The three upcoming ESG regulations every company should pay attention to.
Three key proposals will change the ESG regulatory landscape. The EU CSRD & ESRS, SEC Climate-Related Disclosures and EU Deforestation Law. In this blog, we summarize each and identify areas in which companies can prepare.
CSRD/ESRS: Corporate Sustainability Reporting Directive (EU).
Starting in 2024* companies trading in the EU will need to report on how they affect the environment and people, and how environmental matters affect their financial performance in return.
This regulation, CSRD, improves on and replaces the existing corporate sustainability reporting, Non-Financial Reporting Directive (NFRD), by becoming more ambitious and comprehensive. The idea is that mandatory public disclosure will bring sustainability reporting in line with financial reporting.
Who is it for?
- Large companies listed on regulated markets in the EU. Companies with more than 250 employees, a turnover of over €40 million and over €20m total assets.
- Non-EU companies with a net turnover of €150 million in the EU.
- Listed SMEs.
*The phased rollout means the timelines are as follows: Large companies that already submit NFRD reports will publish their first CSRD reports in Q1 2024, reporting about 2023. For other large companies from the first two points above, they will be required to publish reports in Q1 2025 about 2024. SMEs have a more extended transitional period, obliged to report from 2026 with the possibility to voluntarily opt out. Mandatory reporting on the year 2028 due Q1 2029.
What will companies need to report?
The draft European Sustainability Reporting Standards (ESRS) cover environmental, social and governance topics with sector-specific standards expected to release in June 2023. Environmental matters include; GHG emissions, climate risk, pollution, water and marine resources, biodiversity and ecosystems, and resources and circular economy. Social and governance include; treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards (in terms of age, gender, educational and professional background).
The ESRSs introduce the concept of double materiality, meaning companies will need to assess materials through their sustainability and financial impact. This will involve multi-stakeholder consultation; expertise across the full range of sustainability matters, impact materiality and financial materiality. The requirements expand a company’s reporting boundary to its entire value chain, assessing it retrospectively and forward-looking, forecasting impacts on the short, medium and long term.
Aligning with existing sustainability reporting.
CSRD is linked to a wider range of frameworks, guidance and laws that are synchronously evolving. For companies worried about the burden of reporting, its worth noting that the voluntary sustainability reporting frameworks: GRI, SASB, and CDP, are also working to align with the ESRS. The ESRS are confirmed to align with the sustainability standards and disclosure requirements from International Sustainability Standards Board (ISSB) and Task Force on Climate-Related Financial Disclosures (TCFD), and to align with the sustainability framework of Sustainable Finance Disclosure Regulation (SFDR). There is a strong expectation that ESRS will align with Taskforce on Nature-related Financial Disclosures (TNFD) on its biodiversity framework and how to set science-based targets.
Those that have taken steps to measure biodiversity and water targets under these frameworks are a step ahead.
Goals of CSRD
To achieve the European Green Deal goal of no net emissions of greenhouse gases by 2050, the private sector has a monumental role in mitigating the worst-case scenarios of the climate crisis and environmental degradation. CSRD intends to bring sustainability reporting in line with financial reporting. The EC expects that regulated standards will lower reporting costs in the long term, by reducing the risk of greenwashing and enhancing credibility to be more attractive to consumers and investors.
SEC Climate-Related Disclosures: The Securities and Exchange Commission (USA).
Likely to start in 2023 or 2024, US publicly traded companies will need to expand their ESG reporting to make climate risk and impacts part of the financial disclosure.
With mounting pressure from investors and shareholders, SEC is taking ESG reporting to the next level by requiring companies to report on climate-related risks that are reasonably likely to impact their business.
Who is it for?
US publicly traded companies currently reporting to the SEC.
What will companies need to report?
As the reporting standards are still out for review, the following list is subject to change. The original deadline was Oct 2022, so many expect the final rules set mid 2023 and the implementation plan to begin shortly after. ESG reporting will become more frequent, to be submitted quarterly as part of its financial disclosure.
- Governance of climate-related risks and relevant risk management processes.
- How climate-related risks have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term.
- How any identified climate-related risks have affected or are likely to affect the strategy, business model, and outlook.
- The impact of climate-related events and transition activities on financial statements, and financial estimates and assumptions, on a line-item basis.
- Disclose information about the company’s greenhouse gas emissions from Scope 1 to 3.
The SEC climate-risk will standardize required disclosures, building on the current SEC ESG guidance, those of the Task Force on Climate-related Financial Disclosures (TCFD), and what investors have been required over the years. This creates greater clarity for companies on precisely what they need to report on and what investors expect. Similarly to CSRD, those that have taken steps to measure climate impacts and set targets under these frameworks are a step ahead.
