ESG and sustainable business

The speed of developments in the world of sustainability reporting over the last 12 months has been unprecedented. Over the summer, two "global baseline" sustainability reporting standards were adopted and endorsed for use in capital markets, twelve European Sustainability Reporting Standards finalised, and the UK committed to develop "Sustainability Disclosure Standards", based on the international standards, by July 2024.

European sustainability reporting standards

In July, the European Commission adopted a set of common sustainability reporting standards, the European Sustainability Reporting Standards (ESRS), which are mandatory for use by companies in the scope of the Corporate Sustainability Reporting Directive (CSRD). The CSRD is designed to ensure that companies across the EU report comparable and reliable sustainability information.

The ESRS are based on technical advice (draft standards) received from the European Financial Reporting Advisory Group and will immediately become part of CSRD reporting for the first tranche of companies from 1 January 2024. There are 12 standards that sit across a broad range of environment, social and governance topics. See our briefing for further details.

IFRS sustainability disclosure standards

On 26 June 2023, the International Sustainability Standards Body (ISSB) issued its inaugural standards concerning sustainability-related disclosures: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2) (together, the ISSB Standards). These disclosure standards are expected to form the "global baseline" for sustainability information going forward.

IFRS S1 has been created to provide a framework for the communication of decision-useful, comparable sustainability information to investors. IFRS S2 is the first of a series of topic-specific standards, addressing climate-related disclosures. There is significant overlap between IFRS S2 and Task Force on Climate-Related Financial Disclosures (TCFD), which many organisations will already be preparing for (with a few additional differences, as noted in our briefing). The ISSB will take over the supervision of TCFD disclosures from the Financial Stability Board from next year.

It is worth noting that the ISSB Standards are not mandatory until reporting under them is mandated by national legislators or regulators. The UK is expected to be an early adopter and is preparing to consult on rules to require reporting by listed companies in accordance with nationally adapted ISSB Standards, to be known as Sustainability Disclosure Standards, from 2025. In its August 2023 newsletter, the Financial Conduct Authority set out steps that listed companies can take to prepare for the introduction of ISSB sustainability reporting requirements.

For more information on the ISSB Standards and other developments in sustainability reporting in the EU and UK, please see our briefing note.

The European Commission, European Parliament and European Council are currently discussing the proposed Corporate Sustainability Due Diligence Directive (CSDDD). When enacted, the CSDDD will require EU and non-EU companies to conduct environmental and human rights due diligence across their operations, subsidiaries and value chains, 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 three institutions have each adopted a negotiating position and are conducting trialogue meetings to agree the final text of the CSDDD, hopefully before the end of the year. Although there is agreement between these stakeholders on key portions of the text, there are still elements of the directive that are highly contested. These include the thresholds for undertakings in its scope, and how far obligations should apply in an undertaking's "value chain". Undertakings are likely to have some time (potentially 3-5 years) to prepare before key obligations apply.

As anticipated, the Economic Crime and Corporate Transparency Act 2023 (ECCTA) introduces a new failure to prevent fraud offence, intended to hold large organisations to account for fraud committed by their associates. Under the new offence, organisations will be liable where a fraud offence is committed by an employee or agent, for the organisation's benefit, and the organisation did not have reasonable fraud prevention procedures in place. 

The ECCTA also reforms the 'identification doctrine', the legal test for deciding whether criminal liability should be attributed to a legal person for the conduct of its officers and agents. Previously, a company or partnership could only become liable for the conduct of a natural person where that person represented the “directing mind and will” of the company or partnership. The Act amends and broadens this test, to include "senior management", using the definition from the Corporate Manslaughter and Corporate Homicide Act 2007. This will have the effect of broadening the range of individuals whose conduct could give rise to criminal liability for companies or partnerships.

The EU's Taxonomy Regulation is an initiative for an EU-wide classification system of economic activities that the EU defines as environmentally sustainable, meaning that they make a substantial contribution to one or more of the six environmental objectives. 

The European Commission has recently adopted an amendment to the delegated regulation in which it set out the first technical screening criteria for the climate change objectives. This included, amongst other things, the inclusion of certain aviation-related activities as transitional activities. The Commission has also adopted technical screening criteria for the remaining four environmental objectives:

1. sustainable use and protection of water and marine resources
2. transition to a circular economy
3. pollution prevention and control
4. protection and restoration of biodiversity and ecosystems. 

The inclusion of more economic activities covering all six environmental objectives are expected to be introduced by the Commission over the next year. The new regulations will be of particular interest to entities coming into the scope of CSRD, as those companies will additionally be required to report under the Taxonomy Regulation. See our briefing for further details.