As the planet continues to break climate records and corporations fail to take action, the world is witnessing a wave of policy and regulatory developments in the ESG and sustainability space aimed at catalysing change in the private sector and beyond.
From the CSDDD in the EU to China’s ESG disclosure updates, ESG Mena runs through some of the key rules, discussions and developments.
Shifting regulatory landscape in the EU
The road to more sustainable, transparent and accountable companies is a bumpy one, and while the last few years have seen numerous measures aimed at straightening things out, globally, it’s a rather confusing patchwork, with regulation also encountering considerable resistance.
Indeed, while global ESG regulations have increased by 155 per cent in the last ten years, according to some estimates, it’s been far from plain sailing.
The text of the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), in particular, has been an ongoing point of contention.
The Directive, which seeks to foster sustainable and responsible corporate behaviour, encountered a number of failed and postponed votes before a revised version was agreed to in March.
The approved CSDDD is a watered-down version of the initial text, and cuts back on the number of companies in its scope by around two-thirds.
In addition to applying to far fewer companies, the Directive has stripped back the number of activities subject to due diligence and will be introduced in phases, giving companies between three and five years to comply. Another element removed is the requirement for companies to provide financial incentives to directors to implement transition plans.
Alongside this is the EU’s Corporate Sustainability Reporting Directive (CSRD), which aims to expand the number of companies required to disclose on ESG areas, as well as the scope of reporting.
Under the Directive, companies must disclose information on the risks and opportunities arising from social and environmental issues, as well as on the impact of their activities on people and the environment.
The European Sustainability Reporting Standards (ESRS) supports the CSRD and is to be used by all those subject to CSRD, amounting to roughly 50,000 organisations.
This game-changing reporting regulation is set to shake things up and it’s impact will be wide-reaching, considering that subsidiaries of non-EU companies and third-country (non-EU) companies with revenues in Europe exceeding €150 million turnover will also be required to meet CSRD requirements.
While the first year for reporting is fast approaching, whether or not companies are ready is another question, and research has previously indicated low company preparedness.
The rules do however have the backing of investors. Indeed, a survey from Workiva found that 90 per cent of investors support CSRD, believing it will aid in making more informed investment decisions due to more robust data.
Further, in another move aimed at bolstering transparency, in February, the European Parliament and Council reached a provisional agreement on a proposal to regulate ESG rating firms, bringing them under the purview of ESMA, a move which the UK Treasury plans to emulate.
China moves to keep pace with EU, Singapore updates sustainability rules
While EU regulations may have been diluted and delayed, they have sparked a knock-on effect – including in China.
In February, China’s three major stock exchanges unveiled new sustainability reporting guidelines for listed companies, with mandatory reporting requirements for larger companies.
Under the new rules, over 400 companies will be subject to corporate sustainability disclosure across four areas: governance, strategy, risk management, and metrics and targets, with a 2026 deadline for the 2025 reporting period.
The disclosure guidelines cover a wide range of areas, including climate change, biodiversity, circular economy, energy use, supply chain responsibility, rural revitalisation, anti-corruption and more.
Looking at the wider region, Professor Lawrence Loh, Director, Centre for Governance and Sustainability, NUS Business School, National University of Singapore, said that in the global arena of sustainability, Asia is considered part of the problem and the solution, home to both highly carbon-intensive manufacturing and “huge potential” for nature-based solutions.
“Within the unique sustainability situational setting, it is crucial that Asia, especially its businesses, moves in tandem and good pace along with the global momentum of sustainability.”
Loh highlighted that with regard to corporate sustainability reporting, the GRI has been a dominant standard.
“In a joint 2023 study of 14 Asia Pacific jurisdictions by PwC and Centre for Governance and Sustainability (CGS) at NUS Business School, some 81% of the largest 50 companies use the GRI for reporting.”
Meanwhile, on climate reporting, Loh noted that Hong Kong, Japan, New Zealand, and Singapore have mandated alignment with the Task Force for Climate-Related Financial Disclosures (TCFD).
“Going forward, a key challenge in the Asia region is the response to the International Sustainability Standards Board (ISSB) disclosure standards. These came into force in January 2024, although it is left to domestic jurisdictions to stipulate the adoption timeframes.”
Loh added that Hong Kong, Japan and Singapore have taken the lead by requiring mandatory adherence to ISSB for selected companies.
In Singapore, these mandatory climate-related reporting requirements apply for listed and large non-listed companies, to be introduced in phases, with a deadline of 2025 for listed companies and 2027 for large non-listed entities.
