Jack Robinson, Dale Tromans, Patrick Moloney

April 11, 2024

Thriving amidst the regulatory chaos: 5 climate regulations businesses can't ignore

Reporting on climate action is changing from voluntary to mandatory. With this rapid need for reporting comes complexity for businesses to navigate. In this article, we identify five key regimes that affects European companies in 2024 and offer practical advice on how to prepare for them.

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As more regulatory authorities implement policies targeting disclosure from businesses, climate action reporting is now a must-do for thousands of companies. In this article, we highlight five of the most urgent reporting frameworks targeting climate action for companies to focus on in 2024 (with a primary focus on European companies). Also, we guide you to where to start.
Here are the five climate reporting regimes that will be top of your 2024 “to-do list”.
  1. EU Taxonomy
  2. CSRD (Corporate Sustainability Reporting Directive)
  3. SFDR (Sustainable Finance Disclosure Regulation)
  4. TCFD & ISSB (Task Force on Climate-related Financial Disclosures) & (International Sustainability Standards Board)
  5. OECD & UNGPs (Organisation for Economic Co-operation and Development) & (United Nations Guiding Principles)
1. The EU Taxonomy defines ‘sustainable’ economic activities including those that substantially contribute to climate change mitigation or adaptation
The EU Taxonomy Regulation classifies sustainable activities by setting performance thresholds to measure the environmental impact of selected economic activities. There are six environmental objectives, with relevant sectors defined in each objective.
The EU Taxonomy has a Climate Delegated Act that covers economic activities aspiring to substantially contribute to either climate change mitigation or climate change adaptation. The Climate Delegated Act sets out specific technical criteria that companies must meet in order to demonstrate substantial contribution to this environmental objective.
To illustrate substantial contribution to either climate change mitigation or adaptation, a company is required to align with technical screening criteria for both substantial contribution and Do No Significant Harm (DNSH) and align with Minimum Safeguards. Companies must assess and report what percentage of their CAPEX, OPEX and revenue are eligible and aligned with the Taxonomy.
See our EU Taxonomy page for more information about the Taxonomy
In our experience, companies can have high Taxonomy eligibility but fall short when it comes to actual alignment i.e. passing the technical screening criteria. Alignment with climate criteria can be key. For example, activities that substantially contribute to climate change mitigation must also comply with the Adaptation ‘Do No Significant Harm’ technical criteria that may include undertaking a climate vulnerability and risk assessment.
Knowing your EU Taxonomy climate eligibility and alignment is also one of the CSRD’s climate reporting requirements (see next section).

EU Taxonomy Climate Focus

  • Ensure a thorough understanding of the EU Taxonomy Climate Delegated Act and identify which economic activities could contribute to climate change mitigation or climate change adaptation.
  • Conduct climate risk and vulnerability assessment – a compulsory requirement as part of Do No Significant Harm to Climate Change Adaptation
  • Incorporate climate change adaptation and mitigation processes into business procedures to ensure consistent future alignment.
2. The CSRD is becoming the new normal for corporate climate and sustainability reporting and time is running out to put in place the necessary changes
The Corporate Sustainability Reporting Directive (CSRD) requires large and listed companies to disclose information on the way they operate and manage social and environmental challenges. Here, a large company is defined as one that meets two out of three of the following criteria: more than 250 employees, a turnover of over €40 million and over €20m total assets. The CSRD has specific reporting standards for the different sustainability topics – including climate. Around 50,000 large companies, as well as listed SMEs, will now be required to report on sustainability, including climate change.
See our CSRD page for more information about the CSRD generally
The new requirements ensure that investors and other stakeholders have access to the information they need to assess impacts, risks and opportunities arising from climate change and other sustainability issues. The CSRD also creates a culture of transparency about the impact of companies on people and the environment.
If companies find that climate change is material to their business (most will), through a ‘double materiality’ assessment, they must report on a set of climate-specific disclosure requirements. These are set out in the ESRS Environment 1 (E1) – Climate change.
ESRS E1 – Climate Change (herein referred to as ‘ESRS E1’) establishes nine climate-specific ‘Disclosure Requirements’ that will allow sustainability report readers to understand the organisation's impact on and how it will be impacted by climate change, its climate change mitigation and adaptation efforts, plans for transitioning to a sustainable economy and other actions to prevent, mitigate or remedy negative impacts. It also covers the financial implications of climate-related risks and opportunities on the organisation in the short-, medium-, and long-term.
Similarly, large companies must also disclose how they are tracking the effectiveness of policies aimed at climate change mitigation and actions against policies through target setting. This requires companies to have a clear and defined climate transition plan to ensure they reduce their carbon footprint by 2050 and have a clear strategy in place.
To comply with the ESRS E1 disclosure requirements, companies must undertake substantial work on many data points. It also requires limited and eventually reasonable assurance, requiring that their process is documented and follows ESRS methodological standards. With the deadline for reporting on 2024 financial year data already set for 2025, the clock is ticking. As such, it's imperative to swiftly establish and implement new climate data collection tools and processes.

