Rapid Progress on Sustainability Regulations Worldwide
In 2024, sustainability regulations are progressing rapidly worldwide, matching or surpassing previous years. Not surprisingly, the European Union (EU) highlights of the year's first quarter.
European Union
CS3D - now to be voted in the parliament:
After more than two years of debate, the European Council voted on March 15, 2024, in favor of the Corporate Sustainability Due Diligence (CS3D) proposal. The proposal will require certain EU companies to integrate human rights and environmental due diligence into their operations. Initially introduced by the European Commission in February 2022, the proposal underwent several revisions and negotiations between the EU Institutions, culminating in a compromise text agreed upon in December 2023. The main changes in the compromise text include adjustments to the company thresholds and the scope of the obligations. With these changes, it is estimated that around 5,000 EU companies will be affected by the CD3D. The proposal is now expected to undergo further scrutiny in the European Parliament. This could hinder its adoption before the upcoming parliamentary elections in June 2024.
Environmental crimes to be prosecuted in the EU:
On February 27, 2024, the European Parliament decided to criminalize severe ecosystem destruction. The EU's Environmental Crimes Directive introduces stricter penalties in all 27 member states. The directive imposes prison sentences of up to 10 years and significant fines for environmental crimes and expands the list of offenses to include actions such as illegal product sales and unauthorized water withdrawals. This move responds to concerns raised in a 2020 report by the European Environmental Agency, which highlighted the need for stricter sanctions against environmental crimes. The directive is subject to final approval from EU state leaders. Member states will have two years to implement the new rules, expected to set a robust legal precedent for environmental protection.
EBA consults guidelines on the management of ESG risk:
A public consultation on draft guidelines on the management of Environmental, Socal and Governance (ESG) risks was launched by the European Banking Authority (EBA) on January 18, 2024. The guidelines aim to set out requirements for institutions to identify, measure, and manage ESG risks, including those related to moving towards net zero. The consultation period runs until April 18, 2024, during which stakeholders are invited to provide feedback on the guidelines. The EBA underlines the importance of ESG risk management for the stability and resilience of financial institutions in the short, medium, and long term. The development of these guidelines aligns with the EBA's Sustainable Finance Roadmap and its obligations outlined in the EU Banking Package.
Switzerland
Nature related risks tackled by FINMA:
On February 1, 2024, the Swiss Financial Market Supervisory Authority (FINMA) issued a new circular outlining its supervisory approach to managing nature-related financial risks. The circular, which applies to banks and insurers, highlights the obligation of financial institutions to address material financial risks arising from climate change and loss of nature. Like climate-related risks, the document focuses on integrating nature-related financial risks into corporate governance and institution-wide risk management, including risk assessment criteria and scenario analysis. The circular is effective from January 1, 2025, subject to transitional provisions. FINMA encourages all financial institutions, including small banks and insurers, to assess its requirements due to the potential impact of nature-related financial risks.
United States
SEC approves final rules on climate disclosures:
On March 6, 2024, the US Securities and Exchange Commission (SEC) approved final rules requiring companies to disclose certain climate-related information in registration statements and annual reports. Released nearly two years after they were proposed, the rules have sparked litigation, with petitions for review filed across the US. In response to a request for review, the US Court of Appeals for the Fifth Circuit granted an administrative stay on the final rules on March 15, 2024. Consequently, the timing of the rule's effective date, applicable phase-in periods, and their potential outcome amid legal challenges remain uncertain. Despite being described as scaling back from the proposed rules, the final regulations mark a historic expansion of US federal securities disclosure regulation and could significantly increase companies' reporting costs and compliance efforts if upheld.
The final rules exclude requirements for disclosure of Scope 3 greenhouse gas emissions. They do not require disclosure of GHG emissions for smaller reporting companies. Ongoing legal challenges may lead to modifications or reductions in the requirements of the final rules.