From Burdening to Beneficial: How updates to sustainability reporting requirements may impact business


INSIGHT
Published
Jun 4th '24
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The last few weeks have seen an uptick in ESG and Sustainability regulatory developments, driven by a global push to expand traditional financial reporting requirements to include sustainability aspects. This represents positive progress in developing a strong approach to managing environmental, social, and governance topics in business, but can be a daunting prospect to organisations who are required to disclose more and more data. This blog will focus on recent notable updates from the UK and EU.

 

The latest from the UK:

 

SDR  

Last month, the UK Government published an update on the implementation of Sustainability Disclosure Requirements (SDR). The purpose of this update was to introduce a framework plan for applying best practice reporting standards, with the aim of achieving economy wide SDRs. The updated SDR standards seek to strengthen reporting across stakeholders, with corporates, consumers, investors, and capital markets all considered.  This will be essential in setting a level playing field for sustainability reporting, driving transparency across the economy.

 

SDR standards will be based upon International Sustainability Standards Board (ISSB) requirements, viewed as a sustainability benchmark across industries. Adopting the ISSB approach means that reporting will take the form of single (financial) materiality rather than the double materiality approach found within the Corporate Sustainability Reporting Directive (CSRD). While this provides a streamlined approach for companies making disclosures, it does mean that UK businesses with EU footprints will need to manage the complexity of two different standards as they may be required to report under the UK SDR and EU CSRD.

 

The resulting documentation will be known as the UK Sustainability Reporting Standards (UK SRS), and the Government is expected to make the SDR guidance available in Q1 2025 subject to positive endorsement, with reporting beginning from 2026. To conduct the endorsement assessment, an independent UK Sustainability Disclosure Technical Advisory Committee is being established to provide advice to the Secretary of State for Business and Trade. Among other topics, the Committee will assess the suitability of IFRS S1 (General requirements for disclosure of sustainability-related financial information) and IFRS S2 (climate-related disclosures) to the new standard.

 

In Q2 2025, the Financial Conduct Authority (FCA) will be able to use the UK Sustainability Reporting Standards to introduce requirements for UK-listed companies to report sustainability-related information, following the consultation process and subject to a positive endorsement by the UK Government. There will also be further consultation regarding disclosure requirements for organisations which do not currently sit within the FCA’s regulatory perimeter.

 

By endorsing the ISSB approach, the UK Government builds on its foundation to achieve Net Zero by 2050. Further implications of this update are expected to include the refreshing of TCFD-aligned rules, publication of legislation to implement SDR and labelling for Overseas Fund Regime (OFR) funds, and the strengthening of transition plan disclosures in line with Transition Plan Taskforce (TPT) frameworks.

 

The latest from the EU:

 

CSDDD 

The Corporate Sustainability Due Diligence Directive (CSDDD) adds to the EU’s strong commitment to sustainability. This directive was formally adopted by the European Council on 24th May 2024 and aims to foster sustainable and responsible corporate behaviour in companies’ operations and across their global value chains. Under the new rules, companies that fall under the CSDDD scope ** are required to identify and address adverse human rights and environmental impacts of their actions. In doing so, reporting companies are legally obliged to take responsibility for environmental and human rights impacts of operations and associated supply chains both inside and outside of Europe.

 

The CSRD and CSDDD are designed to work in tandem. They are both based on UN Guiding Principles on Business and Human Rights (UNGPs) and OECD Guidelines for Multinational Enterprises, but with the CSRD offering a reporting system and CSDDD comprising of mandatory actions. Once the CSDDD is in force, member states will have two years to transpose it into national law, with application beginning in 2027 for the largest companies.

 

Both Directives offer companies the opportunity to build more transparent approaches to sustainability. To get ahead, organisations can begin reviewing the processes and procedures in line with the requirements for activities that impact the environment and people, as well as the associated governance systems. By preparing for the requirements of the Directives, companies can not only minimise compliance-related risks, but also develop a more robust and responsible business.

 

ESPR

On 27 May 2024, the European Council adopted the Ecodesign for Sustainable Products Regulation (ESPR). The new regulation replaces the existing ecodesign directive (focused on energy products) and sets requirements for sustainable products for almost all kind of goods placed in the EU market. For companies, this means there will be additional requirements on topics such as product durability, reusability, upgradability and reparability rules, as well as a ban on the destruction of unsold textiles and footwear.

 

The ESPR introduces a new Digital Product Passport (DPP), enhancing traceability and transparency throughout a product’s lifecycle. The purpose of the DPP is to provide detailed environmental information, including the product’s origin, production methods, material composition, and carbon footprint.  For example, carbon and environmental footprints calculated by following the Commission’s product environmental footprint (PEF) method may be necessitated.

 

Under the DPP, producers will be responsible for collecting and verifying data from their supply chain. Additionally, any organisation reselling goods will need to establish a process to ensure that producer-reported data is correctly registered. This places further pressure on organisations to fully understand the impact of the products they offer, especially given that roll-out will begin in 2024, with full adoption expected by 2030.

 

Source: Avyse Partners. Reposted.

 

Footnotes:

*CSRD scope includes companies in the EU that meet two or more of the following: €40 million net turnover, €20 million balance sheet, 250 or more employees.

**CSDDD scope includes all EU limited liability companies with 500 or more employees and >€150 million net turnover globally, and later on, limited liability companies operating in defined high-impact sectors, including mining and extractives, agriculture and textiles, that have more than 250 employees and a global net turnover of >€40m.

 

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