Understanding sustainability and ESG regulations and staying compliant can be challenging, given their complexity and ever-evolving nature. However, progress is being made globally to enhance the consistency, accuracy, and transparency of sustainability reporting requirements. This article aims to highlight key regulations to keep in mind in 2023.
1. Sustainability Disclosure Requirements (SDR)
Origin: The UK Financial Conduct Authority
Applicability: FCA regulated firms
Important dates: The FCA aims to finalise and publish rules by the end of the first half of 2023.
Overview: The SDR regulation introduced by the Financial Conduct Authority (FCA) takes a comprehensive approach to address various areas of sustainability disclosure. It includes sustainable investment labels, disclosure requirements, an anti-greenwashing rule, and limitations on the use of sustainability-related terms in product naming and marketing. The FCA’s focus on sustainability aligns with the UK Government’s Greening Finance Roadmap.
Benefit to compliance
- Regulatory compliance: Complying with SDR is crucial for UK businesses as it ensures adherence to the sustainability disclosure requirements set by the UK Financial Conduct Authority (FCA). Non-compliance can lead to legal consequences and reputational damage.
- Market relevance: Aligning with SDR enhances the credibility and transparency of UK businesses, making them more attractive to investors and shareholders who prioritise sustainable investments.
- Green Finance Roadmap: SDR implementation supports the UK Government’s Greening Finance Roadmap, signaling a company’s commitment to sustainable practices and aligning with the country’s environmental goals.
What can you do
- Familiarise yourself: Stay updated on the progress of SDR implementation and understand its requirements. Review the guidance provided by the UK Financial Conduct Authority (FCA) to ensure compliance.
- Assess internal processes: Evaluate your current sustainability reporting processes and identify any gaps. Establish robust systems to collect, analyse, and report sustainability data accurately and efficiently.
- Engage Stakeholders: Involve key stakeholders, such as sustainability teams, finance departments, and legal counsel, to ensure a comprehensive understanding of SDR. Collaborate internally to streamline reporting procedures and improve data accuracy.
2. EU Sustainable Finance Disclosure Regulation (SFDR)
Origin: European Parliament
Applicability: Investors and other financial market participants (FMPs)
Important dates: SFDR became mandatory on January 1, 2023. The consultation for amendments opened on April 12, 2023, and closes on July 4, 2023.
Overview: The SFDR aims to enhance transparency in the sustainable investment market and combat “greenwashing.” It categorises investment products into three groups based on their degree of sustainability. Financial market participants subject to SFDR must comply with specific disclosure obligations, including collecting relevant data, implementing reporting templates, and aligning reporting processes with the regulation’s requirements.
Benefit to compliance
- Investor Confidence: Complying with SFDR is crucial for UK businesses as it enhances investor confidence by providing transparent and standardised information about the environmental and social impact of their investments.
- Market Access: SFDR compliance ensures that UK businesses can access European markets and effectively engage with investors who prioritise sustainable investments and ESG factors.
- Combating Greenwashing: Adhering to SFDR’s requirements helps UK businesses combat greenwashing, ensuring that their sustainability claims are accurate and reliable.
What can you do
- Understand SFDR categories: Familiarise yourself with the three categories defined by SFDR and determine how your investment products align with each category. Classify your products accordingly and ensure compliance with the required disclosure obligations.
- Update investor communications: Review and update your investor communications, marketing materials, and disclosures to align with SFDR requirements. Provide clear and transparent information about the sustainability characteristics of your investment products.
- Collaborate with partners: Engage with asset managers, fund administrators, and other financial market participants to ensure consistent and accurate reporting throughout the value chain.
3. EU Taxonomy
Origin: European Parliament
Applicability: Large companies and financial market participants offering products and services within the EU
Important dates: Reporting on EU Taxonomy alignment became mandatory on January 1, 2023.
Overview: The EU Taxonomy establishes a classification system that determines which economic activities are considered sustainable. Its purpose is to combat greenwashing, assist investors in selecting environmentally conscious investments, and promote the transition to a low-carbon economy. Companies now need to publicly disclose the degree to which their turnover aligns with the Taxonomy criteria, covering areas such as climate change mitigation, adaptation, circular economy principles, pollution impact, and water and biodiversity.
