Sustainability Assembled
Regulatory Updates
In this section, we highlight the significant progress made in the second quarter with updates to sustainability-related regulation included in Horizons01, new developments and new resources which provide essential practical guidance for market participants complying with sustainability-regulation.
Corporate Sustainability Due Diligence Directive
Following the shaky events of Q1 2024, the Corporate Sustainability Due Diligence Directive was finally formally adopted by the European Parliament on 24 May 2024. No further changes have been made to the text endorsed in March 2024. Member states will have two years to implement the regulations and administrative procedures to comply with the new rules. For more information see the European Council’s press release and Horizons01.
“Large companies must take their responsibilities in the transition towards a greener economy and more social justice. The Corporate Sustainability Due Diligence Directive will give us the possibility to sanction those actors that violate their obligations. It is a concrete and significant step towards a better place to live for everyone.”
Pierre-Yves Dermagne, Belgian Deputy Prime Minister and Minister of the Economy and Employment
Corporate Sustainability Reporting Directive
ESRS: Two year delay published in Official Journal of the EU
As highlighted in Horizons01, the European Parliament and Council previously agreed to a two-year delay for sector-specific European Sustainability Reporting Standards (ESRS) and those for non-EU companies. In April 2024, the European Parliament and Council formally adopted the proposal and the Directive was published in the Official Journal on 8 May 2024. The decision of the Council will postpone the adoption of sector-specific sustainability reporting standards for EU companies and general sustainability reporting standards for non-EU companies to 30 June 2026.
ESRS Corrigendum
In April, a corrigendum to Set 1 of the ESRS was published in the Official Journal of the EU. The corrigendum makes a number of minor corrections primarily to rectify typographical errors, incorrect references, and other evident inaccuracies within ESRS Set 1.
EFRAG: ESRS Implementation Guidance and compilation of explanations
In May 2024, EFRAG announced the finalisation of the first three Implementation Guidance (IG) Documents (EFRAG IG1: Materiality Assessment, EFRAG IG2: Value Chain, EFRAG IG 3: Detailed ESRS Datapoints and accompanying Explanatory Note). As set out in Horizons01, the draft IG were open for consultation until early February 2024.
EFRAG has also usefully included a feedback statement with each final IG explaining the main changes made to the relevant IG to reflect public feedback. In addition, a compilation of explanations relating to sector-agnostic ESRS was also published at the end of May. The explanations are non-authoritative in nature and are grouped by topic (ESRS general requirements and general disclosures, environmental ESRS, social ESRS and governance ESRS). Taken together this provides essential additional guidance to questions frequently raised when considering the Corporate Sustainability Reporting Directive (CSRD) and ESRS.
CSRD Essentials
A joint working group comprising of GRI, Pascal Durand, Member of the European Parliament and CSRD Rapporteur, and the Lefebvre – Sarrut Group has published a new practical resource, CRSD Essentials. CSRD Essentials aims to explain CSRD in “accessible language”. Key areas of focus include the scope, timing and interactions with existing standards, reporting format, legal interconnections, auditing rules and internal supervision, SMEs and implementation procedures and penalties.
Sustainable Finance Disclosure Regulation
In September 2023, the European Commission launched a targeted consultation and public consultation to seek feedback on the Sustainable Finance Disclosure Regulation (SFDR). The LMA’s response to the targeted consultation can be found here.
In early May 2024, the European Commission published a summary report of the open and targeted consultations on SFDR assessment providing the useful insights into market views on key questions including the following:
- greater coherence: as anticipated and emphasised in the LMA’s response to the targeted consultation, respondents have called for greater coherence in the wider sustainability framework citing challenges and an increase in operational costs caused by misalignment between SFDR, the EU Taxonomy and CSRD;
- uniform disclosures: 56% of respondents supported uniform disclosure requirements for all financial products regardless of sustainability claims with additional disclosures for products making sustainability claims; and
- voluntary categorisation system: there is strong support for a voluntary categorisation system regulated at the EU level although no clear preference for the proposed approach. An outline of commonly agreed principles however refer to (i) 72% of respondents support a specific category of products with a transition focus and (ii) the need for the underlying criteria to be asset neutral and applicable to all financial products.
The report does not provide an indication of the approach that the Commission intends to take going forward and there is currently no indication as to timing for any new rules.
ESMA: Final Guidelines on Funds’ names using ESG or Sustainability-related terms
ESMA has published its final report on Guidelines on Funds’ names using ESG or Sustainability-related terms. The content remains broadly in line with the previous version, a summary of which was included in Horizons01. The guidelines will be translated into all of the EU languages and subsequently published on ESMA’s website applying three months after that date. The transitional period for funds existing before the application date will be six months after that date. Any new funds created after the application date should apply these Guidelines immediately in respect of those funds.
UK Government moves forward on Sustainability Reporting Standards
On 16 May 2024, the UK Government published:
- a Framework and Terms of Reference for the Development of UK Sustainability Reporting setting out (i) a summary of the work required for the creation of UK Sustainability Reporting Standards (UK SRS) (including the endorsement of IFRS Sustainability Disclosure Standards and implementation of UK SRS through UK legislation and FCA rules for listed companies); (ii) terms of reference for the Technical Advisory Committee and UK Sustainability Disclosure Policy and Implementation Committee; and
- an update - “Sustainability Disclosure Requirements: Implementation Update 2024” relating to sustainability disclosure requirements (SDR) including timeframes and milestones for the core elements.
Joint Opinion of the European Supervisory Authorities (ESAs) on the Sustainable Finance Disclosure Regulation
On 18 June 2024, the Joint ESAs Opinion on the Assessment of the Sustainable Finance Disclosure Regulation (SFDR) was released.
The Opinion includes a key recommendation from the ESAs to the Commission to consider extending SFDR to introduce a product classification (labelling) system for sustainable finance products. The ESAs have suggested that any such categories should be simple with clear objective criteria or thresholds, to identify which category the product falls into.
Importantly, the ESAs also encourage the inclusion of the concept of “transition investment” in the SFDR to allow for the development of a ‘transition financial product category’. Given the vital importance of transition finance to meeting net zero commitments, and our ongoing work at the LMA to support transition finance, we will be closely following further developments in this area.