3 ESG Developments to Look Out for in 2024

This blog was originally posted on 15th January, 2024. Further regulatory developments may have occurred after publication. To keep up-to-date with the latest compliance news, sign up to our newsletter.

AUTHORED BY HANNAH JANKNECHT, REGULATORY ANALYST, COMPLIANCE & RISKS

ESG Developments in 2024

Despite facing considerable backlash in the United States, regulatory developments in the ESG and corporate sustainability field have gained huge momentum worldwide in 2023.

After starting the year with the entry into force of the Corporate Sustainability Reporting Directive (CSRD), we have seen the adoption of the long-awaited European Sustainability Reporting Standards, a big shift in climate reporting obligations in California and, short before the finish line, a provisional deal on the European Corporate Sustainability Due Diligence Directive (CSDDD). And there is no reason to believe that the pace will slow down in 2024.

2024 will witness a further shift from voluntary towards mandatory corporate sustainability, affecting product sustainability at large, requirements for supply chain due diligence, the reporting of ESG data and certification of environmental claims. While up until now, the EU has been at the forefront of these developments, other jurisdictions have plans to follow suit in 2024, leading to a considerable increase of data collection needs. Below we discuss 3 ESG Developments in 2024 you need to look out for.

Supply Chain Due Diligence

Shortly before the end of 2023, negotiators of the European Parliament and Council agreed on a provisional deal to adopt the Corporate Sustainability Due Diligence Directive which had first been proposed in February 2022. If enacted, the Directive will require large companies as well as smaller companies in certain high-risk sectors to adopt due diligence policies to mitigate their negative impact on human rights and the environment in their supply chains. The European Parliament as a whole and the Council are expected to officially adopt the Directive in early 2024. Once enacted, the requirements will be phased in over the next 5 years depending on the size of the company.

In addition, mandatory supply chain due diligence requirements concerning specific human rights and environmental issues and certain types of products are on the rise. The ban on products made with forced labor, proposed by the EU Commission in September 2022, is expected to take its final shape in 2024. If the Act is adopted, all import and export of concerned goods from companies that have used forced labor in their supply chain would be stopped at the EU’s borders. Companies would also be required to withdraw goods that have already reached the EU market, which would then be donated, recycled or destroyed.

Companies dealing with products that are associated with deforestation must ensure by 30 December 2024 that the relevant commodities and products they intend to place on the market are compliant with the European Deforestation Regulation, meaning that the products must be deforestation-free, produced in accordance with the applicable legislation of the country of origin and accompanied by a due-diligence statement. Furthermore, the European Commission is due to adopt the long-awaited country benchmarking system in 2024. The benchmarking system determines the level of deforestation risk and hence the level of due diligence scrutiny that is needed for each country of origin.

In December 2023, the United Kingdom finally published a first list of forest commodities that will be covered by the new due diligence obligations under the UK Environment Act 2021, including non-dairy cattle products (beef and leather), cocoa, palm, and soy. Unlike the EU regime, the UK plans however do not cover coffee and rubber. The regulations containing the details of this regime are expected to be adopted in 2024.

Meanwhile, first reports under the new Canadian Act to fight Forced Labor are due in May 2024. Some US states are furthermore working on supply chain due diligence applicable to individual sectors, such as the Fashion Sustainability and Social Accountability Act proposed in New York.

ESG Reporting Requirements

In the EU, large companies (the first batch of companies) will have to submit a sustainability report under the new CSRD for the first time in 2025 for the financial year 2024. Considering this, companies must ensure to have the right strategies for data collection and reporting in place now.

While the EU has set the pace with the entry into force of the CSRD and further sustainability frameworks, other jurisdictions, especially in North America and Asia will follow suit in 2024. The US Securities and Exchange Commission is expected to adopt their new climate reporting rules in the first half of 2024, after the initial date has been pushed out several times. In December 2023, SEC Chair Gensler announced the agency’s intention to engage in conversation with EU authorities to suggest using the upcoming Climate Disclosure rules as a substitute for US company’s compliance with the Corporate Sustainability Reporting Directive (CSRD). Since this might lead to less stringent requirements for US companies under the CSRD, it remains to be seen how the EU authorities will react to such a proposal.

At the same time, California did not want to wait for the SEC to adopt its federal rules and hence issued two Californian climate reporting rules in October 2023, which both entered into force on 1 January 2024 (Corporate Data Accountability Act and Climate-Related Financial Risk Reporting). Companies affected by these Acts are advised to look out for the introduction of the implementing regulations in 2024 as well as changes to the Bills themselves, since these will potentially entail changes to the reporting deadlines.

Singapore consulted in 2023 on an extension of their already existing climate disclosure requirements. The consultation proposes to extend the reporting obligations, which are currently limited to certain industries, to all listed companies in 2025 and to all large non-listed companies in 2027. Final amendments to the rules are expected to be introduced in 2024. Similarly, the Hong Kong Stock Exchange is working towards enhanced climate-related disclosures under its environmental, social and governance (ESG) framework and has consulted on changes to its ESG Reporting Rules in April 2023. The Stock Exchange recently announced their intention to align the planned changes with the new ISSB Standards and will therefore extend the implementation deadline of the new rules until January 2025, in order to provide issuers with enough time to familiarize themselves with the new rules.

For all companies that are not yet subject to the CSRD and other mandatory reporting rules in 2024, the IFRS Reporting Standards, which became effective on 1 January 2024, are good news. Application of these standards will help to prepare for potential mandatory requirements in the future and make adaptation strategies audit-proof today. In addition, a number of jurisdictions including Australia, South Korea and Canada are currently working towards implementing their own version of the IFRS Standards in order to adapt them to the national context.

Regulating Green Claims

Emerging legislation aimed at tackling greenwashing is another issue that is poised to keep companies on their feet in 2024. The EU Parliament and Council reached a provisional agreement on the Draft Green Claims Directive in September 2023 and the rules are expected to be formally endorsed in 2024. The Green Claims Directive, together with a more stringent consumer protection law that is expected to be finalized in 2024 as well, aims to counteract misleading environmental claims by introducing minimum requirements for their substantiation, verification and communication. The Draft also aims to streamline the high number of environmental labels currently in use in the EU.

Overall, 2024 will be the year of transitioning from theory to practice. Many of the regulatory developments adopted in 2022 and 2023 have now entered into force and first reporting deadlines are coming up. The trend towards mandatory supply chain due diligence as one of the core elements of the obligations will require companies to implement ESG strategies in all areas of operation ranging from design and manufacturing to finance communications.

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