In line with achieving the European Green Deal and the Green Finance Strategy in the UK, governments require robust data on risks that companies face in relation to sustainability and their impact on society and the environment. As a result, regulators are moving away from implementing largely voluntary policy measures to a more interventionist approach by mandating companies to disclose environmental, social and governance (ESG) information.
The EU’s CSRD will mandate companies to comply with a single standard
The EU’s Corporate Sustainability Reporting Directive (CSRD), adopted at the European Commission in April 2021 and anticipated to come into force in 2022, is a significant step in establishing an encompassing ESG regulatory regime, driving greater collaboration between the private and public sectors and leading the way in setting an industry standard for sustainability-related disclosures to be mirrored across the world.
Interestingly, according to the European Financial Reporting Advisory Group, which provided recommendations for the new proposal, private sector ESG benchmarks have a role to play in the impact assessment of ESG considerations. However, further standardisation will be necessary to achieve a measurable impact assessment framework that can be comparable across businesses and jurisdictions.
Even though current developments could create a more straightforward ESG regulatory regime, they could also render the reporting more challenging as disclosure rules and compliance procedures will become more rigorous. Companies need to manage ESG information in a positive manner and keep abreast with regulatory developments or risk their reputation.
The first set of CSRD standards is expected to be adopted by October 2022.
The UK sets mandatory climate disclosure target of 2025 in line with TCFD
The UK is also set for a new regulatory framework regarding ESG following Brexit. In June 2021, the Task Force on Innovation, Growth and Regulatory Reform published a report containing recommendations on how the UK can reshape its approach to regulation in place of the EU legislation to meet its forthcoming policies. The proposal is based on a set of principles embedded in UK common law that prioritises innovation, growth and inward investment towards trade, environmental and consumer protection.
The UK has also announced significant corporate governance and audit reform as a result of recent corporate failures including London Capital and Finance that led to broader public discontent.
Despite new developments, the UK has made significant progress since its Green Finance Strategy was announced in 2019. It has stated that, in line with the G20’s Task Force on Climate-Related Financial Disclosures (TCFD), it will introduce mandatory reporting of climate-related financial information across the economy by 2025, and a significant portion of mandatory requirements is expected to be in place by 2023.
There are varying timelines for the development and implementation of the disclosures, which are dependent on the type of company. For example, banks, building societies and insurance companies regulated by the Financial Conduct Authority are required to develop disclosure capabilities by December 31, 2021. From January 1, 2022, the quality of firms’ disclosures covering 2021 will be reviewed and, if mandatory requirements are found to be necessary, public consultation and implementation is expected to take place.
Although the EU and the UK are taking different paths to assessing measurable impact of sustainability one thing they both have in common is a move towards a more interventionist approach to regulation.
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