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ESG Developments in 2024
In 2023, regulatory improvements in the fields of corporate sustainability and ESG have gained enormous momentum globally, albeit facing significant opposition in the United States.
Following the implementation of the Corporate Sustainability Reporting Directive (CSRD) at the beginning of the year, significant changes to California’s climate reporting requirements were made, the long-awaited European Sustainability Reporting Standards were adopted, and just before the deadline, a provisional agreement was reached on the European Corporate Sustainability Due Diligence Directive (CSDDD). Furthermore, there’s no reason to think that in 2024 the pace will drop.
By 2024, corporate sustainability will become legally required rather than optional, which will have an impact on the sustainability of products overall, supplier chain due diligence requirements, ESG data reporting, and environmental claim certification. Although the EU has been at the forefront of these advances up until now, other jurisdictions intend to follow suit in 2024, which will result in a significant rise in the amount of data that needs to be collected. We go over three ESG developments for 2024 below that you should be aware of.
- Supply Chain Due Diligence
Negotiators from the European Parliament and Council reached a temporary agreement to implement the Corporate Sustainability Due Diligence Directive, which was first presented in February 2022, just before the end of 2023. Should the Directive become law, it would mandate that both big businesses and smaller ones operating in specific high-risk industries implement due diligence procedures to lessen the adverse effects of their supply chains on the environment and human rights. Early in 2024, the Directive is anticipated to be formally adopted by the Council and the whole European Parliament. Depending on the size of the organisation, the regulations will be phased in over the following five years after they are established.
Mandatory supply chain due diligence requirements pertaining to particular environmental and human rights concerns, as well as product categories, are also becoming more prevalent. The EU Commission’s September 2022 proposal to outlaw goods manufactured using forced labour is anticipated to materialise in 2024. All imports and exports of the concerned items from businesses that have employed forced labour in their supply chain would be prohibited at EU borders if the Act is passed. Additionally, businesses would have to remove products from the EU market that have already been sold; these products would then have to be recycled, given, or destroyed.
By December 30, 2024, companies that deal with products linked to deforestation must make sure that the relevant goods and products they plan to sell comply with the European Deforestation Regulation. This means that the goods must be produced without causing deforestation, in compliance with the applicable laws of the country of origin, and supported by a statement of due diligence. In addition, the eagerly anticipated country benchmarking system is scheduled for adoption by the European Commission in 2024. For each country of origin, the benchmarking system establishes the degree of deforestation risk and, thus, the level of due diligence monitoring required.
A first list of forest commodities, including non-dairy cattle products (leather and beef), cocoa, palm, and soy, that will be subject to the additional due diligence requirements under the UK Environment Act 2021 was ultimately released by the UK in December 2023. However, coffee and rubber are not covered by the UK proposals, in contrast to the EU framework. It is anticipated that the regulations outlining this regime’s specifics would be enacted in 2024.
In the meanwhile, May 2024 is when the first reports under the new Canadian Act to combat forced labour are due. Additionally, certain US states are focusing on supply chain due diligence that is relevant to specific industries. One such state is New York, where the Fashion Sustainability and Social Accountability Act is being proposed.
2. ESG Reporting Requirements
Large businesses (the first group of businesses) in the EU will be required to file a sustainability report for the first time under the new CSRD in 2025 for the fiscal year 2024. In light of this, businesses need to make sure they have the appropriate data gathering and reporting methods in place straight away.
With the implementation of the CSRD and other sustainability frameworks, the EU has set the standard, but other regions, particularly in North America and Asia, will catch up in 2024. After multiple delays, the US Securities and Exchange Commission is anticipated to approve its new climate reporting regulations in the first half of 2024. SEC Chair Gensler stated in December 2023 that the agency will speak with EU authorities on the possibility of substituting the impending Climate Disclosure regulations for US companies’ adherence to the Corporate Sustainability Reporting Directive (CSRD) through discussion. It is unclear how the EU authorities will respond to this idea, as it may result in softer restrictions for US corporations under the CSRD.
The Corporate Data Accountability Act and Climate-Related Financial Risk Reporting are two Californian climate reporting regulations that went into effect on January 1, 2024, because the state did not want to wait for the SEC to approve federal regulations. These regulations were announced in October 2023. It is recommended that businesses impacted by these Acts keep an eye out for the release of the implementing regulations in 2024 as well as any modifications to the Bills themselves, as these may result in adjustments to the reporting deadlines.
Singapore had consultations in 2023 over the expansion of their current climate disclosure regulations. The consultation suggests expanding the present industry-specific reporting requirements to include all listed corporations by 2025 and all big non-listed enterprises by 2027. It is anticipated that the final regulation changes would be proposed in 2024. Comparably, the Hong Kong Stock Exchange has consulted on revisions to its ESG Reporting Rules in April 2023 and is working towards improved climate-related disclosures under its environmental, social, and governance (ESG) framework. The Stock Exchange has declared its desire to harmonise the proposed modifications with the new ISSB Standards. Consequently, the deadline for implementing the new regulations will be extended until January 2025, giving issuers ample time to acquaint themselves with the new guidelines.
The IFRS Reporting Standards are good news for any organisations that are not yet subject to the CSRD and other mandatory reporting standards in 2024. They became effective on January 1, 2024. By putting these criteria into practice, adaptation plans can become audit-proof immediately and be ready for any future mandatory requirements. Furthermore, other jurisdictions, including Australia, South Korea, and Canada, are presently striving to incorporate their own rendition of the IFRS Standards to customize them to their specific national environment
3. Regulating Green Claims
In 2024, legislation that targets greenwashing is another concern that is expected to keep businesses afloat. The Draft Green Claims Directive was finalised in September 2023 by the EU Parliament and Council, and formal adoption of the regulations is anticipated in 2024. The Green Claims Directive introduces minimal rules for the substantiation, verification, and communication of environmental claims in an effort to combat deceptive advertising. It will work in tandem with a stricter consumer protection law that is anticipated to be finalised in 2024. The large number of environmental labels that are now in use in the EU is another goal of the Draft.
In general, 2024 will mark the year that theory becomes reality. A lot of the regulatory changes that were enacted in 2022 and 2023 are now in effect, and the first reporting deadlines are approaching. Companies will need to incorporate ESG strategies in all aspects of their operations, from design and production to financial communications, as a result of the trend towards requiring supplier chain due diligence as one of the main aspects of the duties.