International trends and regulation

ESG International Legal Landscape

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.

EU Taxonomy

Introduced in 2020, the EU taxonomy represents a classification system designed to establish a unified framework for defining sustainable economic activities. Its primary objective is to offer clarity and transparency regarding which economic activities can be deemed environmentally sustainable, particularly within the realm of climate change mitigation and environmental goals. For an economic activity to be deemed environmentally sustainable it must adhere to specific environmental performance criteria, including the reduction of greenhouse gas emissions, improvements in water and resource efficiency, and the preservation of biodiversity.

Regulation – 2020/852 – EN – taxonomy regulation – EUR-Lex (europa.eu)

EU Sustainable Finance Disclosure Regulation (SFDR) on sustainability‐related disclosures in the financial services sector

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)

Corporate Sustainability Reporting Directive (CSRD)

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)

EU Sustainability Reporting Standards (ESRS)

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)

Corporate Sustainability Due Diligence Directive (CSDDD)

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)

US Securities Exchange Commission (SEC): The Enhancement and Standardization of Climate-Related Disclosures for Investors

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