Goals of SEC Climate
Investors representing tens of trillions of dollars recognize the significance of climate risk on a company’s finance, so need reliable information to make informed decisions. Standardizing reporting improves the rigor of ESG accounting by bringing transparency and disclosure around climate risks and emissions to all scopes of a company’s activities and supply chain. This transparency will enable investors to understand the climate risk management of a company. This will give investors decision-useful information to assess a registrant’s exposure to, and management of, climate-related risks, particularly transition risks, promoting further progression towards sustainability.
EU Deforestation Law
By mid-2024 companies with business in the EU will need to verify that their supply chains are deforestation-free.
To move towards a deforestation-free agricultural system, the European Commission is introducing a law that will end deforestation-linked products being sold in the EU, and subsequently, reduce deforestation globally.
Who is it for?
For companies trading in the EU with the following commodities:
- Cattle (including but not limited to live cattle, beef, raw hides and leather)
- Cocoa (including but not limited to cocoa butter, cocoa powder and chocolate)
- Coffee
- Palm oil
- Soya
- Rubber (including but not limited to rubber sheets, conveyor belts, rubber tyres and rubber clothing)
- Wood (including but not limited to particle board, plywood, sawdust, packing cases, casks and barrels, and wooden furniture).
The commodities included in this law will be regularly reviewed and updated according to new data and changing deforestation trends. The regulation will likely be adopted in June 2023. Large companies will have 18 months, and SMEs 24 months until it is enforced. Due diligence will be required from mid-2024 at the earliest. Non-compliant companies could face fines of at least 4% of their EU-wide turnover.
What will companies need to report?
To place any of the included commodities in the EU market, traders and operators must release a due-diligence statement that assures plot level traceability and proof that they have not led to deforestation and forest degradation anywhere in the world after 31 December 2020. The current definition of forest degradation is “structural changes to forest cover taking the form of conversion of primary forests or naturally regenerating forests into plantation forests, other wooded land or planted forests.” The Commission will consider extending the scope to other wooded lands in future.
This means companies need:
- Precise geographical data of farmland where commodities are grown. This is no small feat, which is why companies are already striving to make progress on this.
- Proof that commodities have been produced according to the local law of the producing country and have not led to deforestation or forest degradation.
Important to note.
This law will replace EU Timber Regulation. FSC certification will no longer suffice, full traceability is required. Not complying with the rules will result in bans from importing and exporting in the EU.
Goals of EU Deforestation Law
The EU is a major economy and consumer of these deforestation-linked commodities. Once adopted and effectively applied, this will help stop a significant share of deforestation, forest degradation, and associated GHG emissions and biodiversity loss. It will promote sustainability as an integral part of an evolving agricultural system to feed a growing population.
As ESG regulations evolve, what can companies do to be prepared?
1. Each of these regulations builds on existing voluntary standards, formalizing them and making them mandatory. Companies that have been taking steps on nature reporting and traceability are a step ahead. Pay attention to how emerging standards, guidance and frameworks develop: SBTN, SBTi and SBTi’s FLAG, TNFD, ISSB, TCFD, and SFDR.
2. Invest in assessing Scope 3 spatial data. It has become essential for nature metrics; while a ton of carbon is the same wherever it is emitted, new nature-related metrics are all about where.
The EU Deforestation law explicitly asks companies to identify the geographic coordinates of where materials are produced to monitor and validate with satellite imagery. The ESRS calls out the importance of the spatial context when measuring and reporting on nature-related impacts.
3. Be strategic, not compliant. ESG adds value to your company when adopted as part of the corporate strategic direction. Priorities from consumers to investors are evolving to include ESG matters. To stay competitive, companies are already investing time and resources in their ESG. Excelling in ESG enhances credibility against greenwashing and makes a business more attractive to consumers. Investors recognise the importance of ESG and climate risks and invest their money accordingly.
For people and companies to continue to thrive, we need collective and synchronized action on our increasingly pressured shared resources, from climate to nature. Standardized expectations and measurements help move sectors forward. At LandGriffon, we are committed to aligning with evolving ESG reporting requirements. We ensure companies have a comprehensive tool centralizing data and information across their supply chain. Confidently simplify data management and impact calculation with LandGriffon.
References:
CSRD: Corporate sustainability reporting and First Set of draft ESRS — EFRAG
SEC: SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors and Statement on Proposed Mandatory Climate Risk Disclosures
EU Deforestation: Regulation on deforestation-free products and Press corner | European Commission
