New rules and reporting standards are being developed to support transparency around climate transition; nature and biodiversity risks; opportunities and impacts; value chain due diligence including Scope 3 emissions; and social factors, including in the context of Just Transition. Increasingly, expectations will be rising about deeper integration of ESG factors into the traditional financial reporting and analysis, but this will stretch far beyond 2024 and will be a continued evolution over the next decade (at least).

In this article, our specialists provide a summary of the key developments to date and what you should expect in 2024, across the following regions:

• European Union
• United Kingdom
• United States

Taxonomies[1]

• Green taxonomy: Climate change mitigation & adaptation is in application since January 2023. Other environmental objectives (pollution prevention, water & marine recourses, circular economy, biodiversity): final criteria are published in 2023 and will apply from 1 January 2024. Further guidance on taxonomy usability is expected in 2024.
• Transition taxonomy: The initiative has been put on hold and is unlikely to resume in 2024. The European Commission has published “Recommendation on transition finance”, including on the related definitions. Further non-legislative guidance may be provided. 
• Social taxonomy: This initiative has also been put on hold at the policymaking level, however, investor groups in France and Germany are working on recommendations for social investment frameworks – these may be revealed in 2024.

Corporate Reporting

• European Sustainability Reporting Standards (ESRS): The first set of sector neutral standards under the Corporate Sustainability Reporting Directive (CSRD) will apply from 1 Jan 2024 – the largest listed issues will report for the first time in 2025 for accounting year 2024 year with progressive application to smaller entities until 2028. The application of industry specific standards is delayed until 2026. ESRS will require disclosure on climate transition plans amongst many other sustainability matters.[2]
• EU Taxonomy ratios and key performance indicators (KPIs): Non-financial corporates reported their Taxonomy alignment KPIs for the first time in 2023 (for 2022). Financial institutions, such as banks, investment managers and insurance companies, will report on the alignment of their banking book, investments, and underwriting activities with the Taxonomy for the first time in 2024.[3]

Investment disclosure and fund labelling 

• Sustainable Finance Disclosure Regulation (SFDR): The SFDR has been applied from March 2021 for core provisions and from 1 Jan 2023 for detailed, technical requirements. First Principal Adverse Impact (PAI) statements were due by 30 June 2023. The European Commission has launched an assessment of the SFDR and is gathering data on how the regime should be improved. Results of the consultation are expected in 2024 - these will dictate the next legislative steps. It will take at least three years, however, before an updated SFDR would start to apply.[4]
• European Securities and Markets Authority (ESMA) Guidelines on funds’ names using ESG or sustainability terms: In 2022 ESMA proposed that funds with ESG-related words would have to invest at least 80 percent of assets towards meeting E or S characteristics, or sustainability objectives defined in the strategy. The final Guidelines are yet to be published and are not expected to come out before the end of 2024 (to also consider the SFDR revision).[5]

Instrument labels and disclosures

• EU Green Bond Standard: Finalised in 2023, the Standard will be available for application in late December 2024. By the same time, the Commission is due to propose templates for voluntary disclosures for all sustainable and sustainability linked bonds (with environmental objectives) marketed in the EU.[6]
• Sustainability disclosure in prospectuses: Supervision will be increasing around sustainability disclosures included in the security prospectuses. In 2023, ESMA released a public statement setting out expectations on how the current EU Prospectus Regulation should be interpreted to consider ESG. As part of the revision of the EU Listing Act, the Commission will develop templates specifying the ESG-related information to be included in prospectuses for non-equity securities that are advertised as considering ESG factors or objectives.[7]

Due diligence

• The EU Council and the European Parliament reached a political agreement on the Corporate Sustainability Due Diligence Directive (“CSDDD”). The CSDDD will require many companies in the EU and beyond to conduct environmental and human rights due diligence on their global operations and value chain. Companies will need to conduct assessments of, for example, the potential and actual impact in Scopes 1-3 emissions across their supply chains, as well as implement climate-transition plans. Application dates are not clear yet but are likely to vary for different types of entities between 2027 and 2029.[8]

