Danesmead ESG 2024 Round-Up

11 Dec

2024 has been our busiest and most varied year yet, supporting our clients with ESG and sustainability related projects, regulatory alignment, voluntary frameworks and reporting. Read on for our reflections from the year.

Regulatory Progress

2024 saw important developments in many of the ESG regulatory frameworks and standards that impact our clients, including SFDR, CSRD, SDR, TCFD, and PRI.

SFDR: The EU is still deliberating the future of the framework but it seems increasingly likely they will make changes that formalise the use of SFDR as a labelling regime instead of purely disclosures. The latest opinions from the ESAs seek to replace the Articles 8 and 9 designations with simplified product labels including “Sustainable” and “Transition” with the aim of minimising complexity and confusion as well as enhancing the interaction between SFDR and other disclosure rules. ESMA has also suggested that all investment funds should make basic sustainability disclosures, which would broaden the scope of SFDR disclosures to include Article 6 funds in due course. We expect to hear more from the EU Commission in Q2 next year.

CSRD: With reports due in early 2025 from the first wave of in scope companies, many are only just realising the sheer scale and scope of the undertaking. But it’s the second wave that is going to have the biggest impact, with the scope including certain public and private, EU and non-EU companies. By 2028, some 50,000 corporates will be producing CSRD reports. Among our clients, asset management firms with EU domiciled SPVs or management entities are already starting work on double materiality assessments.

SDR: In the UK, the FCA is continuing its agenda empathising the need for fair, clear, and non-misleading sustainability claims. The Anti-greenwashing rule launched in 2024 – which applies to all regulated UK firms – and covers all sustainability-related communications about financial products or services. This includes ensuring website images, marketing materials content, policies, fund documents, and other communications and claims meet the FCA’s 4C criteria: correct, clear, complete, and comparable. Reviewing marketing and other documentation with these in mind is strongly advised.

TCFD: In the UK, the FCA’s mandatory requirement on firms above £5B in AUM to report in line with TCFD came into force in June 2024. Reporting proved a challenge for certain strategies e.g. macro funds with minimal corporate exposure, or those in markets where climate date is hard to come by. We’re now seeing a more defined split in TCFD reporting, with those with more TCFD experience (and better access to data) producing more sophisticated, glossy reports including the more challenging quantitative elements like scenario analysis, while the newer entrants with the more unusual strategies tend to err on the stricter side of the “comply or explain” rules and produce more compliance focused reports.

PRI: Having updated its reporting requirements for this year’s signatories, the PRI is now moving beyond traditional transparency reporting towards what looks rather like a labelling regime. The PRI Progression Pathways framework will be released in 2025; we plan to work on mapping signatories across to the Progression Pathways as soon as possible. 2025 reporting remains stable, 2026 introduces new foundational reporting, and 2027 introduces new Progression Pathways reporting.

Elections

2024 was the year of the election. Almost half the world’s population went to the polls this year, the outcomes of which could have significant implications for ESG and the future of sustainable finance.

UK: The Labour Government came to power promising to make the country a global leader in sustainable finance. We have already seen progress: proposed legislation to bring ESG rating providers under FCA oversight, consultations on UK Green Taxonomy and climate transition plans, a Call for Evidence on the proposed Financial Services Growth and Competitiveness Strategy, and a commitment to continue plans to adopt the International Sustainability Standards Board (ISSB) standards into UK law. The UK Prime Minister also announced new climate targets, raising the emissions reduction goal from 78% to 81% by 2035.

Despite the increase in regulation and disclosure these measures may create in the short term, we believe they will also help to streamline the current system and provide much needed clarity, hopefully easing the regulatory burden for investors and companies over time.

US: Trump has promised to roll back certain key regulatory commitments such as the Paris Climate Agreement, the enforcement of environmental protections, and the Inflation Reduction Act. The appearance of “Financial Companies that Boycott Energy Companies” on divestment statute lists alongside terrorist organisations is hardly promising either. Finally, it remains to be seen if the new administration will push through the SEC climate disclosure regulations, at least in their current form (though some think they may drop the “Integration” label but keep “Impact” to more clearly differentiate ESG approaches).

All is not lost. Though federal regulations may weaken initially, firms and companies will increasingly need to comply with state regulations, like the California state climate rules (SB 253 and SB 261), and international regulations and standards like ISSB as well as overseas rules for those doing business in the EU (e.g. SFDR and CSRD). Let’s not forget that investor demand for ESG disclosures also remains strong.

Looking Ahead

We have seen huge developments in ESG and sustainability over the last 5 years, and the nature of the work we do with our clients has developed to reflect the evolution. Where ESG was once a differentiator, the focus is now on regulation, compliance and reporting. We believe this trend is here to stay, and we’re ready to assist.

And finally, a quick 2025 checklist to keep you on track:

SFDR – look out for EU Commission’s “future of SFDR” expected in Q2 2025.
PRI – look out for the full Progression Pathways Initiative and map across expected H1 2025.
CSRD – check if you’re in scope, get planning ASAP and look at our software solution.
Enforcement – with the first SFDR sanction issued by the CSSF, and the plethora of anti-greenwashing regulation now in place, compliance and record keeping are now more important than ever.
Biodiversity – hot topic we’re expecting to see rising in investor DDQs. Read more about TNFD and Biodiversity here.