Benefit to compliance
- Market competitiveness: Complying with the EU Taxonomy is essential for UK businesses to remain competitive in the European market. It allows them to demonstrate their alignment with sustainable economic activities and attract customers who prioritise environmentally conscious products and services.
- Access to capital: Aligning with the EU Taxonomy criteria can improve UK businesses’ access to sustainable finance and funding opportunities, as investors increasingly consider sustainability factors in their investment decisions.
What can you do
- Assess alignment: Evaluate your business activities against the EU Taxonomy criteria to determine the extent of alignment. Identify areas of improvement and develop action plans to meet the taxonomy’s standards.
- Enhance data collection: Strengthen data collection processes to gather relevant information on the environmental impact of your economic activities. Ensure the availability of accurate data to support disclosure and reporting requirements.
- Communicate alignment: Incorporate information on your alignment with the EU Taxonomy in your sustainability reports and other relevant communications. Clearly communicate your commitment to sustainable economic activities to stakeholders.
4. Corporate Sustainability Reporting Directive (CSRD)
Origin: European Parliament
Applicability: EU companies meeting specific conditions or non-EU companies with considerable EU activity
Important dates: The CSRD came into force on January 5, 2023, and the mandatory sustainability reporting standards will be finalised by June 30, 2023.
Overview: The CSRD broadens the existing Non-Financial Reporting Directive (NFRD) and addresses key weaknesses in current ESG reporting. It expands the scope to cover a greater number of large EU-listed entities, including businesses, banks, and insurance companies. The reporting requirements encompass environmental matters, social responsibility, human rights, anti-corruption measures, board diversity, and the impact of environmental and social factors on the company’s development. Compliance with the CSRD will be required in the financial year 2024, with reports published in 2025.
Benefit to compliance
- Improved transparency: Complying with CSRD expands the scope of sustainability reporting for UK businesses, providing more comprehensive information on environmental, social, and governance matters. This transparency helps build trust with stakeholders, including customers, investors, and regulatory bodies.
- Risk management: CSRD reporting enables UK businesses to identify and manage sustainability risks effectively, such as climate-related risks and supply chain vulnerabilities. It helps them develop strategies to mitigate these risks and enhance their long-term resilience.
What can you do
- Review reporting scope: Assess the expanded reporting requirements of CSRD and determine how they impact your organisation. Identify the additional areas of sustainability reporting that need to be addressed and develop strategies to capture relevant data.
- Improve data management: Establish robust data management systems to collect, analyse, and report on environmental, social, and governance (ESG) factors. Ensure data accuracy, integrity, and consistency to meet CSRD reporting obligations.
- Engage external service providers: Consider engaging external ESG reporting experts or consultants to support your organisation in meeting the comprehensive reporting standards of CSRD. Seek their guidance in aligning your reporting practices with CSRD requirements.
5. Corporate Sustainability Due Diligence Directive (CSDDD)
Origin: European Parliament
Applicability: Large EU companies and non-EU companies with large EU undertakings
Important dates: Introduced in February 2022, passed EU Parliament vote on June 1, 2023.
Overview: The CSDDD aims to ensure that companies exercise due diligence in preventing human rights and environmental violations throughout their value chains. It requires companies to integrate due diligence into policies, analyse risks, mitigate adverse impacts, establish complaints procedures, monitor effectiveness, and communicate their due diligence efforts. The draft proposal has been approved by the EU Parliament, and negotiations with member states will determine the final implementation timeline.
Benefit to compliance
- Responsible supply chains: Compliance with CSDDD ensures that UK businesses maintain responsible supply chains, promoting human rights and environmental standards. This is crucial for companies operating globally and selling goods or products in the German market, as they must implement due diligence mechanisms to prevent human rights abuses.
- Market access: Adhering to CSDDD requirements allows UK businesses to continue operating in Germany and maintain access to the German market. Compliance demonstrates a commitment to responsible business practices, helping businesses maintain positive relationships with customers and stakeholders.
What can you do
- Conduct due diligence assessments: Review your supply chain and assess potential human rights and environmental risks. Implement due diligence mechanisms to identify, prevent, and mitigate adverse impacts throughout your value chain.
