ESG in 2024: getting to grips with the new paradigm

Due diligence, stock exchange requirements, carbon markets and nature will be on next year's ESG agenda, write HSF’s Silke Goldberg, Ernst Muller and Tihomir Svilanovic

By almost any metric, 2023 was a watershed year for ESG-related developments globally.

The defining ESG-related trend of 2023 was the roll-out of various ESG-related disclosure frameworks. The most critical developments include the sustainability disclosure standards published by the International Sustainability Standards Board (ISSB) in June; the first set of European Sustainability Reporting Standards (ESRS) published by the European Commission in July (against which companies must report against under the EU Corporate Sustainability Reporting Directive (CSRD); the final supporting additional guidance published by the Task Force on Nature Related Disclosures (TNFD) in September; and the final Disclosure Framework published by the UK Transition Plan Taskforce (TPT) in November.

Not all ESG reporting and disclosure frameworks are mandatory. Most of those that are (notably under the CSRD) will be phased in gradually over the coming years. It is clear, however, that minimum expectations for sustainability reporting have now been set. Going forward, businesses will be under increasing scrutiny from regulators, investors and wider stakeholders.

The coming year will build on this momentum and bring with it a raft of further ESG developments. We expect the following trends to feature most prominently on the ESG agenda in 2024.

Trend 1 – greater emphasis on due diligence

The first key trend of 2024 will see companies place a greater emphasis on due diligence, particularly in relation to their supply chains. This trend will unfold across two strands. First, companies which are or will be subject to mandatory reporting and disclosure requirements – which frequently require disclosure of information relating to their supply chains and value chains – will conduct more extensive due diligence into their supply chains and the use of their products in their downstream value chains, in order to be able to comply with these disclosure obligations.

Second, 2024 will see increasing regulation setting mandatory requirements for supply and value chain due diligence. The EU’s Corporate Sustainability Due Diligence Directive (CS3D), likely to be adopted in 2024, will play a leading role. As currently proposed, the CS3D will require companies to monitor adverse human rights and environmental impacts not only by them and their subsidiaries, but also by entities that are part of their value chain and with which they have an established business relationship, in each case wherever incorporated or located. This ‘extraterritorial’ effect of the CS3D means that the due diligence obligations it imposes on EU companies will have a ripple effect impacting businesses around the world.

Trend 2 – the role of stock exchanges

The second key trend of 2024 will focus on how stock exchanges respond to the various disclosure frameworks rolled out in 2023 and ones due to be published in 2024. While select aspects of the voluntary reporting framework have historically been incorporated into mandatory disclosure and reporting requirements (such as the UK Listing Rules requirements regarding climate related disclosures), the list of compulsory disclosures have been limited.  

In 2024, stock exchanges may increasingly transition towards a mandatory sustainability disclosure regime. The UK’s FCA and Singapore’s Sustainability Reporting Advisory Committee have both announced consultations on amendments to their respective listing rules to align with the sustainability reporting requirements set out in the ISSB standards, and investors eagerly await the publication of the final climate disclosure rules of the US Securities Exchange Commission.

Trend 3 – towards a global carbon market

The third key trend of 2024 will centre on global efforts to adopt a unified global mechanism for carbon pricing and the trading of carbon credits.

In 2023, the EU adopted its Carbon Border Adjustment Mechanism (CBAM), CBAM which will, from 2026, effectively require EU importers of certain goods to pay a carbon tariff based on the CO2 emissions associated with their production, accounting for any carbon tariffs paid on the production of the relevant goods in their country of production. Given the extraterritorial consequences of CBAM, key exporters of goods from jurisdictions outside the EU (including emerging markets and developing economies) will be under significant pressure to reduce the emissions associated with their production. Their host states may likewise need to introduce their own carbon taxation or emissions trading schemes.

Notably, negotiations at COP28 to establish a global carbon market system failed in large part owing to objections from the EU that the proposed rules were not sufficient to meet the standards of its own emissions trading system. The coming year is likely to see a continuation of these efforts as key exporting countries increasingly face the prospect of the CBAM rendering their goods less competitive.

Trend 4 – increased focus on nature

Perhaps the most significant ESG trend we are likely to see in 2024 is an increased focus on the impact of businesses on nature more generally. To date, discourse on companies’ ESG-related impacts, risks and opportunities have largely focused on climate change. The publication of the final TNFD recommendations (which complements the Kunming-Montreal Global Biodiversity Framework that was adopted at COP15 in December 2022) however significantly expands the universe of topics which businesses are required to consider in their sustainability reporting.

As stakeholder expectations focus in on nature more broadly, businesses will be required to rapidly evolve their approach to sustainability beyond greenhouse gas emissions and to consider how the changing operating environment (including weather patterns, biodiversity, access to water and other ecosystem services) affects the continued viability of their current business models and strategies.

While 2023 was a significant year for the establishment of new ESG reporting and disclosure frameworks, 2024 will be the year where businesses get to grips with the new ESG paradigm. 

Silke Goldberg is a partner and head of Herbert Smith Freehills’ ESG and climate change practices. Ernst Muller is a senior associate at HSF and Tihomir Svilanovic is an associate.

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