EU: European Commission Adopts the European Sustainability Reporting Standards
On July 31, 2023, the European Commission adopted the finalized European Sustainability Reporting Standards (the “ESRS”), which detail the reporting required under the EU’s flagship Corporate Sustainability Reporting Directive (the “CSRD”). The ESRS aim to provide sufficient information so that investors can understand the sustainability impacts, risks, and opportunities relating to the companies in which they invest.
The ESRS sets out the framework for companies within the CSRD’s scope to disclose both their impacts on people and the environment (including a full range of ESG issues) and how ESG issues financially impact their annual reporting. The ESRS’s main focus is on environmental disclosures, which fall under five standards: climate change, pollution, water and marine resources, biodiversity and ecosystems, and resource use and the circular economy.
Companies in scope must assess whether these standards and the associated data points are material to the company, its value chains, or business relationships. If assessed as material, reporting obligations will include both qualitative and quantitative data. Companies in scope must report also their due diligence processes for identifying and assessing environmental impacts, risks, and opportunities.
The ESRS will come into force three days after publication in the Official Journal. Together with the CSRD, the ESRS will be phased in for financial years beginning on or after January 1, 2024.
UK: Government Announces Sustainability Disclosure Standards Aligned with ISSB Framework
On August 2, 2023, the UK Department for Business and Trade announced that the UK’s forthcoming Sustainability Disclosure Standards will be based on reporting standards issued by the International Sustainability Standards Board (“ISSB”). The UK standards will provide a disclosure framework for companies reporting on climate and other sustainability-related exposure.
The UK has announced that it will diverge from the ISSB standards only “if absolutely necessary for UK specific matters.” By aligning standards with the ISSB framework, the UK aims to create a regime in which company disclosures generate globally comparable information for investors. The government plans to endorse the first two sustainability standards, tracking IFRS S1 on sustainability and IFRS S2 on climate, by July 2024. Once finalized, these standards will serve as the foundation for future sustainability reporting laws or regulatory requirements in the UK.
The UK’s announcement comes after the International Organization of Securities Commissions (“IOSCO”), an international body of securities regulators, formally endorsed the ISSB’s first two sustainability standards in July. The organization called on its 130 members to consider how they can adopt or apply the ISSB standards to promote consistent and comparable sustainability disclosures for investors across jurisdictions.
For a detailed analysis of the International Sustainability Standards Board reporting standards, check out our In Depth report.
IOSCO Endorsement of ISSB Standards
Global: ICVCM Releases Global Framework to Evaluate Carbon Credit and Crediting Programs
On July 27, 2023, the Integrity Council for the Voluntary Carbon Market (“ICVCM”) published its Core Carbon Principles Assessment Framework (the “Framework”), which provides full criteria for evaluating carbon credit and crediting methodologies. The Framework includes a threshold for assessing whether credits and crediting programs meet the ICVCM’s Core Carbon Principles (“CCPs”).
Successful programs under the Framework are eligible to use the CCP label, anticipated to be introduced later this year. To be eligible for this label, projects funded with carbon credits must be:
- compatible with a transition to net zero, which excludes activities relating to the extraction and energy generation solely based on fossil fuels;
- permanent, meaning that projects must observe and report on emissions reductions and removals, as well as compensate for any reversals that occur, during a 40-year period;
- additional, meaning that the relevant emissions reductions and removals would not have been achieved without the program’s operation (such as, for instance, due to a legal mandate); and
- robustly quantified, requiring that projects use conservative measurements to “minimize the risk of overestimation.”
In addition to the detailed criteria laid out in the Framework, the ICVCM also has established programs, such as the Continuous Improvement Work Program, to advise on how to bolster the existing criteria in the upcoming version of the CCPs.
Core Carbon Principles Assessment Framework
Global: IAASB Proposes Rules for Auditing Climate-Related Disclosures
On August 2, 2023, the International Auditing and Assurances Standards Board (“IAASB”) launched the proposed International Standard on Sustainability General Requirements for Sustainability Assurance Engagements (“ISSA 5000”). Once approved, ISSA 5000 would provide a “principles-based, overarching standard” for sustainability reporting.
ISSA 5000 aims to tackle greenwashing and ensure accurate and reliable information is reported. The proposed standard was designed to apply to information prepared for any entity, regardless of type or industry, and under any “suitable reporting framework,” including those issued by the EU, the International Sustainability Standards Board, the Global Reporting Initiative, and the International Organization for Standardization.
Stakeholders are invited to provide input on the proposed ISSA 5000 until December 1, 2023. The final standard is expected before the end of 2024.