The ESG regulation acronym buster
The world of ESG loves an acronym and just as you think you have got your head around them all, another one makes an appearance.
This is especially evident when it comes to legislation and ESG reporting. There are differing opinions as to whether the increasing volume of ESG reporting legislation is an effective way to ultimately drive positive change with some arguing that the resulting ‘reporting burden’ takes time away from actually implementing change.
On balance however, we see this as good news; each piece of new legislation brings with it guidance (and therefore clarity) on how companies need to approach the societal and environmental risks and opportunities they face.
Key regulations
The EU is leading in terms of the volume and maturity of its ESG-related legislation. Although the UK has not adopted all the EU regulation, certain EU legislation will still impact UK companies. For example, the Corporate Sustainability Reporting Directive (CSRD) does apply to those non-EU companies with EU-based subsidiaries, or with securities on EU-regulated markets, which have a net turnover of over €150m within the EU.
The direction of travel is clear, the volume of ESG is growing significantly and the scope is widening, impacting a vastly increased number of companies. Even if your company isn’t mandated to comply with a key piece of legislation currently, we see thresholds dropping and would therefore urge companies to use the legislation as guidance in terms of practices to put in place to future proof their business.
We have outlined below four of the key current and upcoming pieces of legislation that should be on companies radars, with a quick ‘how to’ guide:
> Taskforce for Climate related Financial Disclosures (TCFD) - All UK listed companies
> Corporate Sustainability Reporting Directive (CSRD) - All EU listed companies with over 500 employees, all EU 'large' organisations, Non-EU companies with EU-based subsidiaries, or with securities on EU-regulated markets, which have a net turnover of over €150m within the EU
> Corporate Sustainability Due Diligence Directive (CSDD) - Large EU limited liability companies, Non-EU-companies that generate a net turnover of > €150 million generated in the EU
> Taskforce on Nature-related Financial Disclosures (TNFD) - currently a voluntary market-led initiative but which is highly likely to follow the TCFD in becoming mandatory.
This is not an exhaustive list but it covers some of the key pieces of legislation that companies should be starting to prepare for.
TCFD
Taskforce for Climate Related Disclosures
What is it?
A FCA Listing rule mandating qualifying companies disclose their climate-related risks and opportunities, how these are managed, the resilience of the business model in the context of these risks and opps and the targets and KPIs that have been set.
Who does it apply to?
- UK listed companies with 500+ employees
- AIM companies with 500+ employees
- Other companies with 500+ employees and £500m+ turnover
When does it come into force?
Now, companies must disclose against TCFD in their FY23 Annual Reports
What do companies need to report on?
A description of:
- The governance of climate-related risks and opportunities
- How climate-related risks and opportunities are measured and managed and integrated into the organisation's overall risk management process
- The key climate-related risks and opportunities arising from the organisation's operations and how they impact the company's business model and strategy
- Scenario analysis: An assessment of the resilience of the organisation's business model and strategy in a range of different warming scenarios
- The organisation's targets relating to climate impact reduction (including a Net Zero transition plan, climate risks management and maximising climate opportunities)
- Details of performance against the targets including KPIs to monitor progress
How should companies act/get prepared?
1. Review the TCFD requirements for your business
2. Carry out a gap analysis to identify what activities are missing across:
Governance and management of climate-related issues
Business model and strategy implications of climate-related risks and opportunities
Risk management of climate-related risks and how these are managed
Metrics and targets
3. Address the gaps with internal resource or external specialists
4. Prepare TCFD statement for your company’s annual report
CSRD
Corporate Sustainability Reporting Directive
What is it?
An EU law mandating all qualifying companies disclose information on what they see as the risks and opportunities for their business arising from social and environmental issues, and on the impact of their activities on both people and the environment. All companies will be required to carry out, and publish, a double materiality assessment looking at both financial materiality (the environmental, social and governance factors that affect stakeholders’ decision making and therefore impact commercial performance) and impact materiality (the impact the business has via its operations on the environment and on society).
