Guide to mandatory sustainability reporting and compliance

Summary

With new mandatory sustainability regulations, corporate sustainability reporting is becoming more complex and challenging.

This article will summarise the requirements for each of the mandatory sustainability reporting regulations and an overview to help you manage them.

Corporate sustainability reporting is about to become far stricter and more complex over the coming years.

As more pressure is placed on businesses to become more transparent and proactive with their sustainability efforts, corporate sustainability reporting is set to play a key role in attaining and proving compliance.

Corporate sustainability managers can expect more regulations, more reporting, and more long, jargon-heavy documentation to read through.

Mandatory Sustainability Frameworks

This article will cover everything you need to know about mandatory corporate sustainability reporting for corporations in 2024 and beyond.

Read on for a detailed breakdown of all the mandatory frameworks, what they mean, what you need to do to comply, how to report accurately, and how to make your carbon measurement and reduction easier.

1. Corporate Sustainability Reporting Directive (CSRD)

The EU’s CSRD aims to measure and reduce business impact on climate change.

Businesses within the scope of the CSRD must change how they approach sustainability reporting, as this new directive is expanding on the Non-Financial Reporting Directive (NFRD), which had been in place since 2014.

Who is affected?

European companies meeting certain criteria must comply. Based on revenue and operations, some non-EU companies with substantial operations in the EU will also have to comply.

Businesses fall within the scope of the CSRD if they meet two or more of these stipulations:

• 250 or more employees
• €50 million in net turnover
• €25 million in assets.

Non-EU companies with a turnover of above €150 million in the EU also fall within scope.

The CSRD will not impose new reporting requirements on small-to-medium-sized enterprises (SMEs) other than those with securities listed on regulated markets.

UK-based organisations with EU-based clients may be affected by the CSRD as well.

What is reported?

This directive requires companies to report on sustainability-related data related to business operations, and the impact they have on society and the environment.

This includes environmental concerns, climate protection, and combating climate change, as well as water, the use of other energy resources, and pollution. Also included is the energy consumption of technology, like websites and web hosting providers.

The reporting requirements of the CSRD are becoming far more thorough than the existing NFRD.

The NFRD’s reporting requirements will continue, including:

• Protection of the environment
• Social responsibility
• Diversity
• Treatment of employees
• Respect for human rights
• Anti-corruption and bribery.

In addition to those, the CSRD will introduce new reporting requirements like:

• The process of selecting material topics for stakeholders
• Targets and progress of sustainability initiatives, including aligning the business model and strategy with the EU goal to achieve net zero by 2050
• The most significant negative impacts related to ESG, like the degree of exposure to coal, oil, and gas-related activities
• Administrative, management, and governance bodies’ roles and impact
• Information regarding intangible factors like social, human, and intellectual capital
• Descriptions of corporate policies in relation to sustainability issues
• Descriptions of the company’s most material risks related to sustainability issues.

Further reading

Read our in-depth guide for complying with the CSRD here if you’d like to learn more.

2. Task Force on Climate-Related Financial Disclosures (TCFD) – Public Companies

The TCFD aims to provide recommendations on the information public companies should disclose to help investors make informed decisions regarding climate-related risks and opportunities.

As of 2024, TCFD recommendations will transition to be managed by the International Financial Reporting Standards (IFRS), over from the Financial Stability Board.

These recommendations have also been incorporated into the International Sustainability Standards Board (ISSB) standard, which will be implemented globally in 2024. Investor-led, TCFD recommendations will be enforced globally through local regulations.

Who does this affect?

The Financial Conduct Authority (FCA) regulations for public companies apply to:

• Premium listed companies, from January 1, 2021
• Standard listed companies, from January 1, 2022

What needs to be reported?

Companies must disclose information with regard to:

• Governance – Is climate change governance defined and sufficient at all hierarchical levels, particularly at the highest level?
• Strategy – What are the impacts (actual and potential) of climate-related risks and opportunities on business strategy and financial planning? How resilient is the business strategy under various climate scenarios, including the 2°C scenario?
• Risk management – How will they identify and manage climate-related risks and opportunities within the company? How does this approach fit with the company’s general risk management?
• Measures and objectives – What indicators and targets should an organisation use to measure and manage climate-related risks and opportunities? What are the company’s Scope 1, 2 and 3 emissions?

TCFD disclosures must be included in public filings. If the TCFD’s recommendations aren’t implemented, companies will be required to explain why and highlight the steps they’ll be taking to address the gaps.

What are the benefits?

There are some benefits of the TCFD for public companies. These include:

• Meeting best practices in climate-related financial disclosures, which has been mandatory in the UK for large companies since April 2022.
• Gaining personalised analysis and strategy for climate change exposure will aid economic robustness.
• Effective disclosure encourages transparency and risk analysis, leading to informed investment choices and reduced capital loss.
• It also encourages the identification of opportunities so an organisation can benefit from forward-thinking on climate change.
• TCFD recommendations are incorporated into the credit rating of Standard and Poor’s Global Rating.
• When utilised, TCFD can provide businesses with certainty that they’re meeting investors’ expectations and properly integrating climate risk into their wider business strategy.
• It also provides a robust measurement, reporting, and verification (MRV) system for effective monitoring.

