths of companies integrate executive compensation policies linked to performance metrics, incorporating a variable component based on sustainability-related factors. Specifically, 80% of companies by market capitalization in Europe and 60% in the United States incorporate sustainability considerations into executive compensation.
• About 14% of the worldwide market capitalization is comprised of companies that include employee representatives on their board of directors. The occurrence of employee representation differs across regions, with rates of 62% in China, 38% in Europe, and 11% in Latin America, while other regions exhibit minimal levels of such representation. Furthermore, in 2022, 81% of companies, based on market capitalization, disclosed policies regarding shareholder engagement.
• In 2023, the total value of sustainable bonds issued by the corporate sector worldwide reached USD 2.3 trillion. Europe stood out as the leading region in the sustainable bonds market, representing 45% of the total issuance by non-financial companies from 2014 to 2023. It’s noteworthy that unlisted companies contributed about half of the sustainable bond issuance in both the non-financial and financial corporate sectors during the period of 2022-23.
• A similar trend is observed in investment funds that label themselves as sustainable or climate funds. These funds have experienced increasing net inflows since 2016. However, it’s important to note that assets under management of sustainable funds still represent only 2.76% of the total assets managed by the global investment funds market.

For more information see: https://www.oecd.org/fr/gouvernementdentreprise/global-corporate-sustainability-report-2024-8416b635-en.htm

The EU Taxonomy is gaining popularity among companies, public institutions, and financial entities as an essential framework to guide their business strategies, transition planning, and investment and lending operations.

https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities/eu-taxonomys-uptake-ground_en