What is the ESG reporting regulations landscape?

April 10, 2024
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In the dynamic world of ESG (Environmental, Social, and Governance) reporting, a series of initiatives are paving the way for responsible investing and corporate transparency.

In this article, we will explore a few key regulations and frameworks fostering sustainability and ESG practices.

Increasing number of countries worldwide are initiating or expanding their efforts to regulate ESG reporting, showcasing a global commitment to responsible and transparent business practices.

These regulations are not only shaping the future of finance but are also transforming the way businesses operate.

European Financial Reporting Advisory Group (EFRAG) Standards

The European Financial Reporting Advisory Group (EFRAG) was founded in 2021 as an outcome of joint efforts between the European Union (EU) and private sector entities.

Its primary purpose was to help formulate International Financial Reporting Standards (IFRS) and provide expert advice to the European Commission on matters concerning financial reporting.

One of EFRAG's key responsibilities is to establish reporting standards for the Corporate Sustainability Reporting Directive (CSRD) within the revised framework of the Non-Financial Reporting Directive (NFRD).

The latter was adopted in 2014 by the European Union, requiring select companies to provide non-financial disclosure documents, also called sustainability reports, along with their annual reports.

In line with this mandate, EFRAG approved updated versions of the European Sustainability Reporting Standards (ESRS) on November 16, 2022.

These standards fall under the umbrella framework of the CSRD and help reinforce sustainability reporting obligations.

The CSRD pursues essential objectives, such as enhancing corporate sustainability and elevating the quality, consistency, and comparability of disclosed information.

Approved on November 28, 2022, the CSRD is set to come into effect for the reporting year 2024, with the first submissions due in 2025.

You can find the CSRD timeline here.

This directive marks a significant overhaul of the 2014 NFRD, expanding the number of companies required to disclose sustainability information from approximately 12,000 to over 50,000.

Learn more about how CSRD will impact the investment world.

Sustainable Finance Disclosure Regulation (SFDR)

The European Union legislators, in collaboration with the Commission, introduced the Sustainable Finance Disclosure Regulation (SFDR) to enhance transparency across financial entities and products on ESG parameters.

The regulation classifies financial products into three distinct categories - Article 6, Article 8, and Article 9 - to better identify alignment of financial assets with sustainability.

The SFDR requires financial market participants to provide standardised disclosures on the integration of ESG factors at both the entity and product levels.

It plays an integral role in the broader EU Sustainable Finance Framework and aligns with the EU's Sustainable Finance Action Plan, as well as the Paris Climate Agreement and the United Nations 2030 Agenda for Sustainable Development.

The main provisions of SFDR have been applicable since March 10, 2021.

Learn more about SFDR here.


EU Taxonomy

The EU Taxonomy stands as a crucial classification system established by the European Union (EU) with a twofold purpose.

  1. It serves to identify environmentally sustainable activities and promote sustainable investments.
  2. The EU's commitment to the Paris Agreement climate targets and the UN's Sustainable Development Goals underpins its foundation.

Both investors and companies benefit from the EU Taxonomy as it assists them in transitioning to a low-carbon, resilient, and resource-efficient economy.

It goes beyond mere classification, serving as a tool to maintain market transparency by thwarting greenwashing.

Offering clarity and transparency on environmental sustainability, it strengthens stakeholders' confidence in sustainable projects.

It helps embed sustainability as a crucial component of risk management.

One of the taxonomy's noteworthy features is its ability to provide a shared definition of economic activities that align with a net-zero trajectory by 2050 and broader environmental objectives.

By doing so, it strongly supports the EU's ultimate aim of achieving a climate-neutral economy by 2050, driving investments toward activities that genuinely contribute to sustainable development.

US SEC Climate Disclosure Rule

The United States Securities and Exchange Commission (SEC) released the draft of Climate Disclosure Rule on March 21, 2022.

The proposed rule aims to enhance and standardise climate-related disclosures by requiring certain information to be disclosed by companies in their registration statements and periodic reports.

The key objectives of the SEC Climate Disclosure Rule are to provide investors with consistent, comparable, and decision-useful information to make informed investment decisions and to establish clear reporting obligations for issuers.

By drawing from frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD), the proposed rule seeks to offer a unified set of sustainability reporting standards, ensuring transparency and addressing investor demands for consistent and reliable climate-related information.

The rule is designed to cover SEC-registered domestic or foreign companies and would require them to disclose climate-related information in registration statements and periodic reports, including 10-K annual reports.

To this day, there is no specific enforcement date for the rule. A former SEC commissioner, Robert Jackson, revealed in an April 2023 webinar that the final rule is likely to be delayed until 2024.

To conclude...

Amidst the increasing global awareness of environmental and social issues, regulators are proactively pushing for sustainability reporting and initiatives across industries and geographies

By aligning your activities with environmental goals and embracing responsible investing, you hold the power to shape a brighter and more sustainable future for all stakeholders involved.

And Apiday helps you take the first step without any hassle!

With our AI-powered software, streamline your data collection, verification, reporting, and certification, all in one place while staying compliant with regulations (CSRD, SFDR...).

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What is the ESG reporting regulations landscape?

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