The ESG regulatory landscape is evolving faster than ever, with governments and regulatory bodies around the globe rolling out new frameworks to drive sustainability, enhance transparency, and ensure accountability.

In this week’s newsletter, we’ll cover latest ESG regulatory developments across European Union (EU) and United Kingdom (UK)

Let's get dive in to see how these changes will influence the future of business and investment across the globe.

This is Part 1 of the series, in Part 2, we will be covering regulatory changes in U.S. and APAC Regions. 

European Union (EU) 

The EU’s sustainability regulations, including the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD), and EU Taxonomy, have set a global benchmark for environmental, social, and governance (ESG) accountability. Yet, the regulatory landscape is far from static. Against the backdrop of geopolitical challenges and debates over regulatory complexity, the EU is exploring new pathways to streamline sustainability laws without compromising their impact.

Let's look into each of these regulations and the changes yet to be made in EU's ESG Regulatory Landscape.

Corporate Sustainability Reporting Directive (CSRD) 

The CSRD strengthens corporate sustainability reporting, replacing the Non-Financial Reporting Directive (NFRD) with stricter and standardized ESG disclosure requirements.

While CSRD mandates companies to report on sustainability matters, the accompanying European Sustainability Reporting Standards (ESRS) outline the technical framework for compliance.

Key Implementation Requirements for CSRD:

a. Companies must assess and disclose their policies, as well as environmental and social impacts, risks, and opportunities, with a focus on double materiality.

b. Sustainability disclosures must undergo independent audits and be integrated into the annual financial report.

c. Reports are to be submitted electronically using a standardized digital reporting format.

Applicability

Companies under NFRD:

1.  Publicly listed companies, with over 500 employees, and either a balance sheet exceeding €25 million or net turnover greater than €50 million.

Large Companies:

1.  Companies must meet at least two of the following:

2.   Balance sheet over €25 million

3.   Net turnover above €50 million

4.   More than 250 employees

Listed SMEs:

1.  Companies listed on EU markets, and must meet at least two of the following:

2.  Over 50 employees

3.  Balance sheet over €5 million

4.  Net turnover exceeding €10 million

Non-EU Companies:

1.  Non-EU companies with a significant presence in the EU, either by meeting the above criteria, or Net turnover over €150 million in the EU for two consecutive years, and fulfilling one of the following:

At least one subsidiary in the EU classified as a “large company”

     a. At least one subsidiary listed on an EU market

     b. An EU branch with net turnover over €40 million

Corporate Sustainability Due Diligence Directive (CSDDD):

The directive mandates businesses to integrate human rights and environmental due diligence across value chains, addressing risks in a phased approach. Key obligations include:

i. Embedding due diligence into company policies.

ii. Identifying, mitigating, and addressing adverse impacts across operations, supply chains, and business relationships.

iii. Establishing a complaints mechanism and regularly reviewing effectiveness.

iv. Documenting and reporting annually, typically under the CSRD framework.

v. Aligning with the 1.5°C climate target and developing a transition plan in line with EU emissions goals.

vi. This directive underscores the importance of sustainability while placing compliance at the core of corporate strategies.

EU Taxonomy

The EU Taxonomy, adopted in July 2020 and effective since January 2022, offers a unified classification system to guide investments toward environmentally sustainable activities. Central to the EU’s climate neutrality and sustainability goals, it standardizes how sustainability is defined across member states.

The EU Taxonomy focuses on six environmental objectives:

1.  Climate Change Mitigation

2.  Climate Change Adaptation

3.  Sustainable Use and Protection of Water and Marine Resources

4.  Transition to a Circular Economy

5.  Pollution Prevention and Control

6.  Protection and Restoration of Biodiversity and Ecosystems

The EU Taxonomy aims to:

• Define Sustainability: Provide a clear framework for environmentally sustainable economic activities.

• Boost Transparency: Help investors identify and finance activities aligned with environmental goals.

