Growth in ESG regulation

Environmental, Social and Governance (ESG) regulations are increasing across the world. The EU has been leading the way in this area with a strong focus on sustainability, largely driven by concerns about climate change. Although the UK is no longer part of the EU, its laws still have a considerable influence over our own. 

We expect to see new sustainability-based regulation introduced in the UK in 2024, including new climate related disclosure requirements for firms regulated by the Financial Conduct Authority (FCA). The aim is to improve the quality of sustainability information available to customers, reduce greenwashing and encourage sustainable investments. 

We also expect to see the introduction of more ESG reporting rules. In early 2023 we saw the introduction of the Corporate Sustainability Reporting Directive which applies to large EU companies and requires them to report on non-financial sustainability focused matters, such as environmental issues, social responsibility, and anti-corruption measures. The EU Commission has already proposed various updates to the Directive to amend the scope and encourage greater transparency on issues of sustainability.

The Corporate Sustainability Due Diligence Directive is also currently being negotiated by EU member states and expected to be implemented in early 2025. It will apply to EU and non-EU companies operating in the EU market, subject to certain thresholds. The directive will introduce mandatory due diligence rules for companies and require them to be more proactive in terms of preventing and minimising environmental risks. The directive has been hotly debated between members states. One of the key areas of disagreement is whether the scope of the directive should cover the financial sector.  

Within the UK, we anticipate increased regulation around the disclosure of non-financial information about social responsibility, anti-corruption, diversity and the protection of the environment (for example, information about the business' social impact and environmental footprint). Read more about non-financial reporting in 'Greenwashing litigation and stakeholder activism: A new dawn'.

Whilst sustainability will inevitably remain a priority in the years to come, the increasing focus on ESG reporting rules means that businesses will need to focus their efforts on building comprehensive and reliable reporting systems internally. Businesses must ensure they keep abreast of regulatory developments and implement necessary changes to policies and practices. While regulatory requirements should certainly form an integral part of sustainability objectives within business plans, it is advisable for businesses to see this as a starting point. Ambitious businesses, looking to put themselves ahead of the curve of future changes, should consider adopting more ambitious targets around ESG.