Rating, data and other service providers

• In June 2023, the European Commission published a draft proposal for a regulation of ESG rating services. This would require EU and third country market participants providing ESG ratings commercially to become authorised and supervised by ESMA. Both the EU Parliament and Council reached their negotiating positions by the year-end of 2023. The final legislation is expected to be finalised in 2024, with the application in 2025.[9]

Financial stability and risk management

• Prudential treatment of ESG risk: The European Banking Authority (EBA) published a Report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms. It recommends targeted enhancements to accelerate the integration of E and S risks across the Pillar 1. No supporting or penalising factors are proposed at this stage. By the end of 2024, banks are expected to meet all remaining supervisory expectations on climate and environmental risks outlined in 2020 by the ECB. ECB may (and is likely to) apply Pillar II charges if banks fail to meet the expectations.[10]
• Climate scenario analysis: The EBA will conduct the one-off fit-for-55 climate risk scenario analysis to assess the resilience of the financial sector in line with the EU fit-for-55 package, and to evaluate the capacity of the financial system to support the transition to a lower carbon economy under conditions of stress. The EBA is gathering data from 110 banks from December 2023 till March 2024 with results expected to be delivered by the end of 2024 (not later than Q1 2025).[11]

Taxonomies

• Green taxonomy: The UK Government was due to consult on the UK Green taxonomy in Q3 2023, but this has been delayed again. The Green Taxonomy Advisory Group (GTAG) has now completed its mandate to the Government and published several reports with recommendations on the development of a taxonomy applicable in the UK. It remains uncertain when a green taxonomy will be adopted in the UK. At the moment, greater focus is placed on transition plan reporting (see below).[12]

Corporate Reporting

• Task Force on Climate Related Financial Disclosures (TCFD): The TCFD reporting is mandatory for application since 1 January 2021 for large, listed companies, with progressive application to other entities until 2025. The TCFD reporting is expected to be replaced by the international (ISSB) standards as adopted in the UK, with the UK Government set to endorse the ISSB standards by July 2024.The FCA will consult on disclosure rules referencing the ISSB standards in H1 2024 with the view to have them ready for application for accounting periods beginning 1 January 2025. The UK Transition Plan Task Force (TPT) finalised its sector neutral transition plan disclosure framework in 2023, and sector deep dives are set to be finalised during early 2024. The ISSB standards envision disclosure of climate transition plans, hence the TPT framework is likely to become mandatory for application in the UK eventually.[13]

Investment disclosure and fund labelling

• Sustainability Disclosure Requirements (SDR) for asset managers: Final legislation was released on November 28, introducing: an anti-greenwashing rule (coming onto effect from 31 May 2024) to make sure sustainability-related claims are fair, clear, and not misleading; and product labels to help investors understand what their money is being used for, based on clear sustainability goals and criteria. UK asset managers will be able to use new labels (Sustainability Impact, Sustainability Focus, Sustainability Improvers and Sustainability Mixed Goals) for their funds from 31 July 2024. New naming and marketing requirements come into effect from 2 December 2024 so products cannot be described as having a positive impact on sustainability when they don’t.[14]

Instrument labels and disclosures

• In contrast to the EU GBS, no such initiatives have been announced in the UK. The FCA endorsed the application of the market standards, such as those developed by the International Capital Market Association (ICMA), to govern the issuance of sustainability labelled bonds in the UK. The FCA is also gathering information on additional information that may need to be included in the prospectuses of UoP and KPI linked structures. The FCA may consider tighter supervision of SLL market on issues relating to potential greenwashing – as evidenced by the “Dear Head of ESG/Sustainable Finance” letter published in 2023 [15]. Further information on the FCA’s next steps is expected to come out throughout 2024.

Due diligence

• The UK has not announced plans to implement broad supply chain due diligence in respect of ESG – previously citing the existing burden of regulation on businesses. Its approach to date has been to rely upon self-regulation and businesses choosing to implement supply chain due diligence in line with UN or Organisation for Economic Co-operation and Development (OECD) guiding principles. 

