ESG horizon scanning: what to expect in 2024

Linklaters explore four key ESG themes that will have a significant impact on businesses globally in 2024: transition plans and transition finance; sustainability disclosure regimes; human rights and environmental due diligence; and greenwashing.

Transition plans and transition finance

There is a growing international momentum around climate transition plans and transition finance that comes from both the private sector and policymakers. Investors are increasingly calling for more robust and transparent disclosures on the actions businesses plan to take to decarbonise their operations and adapt to a lower carbon future, and a number of countries are considering making the disclosure of transition plans mandatory. This year’s annual general meeting season has only just started and already we have seen a number of shareholder resolutions asking for greater detail on businesses’ transition plans. Against this backdrop, a number of businesses have started publishing their plans in greater detail.

Transition plans are an important cornerstone to the net zero transition. Not only do they improve the information that is available to investors and lenders, enabling them to make better capital allocation decisions, they also help companies engage with the changes required to their business models, their operations and their products and services. Transition plans are also an increasingly important tool to defend against greenwashing allegations (see below).

The UK has been leading the way on recommendations for robust climate transition plans, with the UK Transition Plan Taskforce (TPT) publishing its final recommendations in October 2023 and sector-specific guidance in April 2024. The UK framework and accompanying guidance provide a set of good practice recommendations to help companies across the economy make high-quality, consistent and comparable transition plan disclosures and to set out credible and robust climate transition plans.

The UK TPT’s work has attracted significant interest from other jurisdictions and we expect that elements of the TPT framework will be picked up by regulatory authorities in other countries.

The UK government has said it plans to consult this year on the mandatory disclosure of transition plans – one of the first countries to do so – although it is not yet clear when that consultation will materialise.

The EU’s forthcoming Corporate Sustainability Due Diligence Directive (see below) will also require in-scope entities to produce a transition plan, which will have to be updated yearly and contain time-bound targets related to climate change for 2030 and in five-year steps up to 2050 and include (where appropriate) absolute emission reduction targets for Scope 1, 2 and 3 emissions. The plan will need to be updated every 12 months and contain a description of the progress the company has made towards achieving the targets.

The UK government is also hoping to lead the way on transition finance and in March the Transition Finance Market Review (TFMR) launched a call for evidence seeking views on how the UK can leverage its existing strengths as a leading financial and insurance market, legal centre and significant exporter of professional services to become a global hub for funding the global net zero transition. Although this review has been commissioned by the UK government, the intention is to look at how the UK financial market can support organisations globally to transition to net zero.

The TFMR proposes to take a broad view of what constitutes transition finance and will focus in particular on what financial products and services are required to support hard-to-abate and high-emitting sectors and the barriers to scaling transition finance in these areas. Fundamental to the review’s approach is the importance that credible transition plans can make.

Sustainability disclosure regimes

2024 will be a critical year in the implementation of various climate and other sustainability disclosure regimes across the globe but serious questions remain about how these regimes will work alongside each other and what this will mean in practice for multinationals having to report in several jurisdictions.

In particular, there are three key disclosure regimes at play:

• Global: sustainability disclosure standards published by the International Sustainability Standards Board (ISSB).
• EU: European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Directive (CSRD).
• US: climate disclosure rules published by the US SEC in March this year.

A great deal of effort has gone into ensuring the ISSB standards are as closely aligned as possible with other sustainability disclosure rules, in particular the EU’s ESRS and the disclosure recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). However, the issue remains that the ISSB global standards (and US standards) are focused on investors’ needs while the EU’s ESRS caters for a wider audience with its ‘double materiality’ requirement – which will make it difficult for these regimes to be fully interoperable.

Also, a number of jurisdictions across the globe (including the UK and in Asia) are consulting on how to implement the ISSB standards in their national rulebooks – which begs the question of whether those countries will make any ‘tweaks’ to the ISSB standards to cater for national circumstances and what additional level of complexity that will entail for in-scope entities. Adding to the uncertainty is the fact that the US climate disclosure rules have been temporarily stayed by the SEC until the various legal challenges have been resolved in court.

However, there is no denying that the EU CSRD and ESRS, which will start applying in relation to the 2024 financial year for the first cohort of EU-listed companies and large public interest entities, will have a very significant effect on how multinationals report on sustainability – with impacts that will ripple across global value chains beyond the EU. In-scope entities would do well not to underestimate the cost, time and effort that will be required to comply with the new EU regime.

Human rights and environmental due diligence

The EU continues to lead the way on human rights and environmental due diligence with its planned Corporate Sustainability Due Diligence Directive (CSDDD or CS3D). Despite some setbacks at the start of this year in the negotiations, the Directive has now been endorsed by both the Council and European Parliament. We are now just waiting for formal approval from the Council, which hopefully should be just a formality at this stage, before the Directive can be published in the Official Journal of the EU and become law. In particular, a number of changes have been made recently to the wording of the Directive, including increasing the scope thresholds so that less companies will need to comply with the new rules.

Despite the changes made to the text, the impact of this new regime – both in and outside the EU – should not be underestimated. The CSDDD will impose far-reaching obligations for in-scope entities to carry out due diligence across their value chain and to take action to mitigate actual and potential adverse impacts on human rights and the environment. For companies operating in the EU and their business partners, this is an extremely important turning point and they should prepare carefully for the entry into force of the new obligations.

But the CSDDD is not the only EU due diligence show in town – a number of EU member states (including France and Germany) have already developed their own national supply chain due diligence regimes, which will add further complexity once the EU-wide CSDDD has to be transposed into national legislation.

The EU also has separate due diligence rules for certain commodities such as batteries, conflict minerals and, most recently, commodities associated with deforestation under the new EU Deforestation Regulation, which will start to come into effect later in 2024 (although the due diligence rules may impact in-scope commodities produced or harvested from June 2023). The EU is also in the process of adopting the Forced Labour Ban Regulation which will prohibit all economic operators from placing and making available on the EU market, or exporting from the EU market, products made with forced labour.

Greenwashing

We are expecting greenwashing to remain a high priority this year for regulators, investors, consumers and activists across the globe.

Regulators in a number of jurisdictions have made it clear that greenwashing remains a priority, with ongoing regulatory investigations in Australia, the UK and elsewhere, as well as new EU legislation emerging on the substantiation of green claims. Also, the increase in sustainability disclosures required under new disclosure regimes (eg the CSRD in the EU) could also give rise to increased litigation.

Consumer protection organisations and activists in various countries are also taking action amid rising concern that consumers and investors are at risk of being misled by marketing or other claims that overstate the green/sustainability credentials of a product, business or investment, or which involve over-reliance on carbon offsets. As advertising, consumer protection and financial regulators have all been at pains to emphasise, providing a substantiated and balanced view in green claims is crucial and ‘greenhushing’ is not the answer.

Those operating in the EU market should keep a close eye on emerging new anti-greenwashing regulation – in particular the Green Claims Directive and the Empowering Consumers for the Green Transition Directive. The former is still being negotiated and will need to be picked up again after the EU elections this summer. The latter has already been adopted and EU member states will have to transpose the Directive into national law by 27 March 2026 and apply the new national rules by 27 September 2026.