CSRD Climate Focus

Top of the ESRS E1 “to-do list” is the Climate Transition Plan, which contains many of the basic building blocks for companies to start taking climate action. This includes a carbon emission baseline, decarbonisation targets and financed decarbonisation roadmap, and integration of the climate strategy within the overall business strategy.
Perform a TCFD-aligned assessment: although not explicitly mentioned in ESRS E1, many of the requirements draw on this framework relating to adaptation, resilience, and understanding the financial consequences of climate change for businesses.
3. SFDR: Requirements for financial market participants are influencing and accelerating investments with climate objectives and climate action
The Sustainable Financial Disclosure Regulation (SFDR) sets disclosure requirements that apply to Financial Market Participants (FMPs) and advisors offering financial products in the EU. Demonstrating climate action at the fund level is driven by the product level disclosure requirements under Article 8 and Article 9, with the former capturing funds that promote environmental or social characteristics and the latter, funds that have sustainable investments as their objective. Funds seeking to showcase climate action must, amongst other requirements, disclose the fund's climate objectives, sustainability indicators used to measure the attainment of the objectives and the investment strategy the financial product will follow.
See our web page for more about the SFDR and getting the sustainability objective right for Article 9 funds.

SFDR Climate Focus

In 2024 the focus shifts towards evidence of tangible climate action and performance analysis takes centre stage.
Stakeholders can now compare the fund's progress across PAI indicators and their climate outcomes, not only within a fund but also across funds. This will drive FMPs to seek to collect and report accurate and comprehensive data from portfolio companies. Thus, businesses must be prepared to provide accurate and comprehensive data, the CSRD and ESRS will be a key supporting tool for businesses to gather and consistently report their data.
The outcomes of the PAI reports will influence improvement strategies and plans going forward to ensure financial products do no harm, meet their climate objectives and stay competitive in light of increasing investor demand for ambitious climate objectives. Utilising this opportunity to improve climate data and risk integration will be key to securing capital and maintaining a competitive edge in the evolving climate-conscious investment landscape.
We observe three key notions within the SFDR that have significantly influenced how investors think and target climate action, these are: the integration of sustainability risks, defining a 'sustainable investment' as per the SFDR definition, and tracking climate change impacts through the sustainability indicators. These trickle down to current and potential portfolio companies as stricter regulations and investor expectations translate into data requests, active ownership engagement and demand for evidence of implementation of actions.
The SFDR mandates FMPs to disclose how sustainability risks are considered and integrated into their investment decision-making. Best practice involves identifying and disclosing relevant sustainability risks and emphasising transparency. As a result, there has been an increased disclosure of climate risk integration practices leading to risk screening for portfolio companies and integrating risk assessment at the due diligence stage.
Both at the entity and product levels, SFDR mandates the disclosure of PAIs which include climate indicators, in specific GHG emission (scope 1,2,3 and intensity) indicators. Challenges surfaced in the 2023 reporting period, particularly regarding accurate climate data, with Scope 3 emissions presenting significant difficulties (from the first reporting period research has been conducted on the availability of data from companies Sustainalytics, MSCI research).
We anticipate stricter scrutiny and expectations for data provision from portfolio companies, as FMPs comprehensive and accurate reporting to address gaps and inaccuracies. We foresee the implementation of the CSRD and ESRS playing a critical role in providing reliable and comparable information that supports the improvement of these indicators.
4. TCFD integration into ISSB & CSRD
The Task Force on Climate-Related Financial Disclosures (TCFD) has now been disbanded but it lives on with both the ISSB and CSRD. The TCFD provided recommendations for reporting on the impact of climate-related physical and transition risks and opportunities. These were based on four pillars, governance, strategy, risk management and metrics and targets covering the key areas of an organisation's structure. Both the ISSB and CSRD have integrated these pillars.
The ISSB has two main reporting requirements, International Financial Reporting Standards (IFRS S1) outlining the General Requirements for Disclosure of Sustainability-related Financial Information and (IFRS S2) Climate-related Disclosures.
Some countries have introduced mandatory reporting requirements for companies to disclose climate-related financial information using the TCFD framework. Following disbandment of the TCFD it is expected that these standards will soon be enforced by countries that currently mandate the TCFD standards (particularly outside of the EU, currently not the case for the UK or US).
The UK has introduced rules for asset managers and certain asset owners to make disclosures consistent with the TCFD’s recommendations. In addition, all UK premium-listed companies have been required to state in their Annual Report, whether they have made disclosures consistent with the TCFD’s recommendations. It is expected during 2024 that the UK will announce its own Sustainability Disclosure Standards that incorporate ISSB IFRS 2 requirements and therefore require an assessment of physical and transition risks and opportunities from climate change.
The CSRD has also integrated the need for TCFD reporting into ESRS E1, with companies required to disclose their financial, risks and opportunities linked to physical and transition changes from climate change. Encapsulating all of this, complying with ESRS E1 for CSRD reporting is expected to fulfil ISSB IFRS S2 requirements, including that for climate-related risks and opportunities. Here it can be helpful to use the TCFD implementation guidance, which gives a useful methodology for completing this and helping companies to translate climate risks and opportunities into business risks and opportunities.

