The Tectonic Shift in Global ESG Reporting: A Comparative Look at UK, EU, and US Regulations
The world of corporate reporting is amid a seismic shift, with new environmental, social, and governance (ESG) reporting regulations in the UK, EU, and the US setting the stage for an era of heightened corporate sustainability and accountability. This article aims to provide a comprehensive overview of these regulatory landscapes and their potential impact on companies worldwide.
United Kingdom
In the UK, the Financial Reporting Council (FRC) introduced the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022. Effective January 17, 2022, these regulations require UK Registered Companies and Limited Liability Partnerships to meet certain thresholds to report on specific environmental risk factors. These factors include environmental risks impacting the company’s operations, governance strategy for assessing and managing environmental risk, the scope for the assessment, environmental goals and KPIs, the process to identify, assess, and manage environmental risks, and integration of environmental risk into the broader enterprise risk management (ERM) strategy. Companies must comply starting from accounting periods on or after April 6, 2022. Although assurance is voluntary, it is guided by the Task Force on Climate-related Financial Disclosures (TCFD). More information
European Union
The European Union, through the European Financial Reporting Advisory Group (EFRAG), has instituted the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS). Effective January 5, 2023, for EU promulgation and to be ratified into law by EU Member States by June 16, 2024, these regulations mandate comprehensive ESG reporting, covering climate-related or environmental issues, fundamental rights-related issues, anti-corruption and bribery-related issues, and diversity-related issues. Compliance deadlines are staggered from 2025 to 2029 based on company size and current reporting requirements. Mandatory limited assurance is required for six years, followed by mandatory reasonable assurance. More information
United States
The Securities and Exchange Commission (SEC) is working on the Enhancement and Standardization of Climate-Related Disclosures regulation in the United States. Although the final reporting requirements' publication is currently delayed due to a comment period extension, the proposed scope focuses on climate-related risks and their actual or likely material impacts on the business, strategy, and outlook, among other areas. Compliance deadlines are staggered from fiscal year 2023 (filed in 2024) to fiscal year 2025 (filed in 2026) based on company size. According to recent reports, the SEC may finalize the climate-related disclosure rules in 2023. Mandatory initial limited assurance is required, which will then phase into mandatory reasonable assurance for accelerated and large accelerated filers. More information
Below is a comparative table summarizing the key aspects of these regulations:
2023 Global ESG Reporting Regulation Comparison - Wheelhouse Advisors LLC
The International Financial Reporting Standards Foundation (IFRS) is also playing a crucial role in shaping the global ESG reporting landscape, with the establishment of the International Sustainability Standards Board (ISSB) to develop globally applicable sustainability reporting standards.
While the new regulations may seem daunting, companies can now unlock considerable benefits by taking proactive steps. These include:
Strategic Alignment: By integrating ESG considerations into their strategic planning, companies can align their business models with sustainable growth, fostering long-term value creation.
Enhanced Reputation: Transparency in ESG practices can significantly improve a company's reputation among investors, customers, and other stakeholders, increasing trust and market value.
Risk Management: Robust ESG reporting can help companies identify and manage environmental and social risks more effectively, reducing potential liabilities and enhancing resilience.
Investor Appeal: ESG reporting is increasingly important to investors. Companies that report ESG factors effectively can attract a broader range of investors and potentially reduce their cost of capital.
As companies grapple with these new regulatory landscapes, here are vital actions to consider by region:
UK: Engage with auditors and consultants to comprehend and integrate the specific environmental risk factors into your broader enterprise risk management (ERM) strategy. Consider voluntary assurance to build credibility with stakeholders.
EU: Prepare for an expanded range of ESG topics to be reported and audited. Familiarize yourself with the IFRS and ISSB standards. Collaborate with auditors to prepare for the transition from limited to reasonable assurance.
US: Stay abreast of the SEC's ongoing rule-making process and strategize for a phased approach to compliance. Understand the specific climate-related risks and impacts relevant to your business and plan to disclose these in your filings.
As I stated in recent news interviews, "The speed of change in ESG reporting regulations is unprecedented, making it a challenge for companies to keep up. However, by staying ahead of the curve and preparing for these changes, companies can significantly enhance their ESG performance and reputation."
“US companies are either largely ignorant of what’s happening or just have their head in the sand.”
It's crucial to note that awareness of these regulatory changes still needs to be improved in certain regions. US companies are lagging. As I highlighted in a recent Bloomberg interview, "US companies are either largely ignorant of what’s happening or just have their head in the sand." This is concerning, especially considering that the EU's CSRD alone is expected to impact at least 10,000 foreign and 50,000 EU companies. The scale of this impact underscores the global reach and significance of these regulations.
With the global move towards greater transparency and accountability, ESG reporting is not just a regulatory requirement but also a business imperative. Companies that embrace these changes and actively engage in ESG practices will be better positioned to navigate the shifting regulatory landscape.
The pace of ESG regulatory development is rapid, and companies must act now. Embrace the challenge, engage with the new requirements, and use the opportunity to improve ESG practices and communication with stakeholders. Through this lens, we can begin to see these new regulations not as a burden but as an opportunity for businesses to drive change and create a more sustainable future.
Sources:
2 EU Corporate Sustainability Reporting Directive
3 SEC Climate Disclosure Guidance
4 ISSB Consolidation Heralds a New Era in Corporate Reporting and Assurance
5 Navigating the ESG landscape
6 At Least 10,000 Foreign Companies to Be Hit by EU Sustainability Rules
7 Eyes on CPI: The Bloomberg Open Europe Edition