- Establish reporting frameworks: Develop robust reporting frameworks to track due diligence efforts and disclose information as required by CSDDD. Include procedures for risk analyses, complaints handling, and monitoring the effectiveness of your due diligence policy.
- Collaborate with suppliers: Engage with your suppliers to encourage their alignment with responsible business practices. Establish clear expectations, provide guidance, and collaborate on implementing due diligence measures throughout the supply chain.
6. Streamlined Energy and Carbon Reporting (SECR)
Origin: UK Government
Applicability: Large enterprises, publicly listed companies, and Limited Liability Partnerships (LLPs).
Large is determined if it meets two of the following:
- 250 employees
- Annual turnover of more than £36m
- Annual balance sheet of over £18m
Important dates: SECR came into force on April 1, 2019.
Overview: SECR is a UK policy that mandates organisations to include energy consumption and carbon emission data in their annual reports. It aims to expand reporting to a broader range of companies and promote energy efficiency initiatives. Quoted companies listed on the London Stock Exchange and unquoted companies meeting specific size criteria must comply. All quoted companies (where its shares are listed on the London Stock Exchange) in the UK need to comply, as will unquoted companies that meet the Company’s Act 2006 definition of “large”.
Benefit to compliance
- Energy efficiency: Complying with SECR enables UK businesses to measure and report their energy consumption and carbon emissions. This promotes energy efficiency initiatives, reduces costs, and helps companies contribute to the country’s climate change targets.
- Competitive advantage: SECR compliance provides UK businesses with a competitive advantage by demonstrating their commitment to sustainable practices and reducing their environmental impact. This can attract environmentally conscious customers and investors.
What can you do
- Measure energy consumption: Implement systems to accurately measure and track your energy consumption and carbon emissions. Gather data from relevant sources within your organisation to ensure comprehensive reporting.
- Identify efficiency opportunities: Conduct energy audits and identify opportunities for energy efficiency improvements. Develop strategies to reduce energy consumption, increase renewable energy usage, and minimise your carbon footprint.
- Report transparently: Prepare robust SECR reports that clearly outline your energy and carbon performance. Communicate your efforts to reduce environmental impact and demonstrate progress over time.
7. German Supply Chain Due Diligence Act (the LkSG)
Origin: German Parliament
Applicability: German and non-German companies with more than 3,000 employees (scope to broaden in 2024)
Important dates: The Act came into effect on January 1, 2023.
Overview: The German Supply Chain Due Diligence Act, also known as Lieferkettensorgfaltspflichtengesetz (LkSG), requires large companies to observe social and environmental standards across their supply chains. Companies must monitor their own operations and direct suppliers worldwide, taking action to prevent or minimise violations. Non-compliance or failure to submit required documentation can lead to fines, exclusion from public contracts, and reputational damage. The Act’s coverage will expand in 2024, reducing the employee threshold from 3,000 to 1,000.
Benefit to compliance
- Global supply chains: Compliance with the German Supply Chain Due Diligence Act is crucial for UK businesses with global supply chains. It ensures that their operations and direct suppliers uphold social and environmental standards, preventing human rights violations and environmental harm.
- Market reputation: Adhering to LkSG requirements protects the reputation of UK businesses by avoiding potential fines, exclusion from public contracts, and damage to brand image. Compliance demonstrates a commitment to ethical business practices and responsible supply chain management.
What can you do
- Conduct supply chain assessments: Conduct thorough assessments of your supply chain to identify human rights and environmental risks. Implement due diligence mechanisms and establish processes to address potential violations within your supply chain.
- Engage suppliers: Collaborate with your suppliers to encourage their adherence to responsible sourcing practices. Facilitate dialogue, provide guidance, and ensure transparency in your supply chain relationships.
- Document compliance efforts: Maintain comprehensive records of your due diligence measures, including risk analyses, mitigation actions, and communication with suppliers. Prepare necessary documentation to demonstrate compliance with LkSG requirements.
By following these steps, UK businesses can proactively prepare for each regulation, ensure compliance, and effectively manage their sustainability practices. Engaging with internal and external stakeholders, enhancing data management systems, and aligning business operations with regulatory requirements are crucial for successful implementation.
Get in touch with us at Sustainable X, if you want to understand the requirements for your business and get ahead of future reporting requirements.