Under-discussed developments in ESG regulations

In this article, our lens is widened to focus on a more comprehensive view of the ESG regulatory landscape. Aside from the well-covered aspects of the SFDR, CSRD and EU Taxonomy, what other emerging trends and less-reported changes are shaping the ESG regulatory scene?

Recap of what you have probably heard about…

On 15 December 2023, the European Commission concluded a new SFDR consultation, focusing on the fund classifications mechanism, alongside the mandatory disclosure templates and Principle Adverse Impacts (PAIs). The initiation of the consultation demonstrates the European Commission’s commitment to refining the SFDR framework and ensuring the guidelines are user-friendly. This, in turn, will improve the application of the SFDR and its overall effectiveness in promoting sustainable investing. The outcome of the consultation is expected towards the end of 2024.

Turning to CSRD, discussions on the “European Sustainability Reporting Standards” (ESRS) are currently taking place and nearing consensus, with the first set of ESRS having been published on 22 December 2023.

At the end of 2023, the EU Taxonomy Environmental Delegated Act was released, laying down the technical screening criteria (TSC) for four environmental objectives, complementing the two climate objectives already in force since 2022. Companies must incorporate these specifications while preparing FY23 EU Taxonomy Disclosures.

… and what we would like to bring to your attention.

Interestingly, discussions about SFDR have evolved to incorporate talks about enforcing mandatory audits. In the world of ESG, where regulatory changes occur much faster, mandatory audits are becoming more topical, with limited assurance of CSRD disclosures coming into force for FY24. This highlights the importance of ESG considerations and strengthens the argument for more stringent adherence to ESG compliance.

Shifting to the Corporate Sustainability Due Diligence Directive (CS3D): the CS3D aims to fill the gap caused by the lack of a uniform legal framework on corporate due diligence obligations (specifically related to negative impacts in global supply chains concerning human rights and the environment) across Europe. On 14 March 2024, the Council and European Parliament reached a provisional agreement on the CS3D; a key highlight being the temporary exclusion of the financial sector from the scope. Additionally, the same data collection requirements and disclosures as CSRD are expected, with a primary challenge being the need for companies to collect data at a supply chain level. This agreement was approved by the European Parliament’s Legal Affairs Committee on 19 March. The European Parliament will vote on the Directive on 24 April.

On 27 February 2024, the EU enacted the groundbreaking Nature Restoration Law. This first-of-its-kind legislation at the continent level has an ambitious goal for the EU to recuperate a minimum of 20% of its terrestrial and marine territories by 2030, and restore all ecosystems by 2050. This would be a significant milestone, inaugurating a new world where sustainability transcends marketing reports and translates into tangible accomplishments. The enhanced law will likely affect Luxembourg companies in sectors tied to nature, enforcing stricter rules and increased expectations to reduce their environmental impact.

It’s evident that ESG regulations are continually evolving. Undeniably, pressure is intensifying and the integral role of regulation in sustainable business models is clearly illustrated.