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A guide to international ESG regulation and legislation
11th April 2024
In this third article in our ESG insight series, we look at some of the key international ESG (Environmental, Social, Governance) regulations and legislation and their impact on UK SMEs.
The International Sustainability Standards Board (ISSB)
The IFRS (International Financial Reporting Standards) Foundation has created the ISSB (International Sustainability Standards Board) to sit alongside the existing IASB (International Accounting Standards Board).
The ISSB aims to develop a comprehensive global baseline of sustainability disclosure standards to meet investors’ information needs. These standards will provide a framework for comprehensive reporting that includes environmental, social, and governance factors, in addition to financial information. This will enable investors and stakeholders to review a company’s long-term sustainability and its impact on people, planet, and prosperity.
The ISSB's S1 and S2 standards were published in June 2023. The UK Government has indicated its intention for UK companies to adopt the ISSB’s Sustainable Disclosure Standards, and a Technical Advisory Committee is currently exploring an appropriate endorsement mechanism for launch in July 2024.
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Who needs to comply? |
What needs to be reported? |
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Decisions regarding required disclosure will be taken independently by the UK government for UK registered companies and limited liability partnerships, and by the Financial Conduct Authority (FCA) for UK listed companies. Whilst it is anticipated that listed companies will be required to follow UK SDS once endorsed by the UK government and FCA, large private companies could also be brought into scope initially, with application possibly falling on smaller businesses in the future. |
IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium, and long term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1. Both fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). |
Further details: UK Sustainability Disclosure Standards - GOV.UK
IFRS - ISSB issues inaugural global sustainability disclosure standards
IFRS - IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information.
IFRS - IFRS S2 Climate-related Disclosures
Corporate Sustainability Reporting Directive (CSRD)
The CSRD has replaced the EU’s Non-Financial Reporting Directive (NFRD) that established the reporting principles for large companies operating in the EU.
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Who needs to comply? |
What needs to be reported? |
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Large organisations with operations in the EU. An EU company is large if it meets two out of three of the following criteria in each of the last two consecutive years:
Several other conditions also apply e.g. non-EU companies that have a turnover of above €150 million in the EU will have to comply. The scope expands to small and medium-sized EU and non-EU listed entities from 1 January 2026, and to additional group-wide reporting requirements for non-EU entities with significant EU activity from 1 January 2028. |
CSRD requires a ‘double materiality’ assessment in its reporting scope. This means that companies are required to identify –
In addition, the CSRD requires organisations to set targets on their GHG emissions, set a baseline and report progress towards these targets. |
Further details: Corporate sustainability reporting - European Commission
The EU Taxonomy
The EU Taxonomy is a green classification system that translates the EU’s climate and environmental objectives into criteria for specific economic activities for investment purposes.
It recognises as green, or ‘environmentally sustainable,’ economic activities that make a substantial contribution to at least one of the EU’s climate and environmental objectives, while at the same time not significantly harming any of these objectives and meeting minimum social safeguards.
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Who needs to comply? |
What needs to be reported? |
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Large public-interest companies already subject to the NFRD (Non-Financial reporting Directive). Large defined as a company meeting two out of three of the following criteria in each of the last two consecutive years:
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The proportion of turnover derived from products or services associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9; and the proportion of capital and operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable under Articles 3 and 9. |
Further details: FAQ: What is the EU Taxonomy and how will it work in practice?
Carbon Border Adjustment Mechanism (CBAM)
From 1 October 2023, the EU’s Carbon Border Adjustment Mechanism (CBAM) has entered effect, starting with a transitional phase that runs until the end of 2025. During this period, EU-based importers of goods covered by CBAM from non-EU countries are obligated to report the embedded emissions of their imports, without incurring any financial liabilities. The obligation to purchase and surrender CBAM certificates will then apply from 2026, effectively imposing a carbon price that should reflect the allowance price level in the EU Emissions Trading System (EU ETS).
The UK Government announced on 18 December 2023 that a UK CBAM will be introduced by 2027. Whilst further details will be consulted on during 2024, it seems clear there will be both similarities and differences from the EU CBAM.
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Who needs to comply? |
What needs to be reported? |
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UK businesses exporting certain goods to the EU. |
Information will include commodity codes, country of origin, direct emissions from fuel combustion and process emissions, as well as indirect emissions from electrical energy consumed. |
Further details about the UK CBAM: Factsheet: UK Carbon Border Adjustment Mechanism - GOV.UK
More details about the EU CBAM: Carbon Border Adjustment Mechanism - European Commission
A separate insight explaining CBAM in more detail will be published soon.
There are other regulations in the pipeline and this article serves to give an insight into some of the main ones.
Whilst new and emerging ESG legislation will impact directly on the larger corporate entities, those SMEs and smaller organisations in their supply chain will be indirectly affected. This is already creating requests to SMEs for information on their environmental impact, their social policies, and their governance processes.
If you are interested in understanding more about sustainability and ESG, contact Fleur Lewis, partner and responsible business lead, or visit our Responsible Business Hub to discover our latest Bishop Fleming Impact Report.
In our next insight in this series we share some tips on how to integrate sustainability and ESG reporting into the business decision making process.
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