ESG update: transition planning, sustainability disclosures and enforcement
A lot has happened in the world of ESG over the last few weeks. We have seen important announcements from the UK Government, the conclusion of COP16 and the ongoing COP29 (which you can read about here, here and here). We have also seen some important updates from the UK, EU, US and international bodies relating to transition planning, sustainability disclosures and enforcement action in respect of corporate reporting. We discuss some of these developments below.
A. Transition Planning
1. TPT publishes final report
On 25 October 2024, the Transition Plan Taskforce (“TPT”) – which was created with the aim of establishing the gold standard for transition plan disclosures – concluded its work and published its final report, ‘Progress Achieved and the Path Ahead’.
The TPT launched its disclosure framework and associated implementation guidance in October 2023. The disclosure framework provides guidance on transition plan disclosures, recommending disclosures in 19 areas grouped under the topics of foundation, implementation strategy, engagement strategy, metrics and targets, and governance. You can read more about the TPT disclosure framework here.
The final report shows that more companies than ever before are disclosing transition plans and aligning business strategies with net-zero commitments, and that financial institutions (“FIs”) are increasingly leveraging such plans to direct transition finance. To support this trend, the report provides information on what the TPT considers are the key opportunities and challenges for the adoption of transition plans, including building market capabilities, sharing best practices, developing tools for decision-makers and fostering global consistency in transition planning norms.
2. TNFD publishes draft guidance on nature transition planning
On 27 October 2024, the Taskforce on Nature-related Financial Disclosures (“TNFD”) published a discussion paper that sets out draft guidance on nature transition planning for corporates and FIs developing and disclosing transition plans in line with the TNFD Recommendations.
The TNFD Recommendations were published in September 2023 with the aim of encouraging and enabling companies and FIs to assess, report and act on their nature-related dependencies, impacts, risks and opportunities. The TNFD has published this discussion paper to help companies and FIs understand what a nature transition plan should include and how such plans should be presented and disclosed. In particular, the discussion paper encourages companies and FIs to base their nature transition plans around the following five core themes:
- Foundations: the organisation’s overall approach to the nature transition, including scope, changes to the business model and value chains, priorities for the plan and transition financing strategies;
- Implementation strategy: actions the organisation plans to undertake to align business policies, activities, products and services with the priorities of the transition plan;
- Governance: the structures and processes at board and management level to oversee, incentivise and support the transition plan’s implementation;
- Metrics and targets: metrics and targets the organisation will use to monitor progress against the transition plan’s priorities; and
- Engagement strategy: how the organisation will work with others to support delivery of the transition plan and accelerate the transition of the whole economy.
3. EFRAG publishes draft implementation guidance for climate transition plans under the CSRD
On 4 November 2024, the European Financial Reporting Advisory Group (“EFRAG”) published a draft version of its implementation guidance for transition plans (“IG 4”). IG 4 aims to support undertakings that are required to report on climate transition plans under the EU Corporate Sustainability Reporting Directive’s (“CSRD”) European Sustainability Reporting Standards (“ESRS”). The EFRAG has already published ESRS implementation guidance in respect of materiality assessments, the value chain and ESRS datapoints. For further information on the ESRS, please see our earlier update here.
IG 4 includes practical steps for companies to create, report and implement credible transition plans. IG 4 also aligns closely with International Sustainability Standards Board and TPT outputs, thereby promoting interoperability and global coherence on effective and accountable transition plans.
IG 4 needs to be approved by the EFRAG’s Sustainability Reporting Technical Expert Group and Sustainability Reporting Board. Once approved, it will then be open for public consultation and subsequently finalised at some point in 2025.
B. Sustainability Disclosures
1. ESAs publish joint report on PAI disclosures under the SFDR
On 30 October 2024, the European Supervisory Authorities (“ESAs”) published their third annual report on disclosures of principal adverse impacts (“PAIs”) under the EU Sustainable Finance Disclosure Regulation (“SFDR”).
The report assesses both entity and product-level PAI disclosures under the SFDR, which highlight the adverse impact of FIs’ investments on socio-environmental factors and the actions taken by in-scope FIs to mitigate them.
The report shows that FIs have improved the accessibility of their PAI disclosures and have improved the quality of the information disclosed by financial products. The report also includes recommendations to Member States’ National Competent Authorities to ensure convergent supervision of financial market participants’ practices, and to the EC for its comprehensive assessment of the SFDR.
2. FCA publishes examples of good practice SDR disclosures
On 1 November 2024, the UK Financial Conduct Authority (“FCA”) published examples of good practice of disclosure under its Sustainability Disclosure Requirements (“SDR”) and investment label regime.
