EU and International Developments

ESRS standards adopted by the European Commission

On 31 July 2023, the European Commission adopted a Commission Delegated Regulation with the first set of the long-awaited European Sustainability Reporting Standards (ESRS) together with a related Q&A developed by the European Financial Reporting Advisory Group (EFRAG).  The ESRS create a common framework for sustainability reporting and support the operation of the EU Corporate Sustainability Reporting Directive 2022 (CSRD) which entered into force on 5 January 2023. The CSRD significantly expands the number of companies required to provide sustainability disclosures and introduces additional detailed reporting requirements in relation to a company’s impact on the environment, human rights and social standards and sustainability-related risk, based on the common framework of ESRS. The first companies will be required to apply the new rules for the first time in the 2024 financial year, for reports published in 2025.

The CSRD will apply to all large companies (with over 250 employees and a 40 million euro turnover whether listed or not) and require public disclosure of information on the way they operate and manage environmental risks in an aim to make businesses more accountable, end ‘greenwashing’ and lay the groundwork for sustainability reporting standards at global level.  Non-EU companies with substantial activity in the EU (150 million euro in annual turnover in the EU) and with at least one subsidiary or branch in the EU will also be subject to CSRD requirements. For further information about the CSRD, please see our previous Engage article.

The Delegated Regulation sets out the ESRS that apply to all undertakings under the scope of the CSRD regardless of which sector or sectors the undertaking operates in.

Annex I contains:

• Two sets of cross-cutting ESRS. The first covers general requirements (including explaining double materiality, the value chain, and how to prepare and present sustainability information). The second covers general disclosures (including on governance, strategy, and impact, risk and opportunity management, and on metrics and targets).

• A set of specific ESRS on environmental disclosures, covering climate change, pollution, water and marine resources, biodiversity and ecosystems and resources and the circular economy.

• A set of specific ESRS on social disclosures, covering an organisation's own workforce, workers in the value chain, affected communities, and customers and end-users.

• A specific ESRS on governance, which covers business conduct.

Annex II contains the list of acronyms and glossary of definitions to be used for the ESRS.

In the second half of August 2023, the European Parliament and the Council will formally scrutinise the Delegated Regulation for a two month period (which is extendable by a further two months) during which time they may approve or reject it, but they cannot amend it.

The CSRD also requires the Commission to adopt by June 2024, sector-specific standards, proportionate standards for listed SMEs and standards for non-EU companies. EFRAG is working on the second set of draft ESRS.

The Commission has also stated that the ESRS considered input from the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) to ensure strong interoperability between EU and global standards. This collaboration aims to avoid double reporting by companies and achieve a seamless integration of sustainability reporting requirements.

AFME calls on negotiators to consider serious outstanding issues in CSDDD

On 4 July 2023, the Association for Financial Markets in Europe (AFME) published a position paper outlining its recommendations for negotiators calling on them to focus on ensuring that the Corporate Sustainability Due Diligence Directive (CSDDD) provides a practical and proportionate approach for financial institutions.

AFME sets out various priorities that should be considered in order to find a workable and effective compromise for the industry including considerations around the value chain, risk-based due diligence, preventing and mitigating adverse impacts, directors duties and civil liability.

DRWG consults on draft code of conduct for ESG ratings and data product providers

On 5 July 2023, the ESG Data and Ratings Code of Conduct Working Group (DRWG), the International Regulatory Strategy Group (IRSG) and the International Capital Market Association (ICMA) launched a consultation on a draft voluntary code of conduct for ESG ratings and data product providers.  The code intends to enhance the consistency, transparency and accountability of ESG ratings and data.  The code is intended to be internationally operable given that it is based on IOSCO principles.  The consultation closes for responses on 5 October 2023.  The DRWG intends to publish the final code at the end of 2023.

ESMA publishes updated Sustainable Finance implementation timeline

On 12 July 2023, the European Securities Markets Authority (ESMA) published an updated timeline setting out key future dates relation to the implementation of sustainable finance legislation in the EU.  It covers updates and key milestones in relation to the Sustainable Finance Disclosure Regulation (SFDR), the Taxonomy Regulation, the Corporate Sustainability Reporting Directive (CSRD), Markets in Financial Instruments Directive II, the Insurance Distribution Directive (IDD), the Alternative Investment Fund Managers Directive (AIFMD) and the undertaking for collective investment in transferable securities Directive (UCITS).

ESMA issues a statement regarding sustainability disclosure in prospectuses for financial institutions

On 11 July 2023, ESMA published a statement outlining its expectations regarding compliance with the specific disclosure requirements of the Prospectus Regulation when drafting sustainability-related information for prospectuses.

ESMA emphasises the inclusion of significant sustainability-related disclosures in both equity and non-equity prospectuses, as well as in final terms, particularly if these matters have a 'material' impact. The type of sustainability information required will be contingent upon its significance to an investor. The statement provides additional considerations for issuers of non-equity securities and equity prospectuses, emphasising the importance of ensuring consistency with non-financial reporting.

