ESG and Impact

Larger companies should be starting to think in earnest about how to tackle sustainability reporting under the CSRD, with most reports due in 2026 (but as early as 2025 for certain large, listed companies). 

As we discussed in the autumn, CSRD represents a step change in sustainability reporting, with more companies in scope, more data required and more stakeholder scrutiny than ever before and extraterritorial effect means that large multinational corporates with significant operations in the EU will be caught. Against this already challenging backdrop, updates to size thresholds for EU companies (and impacting which companies are in scope) and reports of potential "changes" to the regime over the last year have not helped companies with their reporting preparations.

As a reminder, disclosures are required on material impacts, risks and opportunities (IROs) within a business's own operations and its value chain. In-scope businesses will need to carry out a "double materiality" assessment to determine which IROs will reportable.

The fundamental questions of "who is in my value chain?" and "what IROs are material (and therefore reportable)?" continue to be challenging to unpick – even with the aid of (non-binding) draft implementation guidance to help de-tangle the concepts and apply them in practice. With the market's understanding of these core parameters still evolving, determining which information to disclose is not an easy task. Getting it wrong could have significant reputational and regulatory consequences and, in some circumstances will increase litigation risk.

Read our briefings CSRD – Getting to grips with the latest (and greatest?) corporate sustainability reporting | Travers Smith and CSRD: a moving target? | Travers Smith for more.

After significant political turmoil, a revised draft Corporate Sustainability Due Diligence Directive was approved by Member States on 15 March 2024, meaning that it is likely to eventually become law later this year. While the obligations within the directive remain largely as previously proposed, the companies due to fall into scope have been significantly reduced in number. 

Under the new draft, only those EU companies with 1000 employees and EUR450m worldwide turnover and those non-EU companies with EUR450m EU-derived turnover will be in scope. Once enacted, the CS3D will require EU and non-EU companies to conduct environmental and human rights due diligence across their operations, subsidiaries and chain of activities, and act on any impacts they identify. It will also be the first piece of EU legislation that mandates companies to adopt a climate transition plan. 

The final steps of passage required for CS3D to come into force are expected to take place in late April. In a reaction against the continued delays to this legislation, there remains an ever-increasing list of countries refusing to wait for the EU and introducing corporate due diligence requirements into their own national law. Various sector-specific EU regulations also incorporate new due diligence obligations. Read this briefing for more.

Meanwhile, in the UK, a private members bill has been introduced in the House of Lords that would impose on UK entities very similar obligations to those proposed under CS3D. The bill remains at very early stages and while it is generally considered that it is unlikely to pass, it is another indicator of the growing importance of international supply chain issues and the need for companies to put in place appropriate diligence processes in place to manage the risks it faces.

The UK is forging its own path on sustainability disclosures. The UK's answer to the EU SFDR is the FCA's UK Sustainability Disclosure Regime (SDR) which will start to apply (on a phased basis) from 31 May 2024 to FCA-authorised firms. 

There will be an anti-greenwashing rule for all FCA-authorised firms, but the most significant changes will be for UK AIFMs, UK UCITS managers and distributors. These include sustainability disclosures and a product labelling regime. Read our briefing for more.

After much discussion in the market about how far the SEC would go in requiring companies to expand disclosure on emissions and climate-related risks, strategy and expenditure, the SEC has released the final, highly anticipated climate-related disclosure rules (Final Rules). The Final Rules are scaled back significantly from those proposed, resulting in far more limited requirements and less onerous disclosure than some markets participants feared (or hoped for). 

Already adopted by the SEC, the Final Rules will go into effect this spring. One of the most controversial aspects of the proposed rule was the requirement to disclose scope 3 emissions – that requirement does not feature at all in the Final Rules.

The legal challenges to the rules have already begun. The Final Rules were adopted on Wednesday 6 March 2024. The first suits were filed that day and by the end of the day on 8 March 2024, a combined 13 states had challenged the rules in two different U.S. Courts of Appeal, taking issue with the process through which the Final Rules were adopted, arguing that the Final Rules exceed the SEC’s authority and challenging the required disclosure as impermissible compelled speech under the First Amendment to the US Constitution. Indeed, the 5th Circuit put the implementation of the Final Rules on hold on 15 March. More challenges are expected be filed, from both the left and right. This is not a surprise. Given the certainty of future challenges in court, the SEC pared back the Final Rules significantly from what was originally proposed in order maximise the possibility that the Final Rules would survive. Whether this was enough to ensure safe passage through the legal challenges is uncertain. Time (and perhaps the Supreme Court) will tell. For more, read this briefing.