3. TCFD – International Regulations

Several jurisdictions outside of Europe have implemented their own climate risk reporting requirements, which are somewhat aligned with the recommendations of the TCFD and/or IFRS I and II.

This landscape is rapidly evolving, so we’ll provide updates as changes are made over the coming months and years.

Who does this affect?

Australia, Canada, Hong Kong, Japan, Malaysia, New Zealand, Nigeria, Singapore and the UK have all indicated they’ll introduce IFRS I and II sometime in future.

What is reported?

The information disclosed will vary from region to region, but will always include some, if not all, of the TCFD’s recommendations. Additionally, some disclosures will require additional sustainability-related disclosures.

• Australia: Mandatory disclosure from 2024/2025
• Brazil: BCB regulations from 2022, CVM Resolution 59 from 2023
• California: Climate Disclosure Bill from 2025
• Canada: OSFI Regulations from 2024, Crown Corporations from 2022, CSSB TBC
• Colombia: Regulation 031 from 2021
• Egypt: FRA Decrees 107 and 108 from 2022
• The EU: CSRD from 2023
• Hong Kong: The Exchange Regulations from 2025
• Japan: FSA for listed companies from 2023, SSBJ TBC
• New Zealand: CRD for around 200 companies from 2023
• Singapore: SGX applies to all SGX-listed issuers from 2022
• Switzerland: Ordinance on Climate Disclosures from 2024
• USA: SEC Climate Disclosures Rule from 2024.

4. EU Taxonomy

The EU Taxonomy is a classification establishing which economic activities are sustainable according to climate, environmental, and social criteria.

It’s part of the EU’s plan to reach climate neutrality by 2050 and is crucial to the European Sustainable Finance Strategy.

Who does this affect?

The EU Taxonomy applies to over 11,000 organisations, including:

• Large companies and financial institutions with more than 500 employees (with a balance sheet of more than €20m or a turnover of more than €40m), which are already required to provide a declaration of extra-financial performance under the Non-Financial Reporting Directive (NFRD).
• Any organisation that uses the following information: financial market players, financial supervisory institutions (such as central banks), and all member states when they establish public measures, standards, or labels for green financial products or bonds.

From 2024, large companies and financial institutions that are already required to provide a declaration under the NFRD and meet two of the three following criteria:

• 250 employees
• A balance sheet of more than €25m
• Turnover of more than €50m.

From 2025 the timeline will align with that of the Corporate Sustainability Reporting Directive (CSRD):

• From the 2025 financial year: large companies not subject to the NFRD (publication in 2026)
• From the 2026 financial year: listed SMEs (publication in 2027, derogation possible until 2028)
• From 2028: large non-European groups with more than €150m turnover in the EU (publication in 2029).

What is reported?

Since January 2022, companies and financial institutions have been required to publish their analysis of eligibility for the European Taxonomy.

Alignment will have to be communicated publicly in 2023 for companies and in 2024 for financial institutions.

The eligibility analysis represents an analysis of the company’s or the financed activities that the EU considers to contribute significantly to the ecological transition.

The shares of turnover, operating expenditure (OPEX), and capital expenditure (CAPEX) of these activities must be published.

The alignment study consists of verifying that the eligible activities meet the technical criteria ensuring that they’re sustainable.

The economic activities must contribute to one of the following environmental objectives and not harm the other objectives while respecting social rights:

1. Climate change mitigation
2. Climate change adaptation
3. Sustainable use and protection of water and marine resources
4. Transition to a circular economy
5. Pollution prevention and control
6. Protection and restoration of biodiversity and ecosystems.

What are the benefits?

Compliance with the EU Taxonomy presents a variety of benefits, including:

• Establishing a harmonised classification of green activities, promoting consistency across the EU.
• Allowing investors to compare portfolios and financial products based on environmental characteristics.
• Ensuring organisations in the financial markets across Europe align with the commitments made in the Paris Agreement.
• Supporting legislative initiatives affecting reporting, turnover, capital and operating expenditure, eco-labelling, and standards.

5. Climate-Related Financial Disclosure (CFD)

The climate-related financial disclosure (CFD) regulations were originally implemented in April 2022. They are regulated by the Financial Reporting Council (FRC) ‘s conduct committee.

Who does this affect?

The CFD regulations apply to companies for which one or more of the following applies:

• A UK company is currently required to produce a non-financial information statement, with 500 or more employees, and either with transferable securities admitted to trading on a UK-regulated market or banning companies or insurance companies.
• Companies with 500 or more employees and securities admitted to AIM
• Companies with 500 or more employees and turnover of £500m or more.

The CFD also applies to some LLPs meeting the following criteria:

• LLPs that are not traded or banking LLPs and have 500 or more employees and a turnover of £500m or more
• LLPs that are traded or banking LLPs with 500 or more employees.

The regulations apply for financial years starting on or after 6th April 2022.

What is reported?