• Prevent Greenwashing: Ensure companies’ sustainability claims are credible and verifiable.

 To qualify as sustainable under the Taxonomy, an economic activity must:

     1. Significantly contribute to at least one of six environmental objectives.

     2. Avoid significant harm to other objectives.

     3. Adhere to minimum social safeguards.

The Changing Landscape
As the EU advances these frameworks, the proposed "Omnibus Regulation" adds a layer of complexity. Expected to reduce reporting burdens by 25% by mid-2025, the initiative aims to harmonize and consolidate three overlapping regulations: CSRD, CSDDD and EU Taxonomy, while addressing SME challenges. This move has initiated debate about the potential risks of regulatory errors and implementation gaps, especially with frameworks like CSRD and CSDDD which are still in their early stages.

Carbon Border Adjustment Mechanism (CBAM):

CBAM, launching in 2026, imposes carbon tariffs on imports from regions with lower environmental standards, incentivizing decarbonization. Industries like steel, Aluminum, and cement will face immediate impacts, requiring supply chain realignment to avoid penalties. 

• The CBAM requires countries that sell goods to the EU to report the carbon emissions linked to their products.

• These countries will also have to buy certificates to cover the emissions of their goods when they export to the EU.

• The goal is to make sure that imports are taxed similarly to products made in the EU, so companies in the EU are not at a disadvantage.

United Kingdom

Sustainability Disclosure Requirements (SDR):

The UK’s Financial Conduct Authority (FCA) has introduced the Sustainability Disclosure Requirements (SDR) to bolster trust and transparency in sustainable investment products. This framework sets common standards, product labels, and clear terminology to guide investors and consumers effectively and aims to build a transparent and trustworthy sustainable investment landscape, balancing regulatory clarity with market adaptability.

Key highlights of SDR

The SDR introduces four distinct sustainability labels for financial products:

Four Sustainability Labels:

1.  Sustainability Improvers

2.   Sustainability Focus

3.   Sustainability Impact

4.  Sustainability Mixed Goals

These labels help distinguish products based on sustainability goals, ensuring clarity and credibility in the market.

SDR is a package of measures and includes:

• Anti-Greenwashing Rule: Effective 31 May 2024, FCA-authorized firms must ensure all sustainability-related claims are fair, clear, and not misleading.

• Investment Labels: From 31 July 2024, UK-based investment funds can adopt the new labels to aid consumers in informed decision-making.

• Naming and Marketing Rules: Initially set for 2 December 2024, firms now have flexibility until 2 April 2025 to comply. Asset managers targeting retail clients must avoid terms like "ESG," "sustainable," or "impact" unless their products meet SDR criteria.

Compliance Conditions

a.  Use of Labels: Products must qualify under one of the SDR’s four sustainability labels.

b.  Alternative Criteria: Products without labels must provide detailed sustainability disclosures as per the SDR framework.

Transition Plan Taskforce (TPT) Disclosure Framework: 

1. The TPT released its disclosure framework in October 2023, providing guidance for companies to develop and disclose credible transition plans.

2.  The disclosure framework helps the organizations in achieving their climate goals by developing climate transition plans in alignment with UK government’s pledge to achieve net zero goals by 2050.

3.  The framework aligns with IFRS S2 Climate related disclosures issued by ISSB.

1. It aims to drive good practice transition plans based on three principles- Ambition, Action and Accountability.

UK Sustainability Disclosure Standards (SDS)

a.  The UK is in the process of finalizing its Sustainability Disclosure Standards (SDS) to establish a unified baseline for corporate sustainability and climate-related disclosures.

b.  By the first quarter of 2025, the UK government is expected to finalize and officially endorse the SDS framework. The SDS will be based on the International Sustainability         Standards Board (ISSB) framework, which focuses on global best practices for sustainability reporting. This alignment ensures a clear and standardized approach to reporting         environmental and climate-related risks.

c.  The SDS standards are expected to come into force for accounting periods beginning on or after January 1, 2026. 

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