In addition to this, the Singaporean government has introduced a Sustainability Reporting Grant. This covers up to 30 per cent of the expenses involved in generating companies’ inaugural sustainability reports in an effort to provide them with the resources they need to get started.
The Middle East perspective
After two successive COPs in the MENA region, sustainability has worked its way up the agenda and into the regulatory spotlight with the introduction of various ESG guidelines, metrics, and disclosure requirements.
Now, in the Middle East, most exchanges and regulators have launched guidelines, and in January 2023, the GCC Exchanges Committee introduced the voluntary Unified ESG Metrics for GCC Listed Companies in an effort to standardise things. However, it is worth noting that these guidelines do not replace existing ESG disclosure guidelines for GCC stock exchanges.
Mandatory ESG reporting for listed companies has already been implemented in the UAE by the Securities and Commodities Authority (SCA), while the Muscat Stock Exchange (MSX) is set to introduce mandatory reporting in 2025. Mandatory reporting is also incoming from Bahrain Bourse.
Elsewhere, in Saudi Arabia, Tadawul (Saudi Stock Exchange) launched disclosure guidelines back in 2021. In the Kingdom, these developments are largely driven by Vision 2030.
According to Leopold Zentner, Partner, AlQhtani & Partners, since these guidelines were introduced, large companies have been placing more emphasis on ESG through the creation of dedicated committees to address ESG performance. A shift is taking place among SMEs and startups, too, he said.
However, standardisation in ESG reporting remains a challenge, said Zentner.
“What works for a multinational / listed company in the industrial sector may not work for SMEs. This can be a reason as to why some are not yet fully sold on the benefits of ESG,” he noted.
That said, Zentner explained that movement toward greater standardisation is being taken.
“As an example, the Saudi Ministry of Economy and Planning, Capital Market Authority and Saudi Exchange Company signed a trilateral MOU in 2023 to enhance and harmonise bespoke ESG standards for the Kingdom.”
According to Zentner, ESG enhancement and reporting will “only gather more and more momentum and traction” in the Kingdom.
Anti-ESG wave in the US
Comparatively, in the US, ESG and sustainability progress has been caught up in political headwinds, with a number of anti-ESG bills introduced.
In fact, Thomson Reuters counted 61 anti-ESG bills that have either been introduced to state legislatures or are pending in committees in various states, including Oklahoma, South Carolina, Missouri, and West Virginia.
Despite this backdrop, US regulators recently voted to green-light the first nationwide climate disclosure rule in the US; much like the CSDDD, the legislation faced backlash and has been significantly scaled back.
When first proposed, the Securities and Exchange Commission (SEC) applied to all public companies, but in its final form, it applies only to large, publicly traded companies that will now be required to disclose climate change-related information to investors.
Crucially, Scope 3 disclosures have also been omitted from the rule, while disclosure of Scope 1 and 2 emissions is required only when they are deemed material.
Moreover, while the final version of the rules was already diluted, the requirements have faced a number of legal challenges and the SEC has since chosen to stay the rules pending judicial review.
Although this means a pause on a national level, on a state level, California is leading the way on climate reporting, going beyond SEC’s proposals by requiring public and private companies with more than $1 billion in annual revenues to disclose emissions, including Scope 3 emissions from 2027.
The road ahead
With such variability across different geographies and multiple frameworks and regulations, lack of hamonisation is a key concern and risks fragmentation.
Indeed, Sameera Fernandes, Director ‑ Corporate Affairs & Sustainability, Century Financial, notes that while global initiatives mark a “decisive move” towards harmonised ESG reporting and mandatory disclosures, again, the standardisation obstacle remains.
“With over 80 per cent of the world’s largest corporations reporting on sustainability, the challenge remains in standardising these diverse practices.”
Here, like Loh, Fernandes spotlighted the International Sustainability Standards Board’s (ISSB) proposal for global reporting standards, which she said “heralds a future of reliable ESG data,” something “crucial” for informed decision-making.
Alongside this, some have pegged hopes that the so-called Brussels effect could spark further alignment.
However, considering that in many cases, international regulations have been significantly watered down, to see the real change required to combat climate change, inequality and corruption, some say companies need to step up and take the lead.
Indeed here, Fernandes says the real call to action lies beyond mere compliance. “The urgent need for a united front against the looming threats of climate change and social inequities calls for immediate, collective action.”
“As we stand at this pivotal crossroads, the choices we make today will define our legacy. Let us champion transparency, strive for sustainability excellence, and mobilise for impactful change, setting new benchmarks for a greener, equitable world. The time to act is now.”
By Madaline Dunn, Lead Journalist, ESG Mena