A key concept of the SDR regime, which enters into force on 2 December 2024 (but has been open for voluntary use since 31 July 2024), is that to qualify for an investment label, specific criteria must be met and supported be disclosures. The FCA has, therefore, provided illustrative examples and approaches across a selection of labels to showcase how applicants can meet these disclosure requirements. The examples are based on the FCA’s experience of applications to date and are intended to aid applicants as they prepare their documentation.
3. EFRAG publishes draft sustainability reporting standards for non-EU parent entities in-scope of the CSRD
Following the conclusion of its meeting on 7 November 2024, the EFRAG – which is responsible for developing the sustainability reporting standards underpinning the CSRD – published first drafts of its sustainability reporting standards for non-EU parent undertakings reporting under the CSRD (“NESRS”).
The NESRS – which are the ESRS equivalent for non-EU parent undertakings – largely follow the structure of the ESRS, with two cross-cutting standards (NESRS 1 (General Requirements) and NESRS 2 (General Disclosure)) and ten topical standards, namely (1) Climate Change, (2) Pollution, (3) Water and marine resources, (4) Biodiversity and ecosystems, (5) Resource use and circular economy, (6) Own workforce, (7) Workers in the value chain, (8) Affected communities, (9) Consumers and end-users and (10) Business conduct.
However, there are some important differences to the ESRS. For example, as currently drafted, the NESRS provide that “the ultimate parent undertakings of subsidiary undertakings in the EU may elect to rather apply ESRS as applicable to undertakings in the EU (excluding the ESRS for Listed SMEs) in full”. The current draft of NESRS 1 also provides that non-EU undertakings may exclude “information about the impacts of sales of goods or provision of services to natural and legal persons outside of the EU” in respect of disclosures under all ten of the topical standards, excluding climate change.
The NESRS are only in draft form. Since the CSRD requires the European Commission (“EC”) to adopt a delegated act containing the final NESRS by 30 June 2026, the deadline for delivery of the final draft NESRS is the end of Q4 2025. This means that the EFRAG should open the draft NESRS for public consultation in January 2025, once it has approved the draft NESRS for issuance in December 2024.
4. EC publishes notice on the interpretation and implementation of the Taxonomy Regulation Disclosures Delegated Act
On 8 November 2024, the EC published its latest guidance notice on the Taxonomy Regulation (the “Taxonomy Notice”). While the previous EC notices and staff documents focussed mainly on non-financial undertakings, the Taxonomy Notice aims to provide further interpretative and implementation guidance to financial undertakings in the form of replies to FAQs on KPI reporting under the Disclosures Delegated Act to the Taxonomy Regulation.
5. EC publishes notice on the interpretation of certain legal provisions on sustainability reporting introduced by the CSRD and SFDR
On 13 November 2024, the EC published a guidance notice on the interpretation of sustainability reporting introduced by the CSRD into the Accounting Directive, Audit Directive, Audit Regulation and the Transparency Directive (the “CSRD Notice”). The CSRD Notice also clarifies certain provisions of the SFDR and the ESRS.
C. Enforcement
1. ESMA announces that it will focus on sustainability statement compliance
On 24 October 2024, the European Securities and Markets Authority (“ESMA”) issued its annual EC Enforcement Priorities Statement for 2024 corporate reporting, highlighting that it will focus on materiality considerations in ESRS reporting, the scope and structure of sustainability statements, and disclosures related to Article 8 of the Taxonomy Regulation.
In respect of double materiality – one of the key concepts under the CSRD – the ESMA has states that “conducting a thorough materiality assessment covering both impact and financial materiality is the starting point for the determination of the information to be disclosed in the sustainability statement”.
Regarding the scope and structure of sustainability statements, the ESMA highlighted the importance of connectivity between the sustainability statement and financial statements. The ESMA also noted that the information provided in the sustainability statement must cover impacts, risks and opportunities connected to a company’s value chain.
Finally, in terms of disclosures under Article 8 of the Taxonomy Regulation, the ESMA has reiterated the importance of using the Taxonomy Regulation Delegated Acts’ templates, avoiding double counting, scanning activities in relation to all environmental objectives under the Taxonomy Regulation, and ensuring that qualitative disclosures on the assessment of compliance with the technical screening criteria under the Delegated Acts are treated with as much importance as the quantitative disclosures.
2. Global investment firm charged by the SEC for making misleading statements about investment considerations
On 8 November 2024, the United States’ Securities and Exchange Commission (“SEC”) charged a global investment firm for making misleading statements about the percentage of company-wide assets under management (“AuM”) that integrated ESG factors in investment decisions.
According to the SEC’s, between 2020 and 2022, the global investment firm informed clients and stated in marketing materials that 70-94% of its parent company’s AuM were “ESG integrated.” However, the SEC found that these percentages included assets that were held in passive exchange-traded funds that did not consider ESG factors in investment decisions. The SEC also found that the global investment firm lacked any written policy defining ESG integration.
The global investment firm agreed to pay a $17.5 million civil penalty to settle the charges.