Rating, data and other service providers

• In December 2023, ICMA and the International Regulatory Strategy Group (IRSG) launched a voluntary code of conduct for ESG ratings and data products providers. Earlier in the year 2023, the UK Government launched a consultation on the regulation of ESG ratings providers – seeking feedback on whether a regulatory regime should be introduced and what its scope should entail. HM Treasury is now analysing the feedback provided and is expected to publish official proposals in January 2024.[16]

Financial stability / risk management

• Ongoing monitoring of climate related risks: From 2022, the PRA’s approach to climate-related financial risk moved from assessing implementation to actively supervising against the threats. The PRA will continue to assess firms’ ability to meet the set expectations through its supervisory engagement. The PRA expects firms to be able to demonstrate how they are responding to its supervisory expectations and to set out the steps they are taking to address barriers to progress.[17]

Taxonomies

• The development of an environmental and/or social taxonomy remains unlikely in the near term.

Corporate Reporting

• SEC Climate related disclosure rules: In 2022, the SEC proposed climate related disclosures that would require a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports, such as on Form 10-K – largely in line with the TCFD [18]. The finalisation of the legislation has been delayed a few times and the discussions have now moved into 2024. 
• California SB 253 AND SB 261: Two climate disclosure bills introduced in 2023 will mandate climate reporting by 2026. Companies with more than $1 billion in global revenue will have to report scope 1, 2, and 3 emissions if they do any business in California. The bills are likely to shape the ESG reporting landscape in the US as they come before the SEC rules and include private companies.[19]

Investment disclosure and fund labelling

• Disclosures by certain investment advisers and investment companies about ESG investment practices: In 2022, SEC proposed disclosures to improve information for investors concerning funds’ and advisers’ incorporation of ESG factors. The finalisation of the rules has also been delayed.[20]
• Rules to Prevent Misleading or Deceptive Investment Fund Names: In September 2023, the SEC adopted amendments to the Investment Company Act “Names Rule,” which will require more funds to adopt an 80 percent investment policy, including funds with names suggesting a focus in investments with ESG characteristics. Funds with net assets >/=$1 billion will have to comply by Dec 2025; funds with net assets of less than $1 billion will have until June 2026.[21]

Instrument labels and disclosures

• No initiatives directed at designing product or instrument labels have been announced.

Due diligence

• The US has not announced plans to implement broad supply chain due diligence in respect of ESG. 

Rating, data and other service providers

• No dedicated initiative has been launched. More countries, including Japan and Singapore, are adopting voluntary codes of conduct for ESG data and ratings providers, and the US may follow suit at some point, but this has not been officially announced.

Financial stability / risk management

• Climate-related financial risk guidelines for banks: In October 2023, US federal banking regulators released their final high-level principles for managing climate-related financial risk at large financial institutions – applicable to financial institutions with over $100 billion in total consolidated assets.[22]
• Pilot climate risk stress testing: The Federal Reserve Board is conducting a pilot climate scenario analysis exercise involving the six largest banks in the US. The results were due to be published by the end of 2023, but the deadline is apparently shifting into 2024.[23]

For those looking to discuss any of the above further, you can reach out to our author, Tonia Plakhotniuk, Vice President, Climate & ESG Capital Markets.

References

[1] https://finance.ec.europa.eu

[2] https://www.efrag.org

[3] https://ec.europa.eu

[4] https://www.gibsondunn.com

[5] https://www.esma.europa.eu

[6] https://finance.ec.europa.eu

[7] https://www.lexology.com

[8] https://www.consilium.europa.eu

[9] https://www.europarl.europa.eu

[10] https://www.eba.europa.eu

[11] https://www.eba.europa.eu

[12] https://www.freshfields.com

[13] https://www.ifrs.org

[14] https://www.fca.org.uk

[15] https://www.fca.org.uk

[16] https://www.irsg.co.uk

[17] https://www.bankofengland.co.uk

[18] https://www.sec.gov

[19] https://watershed.com

[20] https://www.sec.gov

[21] https://www.sec.gov

[22] https://www.fdic.gov

[23] https://www.federalreserve.gov