TCFD & ISSB Focus

If your organisation operates outside of the EU, be aware of the ISSB reporting standards and develop a TCFD report. This will allow your company to understand the climate-related financial risks and opportunities facing your business. While, if you are in the EU take comfort in knowing that ESRS E1 covers the need for a TCFD-aligned report and if your business is currently signed up to this reporting framework some of the disclosure requirements are already covered.
5. The OECD Guidelines and UN Guiding Principles on Business and Human Rights are key for a Just Transition
The OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights (UNGPs) are essential instruments for companies striving to align their climate strategies with social equity and human rights principles, thus ensuring a responsible and inclusive transition towards a low-carbon economy.
Adherence to these frameworks not only promotes ethical practices but is also becoming mandatory. Furthermore, adherence to these frameworks also bolsters business resilience in the face of climate change implications.
Companies aspiring to meet net-zero emissions targets should not overlook the importance of a Just Transition — a concept that emphasises workers' rights and the need for sustainable development in the shift away from fossil fuels. Integrating the principles of the OECD Guidelines and UNGPs is therefore crucial. A robust commitment to these frameworks in practice entails the following key components
  • Education on the significance of a Just Transition by exploring the link between human rights frameworks and net-zero strategies. This will reinforce the understanding that climate action must not come at the expense of human and labour rights.
  • Proactively adapting these frameworks is no longer optional considering the upcoming EU regulations. For compliance with the EU Taxonomy, for instance, businesses must adhere to Minimum Safeguards rooted in OECD Guidelines and UNGPs. Familiarising with and employing these guidelines is fundamental for navigating and excelling in the evolving regulatory landscape.
  • Implement human rights due diligence processes. This involves: Scrutinising the company's current and proposed business models, operational changes, new activities, projects, or products to foresee any potential negative human rights ramifications.
  • Ensuring that your company assesses, mitigates, and reports on both existing and potential adverse human rights impacts, particularly those tied to climate strategies and investment decisions.
  • Actively monitoring and tracking how these impacts are managed and sharing this information transparently with relevant stakeholders.

Focus Areas for OECD Guidelines and UNGP

  • Perform a Gap Assessment of your company’s current practices against what is required by the OECD Guidelines and the UNGPs.
  • Develop a stakeholder engagement plan: Construct a comprehensive plan to engage with diverse stakeholder groups, which might include employees, local communities, customers, and suppliers. Identify their concerns and expectations regarding your company's climate action plans, ensuring that your transition strategies are informed, inclusive, and equitable.
Moving Forward
There are multiple moving parts with respect to climate related regulatory drivers, as the above clearly illustrates. This can actually have the reverse impact in that enterprises hesitate until such time as the regulatory landscape becomes clearer. Climate inaction has been evident over the last 18 months as enterprise have waited to see how, for example, the CSRD will affect their existing ambitions, are they eligible for the EU Taxonomy, do they still proceed with TCFD commitments etc.
The dust is now settling, however, with respect to what piece of regulation affects which jurisdiction and economic activity. Enterprises can now lay out the above, map their activities against the requirements and – with confidence - move forward on both compliance and climate action.

Want to know more?

  • Jack Robinson

    Associate Manager

    +45 51 61 05 75

    Jack Robinson

  • Patrick Moloney

    Director, Strategic Sustainability Consulting

    +45 51 61 66 46

    Patrick Moloney

  • Dale Tromans

    Consultant

    +44 7816 204102

    Dale Tromans