ESMA initiates a Comprehensive Sustainability Assessment (CSA) concerning disclosures and sustainability risks for financial institutions

On 6 July 2023, ESMA published a press release announcing a Common Supervisory Action (CSA) in collaboration with EU National Competent Authorities (NCAs) on sustainability-related disclosures and the integration of sustainability risks for financial institutions.

The aim of the CSA is to assess the compliance of asset managers with the relevant provisions in the SFDR, the Taxonomy Regulation and relevant implementing measures, including the relevant provisions in the UCITS Directive and AIFMD implementing acts on the integration of sustainability risks.

The CSA will also promote convergence in the supervision of sustainability-related disclosures amongst NCAs. This will involve gathering additional information on greenwashing risks prevalent in the investment management sector and identifying any necessary supervisory or regulatory interventions to address this issue. The CSA is set to continue until the third quarter of 2024.

EBA decision on ad hoc collection of institutions' ESG data

On 18 July 2023, the European Banking Authority (EBA) published a decision (dated 6 July 2023) on the ad hoc data collection of institutions' ESG data.

The decision will provide NCAs and the EBA with the necessary data and tools to fulfil their monitoring functions and ESG-related mandates including setting up a risk monitoring framework and contributing to the European Commission's Strategy for financing the transition to a sustainable economy. The data collection will be temporary and discontinued once a supervisory reporting framework on ESG risks is in place.

The EBA will collect ad-hoc basis data that is already available to large, listed institutions aes part of their Pillar 3 disclosure obligations with respect to ESG risks. This is deemed to be the least burdensome way for ensuring the EBA can carry out its mandated tasks. They data is already produced by the institutions in a uniform and harmonised way pursuant to Article 449a of the Capital Requirements Regulation (575/2013) (CRR) and Article 18a of Implementing Regulation (EU) 2021/637.

The decision sets out provisions relating to the data to be reported, the date and frequency of the submission (the reference date for the first annual submission is set as of 31 December 2023 and for the semi-annual, 30 June 2024) and the format and procedure for the submission.  The decision entered into force immediately on 6 July 2023.

Advancing Compliance Carbon Markets: A Guide for IOSCO Member Jurisdictions

On 17 July 2023, the Board of the International Organization of Securities Commissions (IOSCO) published a final report concerning Compliance Carbon Markets (CCMs).

The report covers primary and secondary markets, spot and derivatives trading. It also contains a section on international carbon markets and mechanisms that could, over time, lead to a consistent price for carbon globally.

The report specifically considers the unique characteristics of CCMs in comparison to traditional financial markets. It sets out a series of recommendations towards addressing issues around integrity and orderly functioning. The aim of the recommendations is to support jurisdictions seeking to establish new CCMs or to enhance their existing markets. The recommendations relate to primary market functioning, transparency and predictability of primary market decisions, market structures for primary markets, covering allowance allocation mechanisms, market stability mechanisms and primary market access, and secondary market functioning (with particular focus on market integrity, transparency and structure).

UK developments

FCA delays SDR policy statement until Q4 2023 

In a further delay to the announcement of the final Policy Statement relating to the Sustainability Disclosure Requirements (SDR) and investment labels, the Financial Conduct Authority (FCA) now intends to publish the final rules in Q4 2023.  On 17 July 2023, the FCA published an update to its February 2023 Regulatory Initiatives Grid confirming the delay. As we reported in March 2023, the FCA previously delayed announcing the final rules from the end of H1 2023 to the end of Q3.

For further information, see the following Engage article.

FCA perimeter report: July 2023

On 20 July 2023, the FCA published an updated version of its webpage on the perimeter report. The report describes specific issues around the regulatory perimeter and the action the FCA is taking in response. The FCA last updated the perimeter report webpage in March 2023.  The FCA's revisions to the report reflect regulatory developments since March 2023, particularly the Financial Services and Markets Act 2023 (FSMA 2023). In relation to ESG, the report contains new materials on ESG data and rating providers.

FRC review of climate-related metrics and targets disclosures

On 26 July 2023, the Financial Reporting Council (FRC) published a thematic review setting out the findings of its review of the TCFD disclosures in the 2022 annual reports of 20 companies operating in the asset manager, banking, energy and material and buildings sectors.  The review found that explanations of how climate targets affect financial statements still need improvement and the inclusion of boilerplate language on climate being 'considered' provided little insight on the impact.  FRC Executive Director of Regulatory Standards Mark Babington said: “The review highlights the continued need for clearer, more decision-useful disclosures of companies’ plans to transition to a low-carbon economy. 

Authored by Melanie Johnson, Julia Cripps, Emily Julier and Celeste Aubee.