ESG Weekly Update – October 19, 2023

19 October 2023

EU: EFRAG Publishes Illustrative Guidance on Key Aspects of CSRD

The European Financial Reporting Advisory Group (“EFRAG”) recently published two guidance notes on the EU’s Corporate Sustainability Reporting Directive (the “CSRD”).

The first note provides guidance on the materiality assessment required by the CSRD. Under the CSRD principle of “double materiality”, companies must assess: (i) the material impact of the company’s operations on society and the environment; and (ii) how sustainability-related material risks and opportunities may affect the company financially. EFRAG clarified that the materiality assessment will concentrate on limb (i) above, with the assumption that an assessment of limb (ii) will naturally follow. Among other things, the guidance clarifies that materiality should be assessed based on qualitative and quantitative data relating to the severity and likelihood of the negative impacts.

The second note provides guidance on value chain reporting under the CSRD. As part of the materiality assessment, the analysis in limbs (i) and (ii) must cover the company’s upstream and downstream value chains. EFRAG clarified that the amount of leverage a company has over the actors in its supply chains is irrelevant to its assessment of materiality. While the materiality assessment should cover all relevant actors in the supply chain, it should focus on key business dependencies and relationships with actors linked to sustainability “hot spots” of actual and potential impacts.

The CSRD and accompanying European Sustainability Reporting Standards will be phased in for financial years beginning on or after January 1, 2024. The purpose of the CSRD is to provide sufficient information so that investors and other stakeholders can understand the sustainability impacts, risks and opportunities of a company.

Guidance Note on Value Chains
Guidance on the Materiality Assessment

UK: TPT Releases Final Climate Transition Plan Disclosure Framework

On October 9, 2023, the United Kingdom’s Transition Plan Taskforce (“TPT”) released the final version of its disclosure framework for climate transition plans. The TPT was launched by the Treasury in 2022, with the core mandate of developing a “gold standard” for climate transition plans prepared by the private sector.

The framework is designed to apply internationally, across all industry sectors, to both voluntary and mandatory disclosures. The framework centers on five elements of climate transition plans:

  • foundations (including key assumptions and potential business implications);
  • implementation strategy (including operational and financial considerations);
  • engagement strategy (including interactions with industry and government actors);
  • metrics and targets (including GHG and carbon figures); and
  • governance (including oversight and reporting).

The TPT framework builds on the ISSB’s climate-related disclosure standard and incorporates guidance from industry and academic leaders, regulators and civil society groups.

The United Kingdom’s financial regulator, the Financial Conduct Authority, announced that it will consult in 2024 on proposals to make disclosure of climate transition plans mandatory for listed companies. If the plan goes ahead, the new disclosure requirements are expected to be implemented for accounting periods beginning in January 2025, with the first reporting beginning in 2026.

TPT Disclosure Framework
FCA Announcement

EU: Parliament Approves New Standards for Companies Issuing Green Bonds

On October 5, 2023, members of the European Parliament approved a new voluntary standard that establishes rules for issuers using the “European green bond” designation (“EuGB”). The aim is to increase investors’ and companies’ confidence that the bonds support sustainable activities, in accordance with the EU’s Taxonomy Regulation.

Issuers opting into the voluntary standard will be required to make substantive disclosures on how the proceeds are utilized. The standard further requires the issuer to allocate at least 85% of proceeds to sustainable activities. The remaining 15% may be allocated to other economic purposes, as long as these are clearly explained. Implementation of the EuGB will be overseen by a supervisory framework, an independent entity made up of external reviewers tasked with ensuring that the bonds adhere to the EuGB standards.

Europe remains the global frontrunner in terms of the issuance of green bonds, accounting for over half of the global volume. However, green bonds only represent approximately 3-3.5% of the overall bond market.

Press Release

UK: CFA Institute Rolls Out DEI Code in the UK

On October 11, 2023, the CFA Institute unveiled the UK edition of its diversity, equity and inclusion (“DEI”) code. Like the Institute’s DEI codes launched in the United States and Canada in February 2022, the UK edition requires firms to follow six guiding principles across their talent pipeline, talent acquisition, promotion and retention, leadership, influence and measurement.

Firms who sign the code pledge to:

  • bolster their talent pipeline with more diverse candidates;
  • adopt inclusive and equitable hiring and onboarding practices;
  • remove obstacles that impede retention and promotion of diverse employees;
  • promote DEI at the firm and industry level;
  • generate positive DEI outcomes at the firm and industry level; and
  • report on DEI metrics to the firm’s management and board as well as to the Institute.

Recognizing that DEI may not have a universal definition across different markets, the UK edition is an adaptation of the North American code, which “incorporates UK variations in demographics, culture and societal norms” and addresses issues that are unique to the UK market.

CFA Institute Announcement