Who does it apply to?
All EU listed companies with over 500 employees,
All EU 'large' organisations—firms that meet 2 of the following 3 criteria: A net turnover of €40 million or more, at least €20 million in assets or 250+ employees
Non-EU companies with EU-based subsidiaries, or with securities on EU-regulated markets, which have a net turnover of over €150m within the EU.
When does it come into force?
It will be a phased introduction with listed companies being required to disclose against CSRD in their FY24 Annual Reports and EU ‘large’ organisations the following year.
What do companies need to report on?
Companies will need to report against 12 disclosures, the European Sustainability Reporting Standards (ESRS)
These disclosures are due to be confirmed in June 2023 and will cover the following:
2x Cross-cutting standards on: Governance processes, controls and procedures, sustainability strategy based on double materiality, impact, risk and opportunity management and metrics and targets.
Environment: Climate change
Environment: Pollution
Environment: Water and marine resources
Environment: Biodiversity and ecosystems
Environment: Resource and circular economy
Social: Own workforce
Social: Workers in the value chain
Social: Affected communities
Social: Consumers and end users
Governance: Business conduct
How should companies act/get prepared?
1. Conduct a Double Materiality Assessment, a mandated requirement under CSRD.
2. Start to collate data based on the draft ESRS standards.
CSDD
Corporate Sustainability Due Diligence Directive
What is it?
A proposed EU law mandating all qualifying companies:
Undertake due diligence across their value chains to identify the adverse impacts of their business on human rights and the environment
Implement processes to mitigate those impacts
Integrate sustainability and human rights considerations into their corporate governance and management systems.
Who does it apply to?
EU limited liability companies with 500+ employees and > €150 million turnover worldwide.
EU limited liability companies operating in high impact sectors e.g. textiles, agriculture, extraction of minerals, with 250+ employees and net > €40 million turnover worldwide.
Non-EU-companies that generate a net turnover of > €150 million in the EU (or > €40m in high impact sectors)
When does it come into force?
Law expected to be passed in 2023
What do companies need to report on?
Publicly communicate on due diligence implementation
How should companies act/get prepared?
1. Conduct a risk analysis of existing operations and value chains
2. Identify areas of the business and value chain which could have adverse human rights and/or environmental impacts
3. Consider where changes to policy and/or strategy are required and taking appropriate action
4. Embed a culture of due diligence within the company
TNFD
Taskforce on Nature-Related Financial Disclosures
What is it?
TNFD is a voluntary, market-led risk management and disclosure framework for organisations to report and act on evolving nature-related risks.
Who does it apply to?
It is not mandatory for any companies, yet. However, it is highly likely that this will follow the path of TCFD and become mandatory for a certain group of companies. Although the evolution from being a voluntary disclosure to a mandatory one is not yet clear, regulators and policymakers have expressed their support for the TNFD, including the G7 environment and finance ministers and the G20 environment ministers.
When does it come into force?
No confirmation yet as to when TNFD will move from being voluntary to mandatory
What do companies need to report on?
Governance: disclose the organisation’s governance around nature-related dependencies, impacts, risks and opportunities
Strategy: Disclose the actual and potential impacts of nature-related risks and opportunities
Risk and impact management: Disclose how the organisation identifies, assesses and manages nature-related dependencies, impacts, risks and opportunities.
Metrics and targets: Disclose the metrics and targets used to assess and manage relevant nature-related dependencies, impacts, risks and opportunities.
How should companies act/get prepared?
1. Familiarise yourself with the most up to date version of TNFD.
2. Identify which nature related risks and opportunities impact your business. Consider whether those identified under the TCFD can be extended out to incorporate nature.
3. Allocate a member of management or the board to take charge of nature-related disclosures
If you would like any help in preparing for upcoming ESG legislation or developing your ESG strategy, please get in touch: Jane@thethrivebusiness.com
