EU CSRD – Corporate Sustainability Reporting Directive
Is the new EU directive that will take effect for large and listed companies, obligating them to share information on how they monitor a wide range of ESG issues and their impact on our planet.
Developed initiatives
There are several key ESG (Environmental, Social, and Governance) standards, frameworks, and reporting initiatives that have been developed to provide guidance to businesses:
UN Global Compact
It’s a voluntary initiative that encourages organizations to adopt sustainable and socially responsible policies, and to report on their implementation.
Global Reporting Initiative (GRI)
It provides the world’s most widely used standards on sustainability reporting and disclosure.
CDP (formerly Carbon Disclosure Project)
It runs a global disclosure system for companies to manage their environmental impacts, and for investors to access environmental information for use in financial decisions.
Sustainability Accounting Standards Board (SASB)
It provides industry-specific standards for corporate sustainability disclosure, with a focus on financial materiality.
International Integrated Reporting Council (IIRC)
Its Integrated Reporting Framework aims to communicate how an organization’s strategy, governance, performance, and prospects lead to the creation of value over the short, medium, and long term.
Task Force on Climate-related Financial Disclosures (TCFD)
It provides recommendations for consistent climate-related financial risk disclosures for companies, banks, and investors.
As for adoption by industry, it can vary significantly, and up-to-date data might be required for a comprehensive understanding. However, as a general trend:
Companies in industries with significant environmental impacts, such as energy, utilities, and manufacturing, are more likely to use frameworks like GRI, SASB, and TCFD, which have strong focuses on environmental disclosures.
Financial sector companies (banks, insurance companies, asset managers, etc.) often use the TCFD framework to understand and disclose climate-related financial risks.
Consumer-facing companies in sectors like retail, food and beverage, and consumer goods may be more likely to use standards that highlight social factors, such as the UN Global Compact.
High-tech and IT companies often focus on governance factors, including data protection and privacy standards.
Overall, most large corporations use some combination of these standards, depending on their industry, stakeholder demands, and specific ESG risks and opportunities. The growing importance of ESG factors means more and more companies across all industries are adopting these standards.
CSRD – EU Regulation
The EU has made significant strides in developing a sustainable finance framework.
This includes several initiatives aimed at integrating sustainability considerations into its financial policy framework to support sustainable investments.
Key measures include:
EU Taxonomy Regulation
It establishes a classification system (“taxonomy”) for sustainable activities. The taxonomy will create a common language that investors can refer to when investing in projects and economic activities that have a substantial positive impact on the climate and the environment.
EU Disclosure Regulation
It aims to provide more transparency on how financial market participants integrate ESG factors into their risk processes. Under the regulation, they are required to disclose certain information about their policies on the integration of sustainability risks in their investment decision-making process.
EU Benchmark Regulation
This aims to ensure that benchmarks used for ESG products or measuring the ESG footprint of an investment portfolio are clear and comparable. It establishes labels for two new categories of benchmarks: “EU Climate Transition” and “EU Paris-aligned” benchmarks.
Within the EU, specific ESG regulations can vary by country. Some countries, such as Sweden and the Netherlands, have been particularly progressive in incorporating ESG standards into their financial and corporate governance frameworks.
In contrast, the United States has a less centralized and less prescriptive approach to ESG regulation. As of 2021, there is no equivalent to the EU’s Taxonomy Regulation or Disclosure Regulation. However, various agencies govern different aspects of ESG. For instance, the Securities and Exchange Commission (SEC) oversees corporate disclosure of material ESG risks, the Department of Labor (DOL) regulates how pension funds can consider ESG in their investment decisions, and the Environmental Protection Agency (EPA) enforces environmental laws.
There has been growing momentum in the U.S. for more comprehensive ESG regulations. For example, under the Biden administration, the SEC has signaled that it may implement more rigorous climate and ESG disclosures.