ESG and sustainability disclosure standards are increasingly important.

13 February 2023

As sustainability disclosure standards evolve it becomes ever more essential that companies in multiple sectors take time to map the international landscape in which they operate in order to understand their exposure.

Environmental, Social and Governance (ESG) is a broad church and dealing with the risks requires a multi-disciplinary approach to understand and implement an appropriate risk management framework.

The plethora of regulatory requirements is often daunting for those tasked with ensuring compliance with the various ESG and sustainability reporting standards. In America the Securities and Exchange Commission (SEC) have introduced requirements for investment advisors and investment managers around disclosure. The International Sustainability Standards Board (ISSB) have drafted various proposals related to climate related issues as well as wider sustainability issues and the European Financial Reporting Advisory Group (EFRAG) has been equally prolific.

The European Union (EU) Taxonomy of ESG was introduced in 2020 with reporting provisions applied in 2022. Importantly, for financial services businesses further disclosure requirements related to the Sustainable Finance Disclosure Regulation (SFDR) will come into effect in 2023. Navigating this complex area is a challenge, particularly given resource constraints with a difficulty post-Covid economy. Not to be left out, the United Kingdom (UK) intends to increase disclosure requirements in certain sectors and for certain entities as far at both entity and product level.

The EU Corporate Sustainability Due Diligence Directive (CSDDD) represents an onerous challenge for many businesses. For those in scope it introduces duties for directors of EU companies to set up and oversee the implementation of the due diligence process and integrate due diligence into the corporate strategy as well as applying a corporate due diligence duty for companies to identify, bring to an end, prevent, mitigate and account for negative ESG impacts in their own operations and value chains; as with most regulation, the devil is in the detail.

Additionally, there are key developments in ensuring companies are conducting effective third party risk management techniques. In January 2023 the German Supply Chain Due Diligence Act introduced requirements on companies to conduct human rights and environmental due diligence to assess risk and ensure they have appropriate remedies in place. This is just one example of the increasing reach of legislation and regulation in all aspects of international business and it is highly likely that this represents to beginning of attempts to develop a fairer and more sustainable global environment for both business and society.

The specific requirements and impact of each piece of legislation and regulation requires deep understanding and it is highly likely that a ‘tick-box’ approach will end badly for those companies who do not take the time to understand the risks involved.