While the CFD is mostly aligned with the TCFD recommendations, there are some key differences, including:

• The CFD has nine recommendations, two fewer than the TCFD’s eleven.
• An explanation of whether risks are assessed at the group or subsidiary level
• Climate scenario analysis that includes a 1.5C scenario and detailed analysis of results every three years.

CFD recommendations focus on the “why?” as opposed to the “what?” and “how?” covered by the TCFD. For example, WHY particular scenarios were used for CSA.

Disclosure should appear in the annual report.

6. SEC

The SEC climate disclosure rule aims to enhance the climate-related disclosures of US publicly traded companies by including information relating to climate-related risks.

Who does this affect?

These SEC regulations will apply to US publicly traded companies, including both foreign and domestic organisations.

For smaller companies, the regulations are expected to be applicable for FY2024 and FY2025.

What is reported?

The SEC is broadly aligned to the four pillars of the TCFD, but with some key differences:

Governance:

• This includes a requirement to disclose whether the board or management have climate-risk expertise.
• Disclosures relating to opportunities are not mandatory, unlike the TCFD.

Strategy, business model, and outlook:

• This includes impacts of climate-related events and transition activities on using pre-defined KPIs.
• CSA disclosure is only required if undertaken by the organisation, whereas under the TCFD it’s a core pillar.

Risk Management:

• Here, companies must disclose the impacts of climate-related risks on specific line items in their financial statements.

GHG emission metrics:

• Companies must disclose scope 1 and 2 emissions intensities.
• This requires limited assurance of scope 1 and 2 emissions.
• Companies must disclose details of RECs and offsets used by the organisation.

Exemptions exist for smaller companies regarding scope 3 disclosures.

Information to be disclosed in financial statements and annual reports. For example, Form 10-K.

What are the benefits?

These SEC regulations will enable more transparency of climate-related risk information for investors of US-based companies.

7. Corporate Sustainability Due Diligence Directive (CSDDD)

The CSDDD was provisionally agreed upon by the European Council and European Parliament in December 2023. Its aim is to enhance the protection of the environment.

The directive sets requirements for large companies regarding the impacts their operations, subsidiaries, and partners have on human rights and the environment.

Who does this affect?

• Large EU companies with more than 500 employees and a net worldwide turnover of over €150m
• Non-EU companies with over €150m turnover generated in the EU within three years of the entry into force of the CSDDD. The European Commission will publish a list of non-EU companies that fall under the scope of the directive
• Financial institutions will be excluded from the directive, with a possible review for future inclusion.

No date has been set yet for compliance, but 2027 has been suggested.

What is reported?

Under the CSDDD, companies must identify, mitigate, and prevent negative actual and potential human rights and environmental impacts in their operations, their subsidiaries’ operations, and those of their business partners.

This should cover upstream business partners and partially the downstream activities such as distribution or recycling.

The directive includes duties for directors, which mandate the implementation of a due diligence process integrated into corporate strategy.

Companies must develop a transition plan that ensures their business model complies with limiting warming to 1.5C.

Companies not in compliance could face fines of up to 5% of their net turnover.

What are the benefits?

Benefits of the CSDDD include:

• Protection of the environment and human rights
• Increased transparency
• Greater awareness of a company’s negative impacts
• Risk management and resilience.
  

8. California Climate Disclosure Bill

The California Climate Disclosure Bill consists of Senate Bill (SB) 253, which mandates the disclosure of emissions, and SB 261, which mandates disclosures in line with the recommendations of the TCFD. These regulations are set to come into place from 2026.

Who does this affect?

SB 253 applies to US companies doing business in California with annual, global revenues exceeding $1b. SB 261 applies to US companies doing business in California with annual global revenues of more than $500m.

What is reported?

The requirements of this bill are mostly aligned to the four pillars of the TCFD, but with a few additions, such as Companies must evaluate climate-related financial risk based on “immediate and long-term financial outcomes.”

Metrics and Targets:

• Scope 3 emissions disclosure is required
• Limited assurance of scope 1 and 2 emissions up until 2030, and
• then reasonable assurance thereafter
• Scope 3 emissions will need to be assured to a limited standard by
• 2030
• Scope 3 emissions must be disclosed no later than 180 days after
• disclosing scope 1 and 2 emissions.

Companies failing to comply with SB 253 may face penalties of up to $500,000 per year.

Companies failing to comply with SB 261 may face penalties of up to $50,000 per year.

What are the benefits?

Complying with this bill will:

• Enhance transparency for investors
• Standardise disclosures for companies operating in California
• Align public investment with climate goals.

Organisations will enhance and protect their brand reputation, attract more capital, and track and benchmark progress. The framework will also help financial institutions to identify nature-related risks and opportunities.

Sustainability reporting guides

This guide to mandatory sustainability reporting frameworks is part of a wider series where we’ve detailed all the voluntary and mandatory reporting requirements for sustainability and carbon reduction across various sectors.

You can find more guidance in the other articles in this series here:

1. Mandatory sustainability frameworks
2. Mandatory sustainability frameworks for financial institutions
3. Mandatory energy and emissions sustainability frameworks
4. Voluntary sustainability frameworks
5. Voluntary energy and emissions sustainability frameworks
6. Voluntary sustainability frameworks for financial institutions

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