In the last few years, Environmental, Social, and Governance (ESG) principles have become critical factors in determining a business’ sustainability and societal impact. The EU and the UK have been leading the development of regulations that aim to standardise ESG reporting and eliminate greenwashing, which has become a growing concern.  

As businesses with over 500 employees must start meeting ESG reporting requirements from the start of the 2024 financial year, in this guide, we break down the key ESG regulations, who they affect and what you need to do to be compliant. 

UK and EU ESG reporting regulations

EU: Corporate Sustainability Reporting Directive (CSRD) 

The Corporate Sustainability Reporting Directive (CSRD) came into effect in January 2023 and requires EU businesses to disclose their environmental and social impact and the impact of their ESG initiatives on their business finances. For instance, a business must report how its energy use impacts the environment, how it intends to reduce this impact and how achieving this will affect its finances. CSRD reporting must be publicly available and all disclosures audited by a third party. 

The directive affects primarily large companies. Any company meeting two out of three criteria (over €40 million net turnover, over €20 million balance sheet assets, or more than 250 employees) will be required to comply. 

EU: Sustainable Financial Disclosure Regulation (SFDR) 

The Sustainable Financial Disclosure Regulation (SFDR) has been in effect since April 2021. It focuses on businesses in the financial sector, including pension fund providers, insurers, asset managers, financial advisors, venture capital funds and banks operating within the European Economic Area (EEA). Its main aims are to increase clarity and comparability of information on how sustainability factors are considered in financial products. Those affects must consider how they consider ESG  risks in their investment decisions (both positive and negative impacts) and information on specific sustainability-related investment products they offer. 

EU: Taxonomy 

The EU Taxonomy is a classification system established to create a common language for what qualifies as an “environmentally sustainable” economic activity. Under the SFDR framework, investors are required to report on the EU Taxonomy (EUT), consisting of 18 criteria that encompass a range of sustainable economic activities. This framework evaluates investments aligned with standards such as climate change mitigation, circular economy practices and biodiversity preservation in line with the objectives of the Paris Agreement. 

The Taxonomy affects large companies subject to the CSRD, indirectly companies marketing themselves as sustainable, financial services companies offering sustainability-related products and investors who can use the tool to identify investments genuinely contributing to environmental sustainability. 

Overall, the EU Taxonomy is a key piece of the EU’s sustainable finance framework, impacting companies seeking sustainable investments and financial institutions managing those investments. It also empowers investors to make informed decisions based on a shared understanding of sustainability. 

UK: Sustainable Disclosure Requirements (SDR) 

The Sustainability Disclosure Requirements (SDR) are a set of rules aimed at increasing transparency and reducing misleading information (greenwashing) in sustainable investment products in the UK. Requirements affect financial services firms who must comply with the anti-greenwashing rule and labelling requirements for investment products they offer and investment product distributors who need to ensure product information (including labels) is available to consumers. 

UK: Green Taxonomy 

The UK Green Taxonomy is still under development. Similar to the EU Taxonomy, it aims to define what qualifies as an “environmentally sustainable” economic activity in the UK context. This will help tackle greenwashing and promote investments that support the UK’s net-zero goals. The Taxonomy is likely to affect large companies who may need to disclose how their activities align with the Taxonomy (similar to the EU’s CSRD requirements). This could be especially relevant for companies issuing green bonds or promoting themselves as sustainable. 

Since the UK Green Taxonomy is still under development, the specific details and who it will definitively affect might change based on the final framework. 

International Sustainability Standards Board (ISSB) 

The ISSB, is a relatively new organisation working on global sustainability reporting standards. The aim is to develop a comprehensive set of baseline sustainability disclosure standards for companies, focusing on the needs of investors. Primarily listed companies (publicly traded) will likely be the first to be impacted by mandatory ISSB standards. However, the specific companies and timelines for adoption will depend on national regulations.  

The ISSB standards aim to benefit investors by providing them with high-quality information about a company’s sustainability performance, alongside financial information.  

More information on the new standards being developed can be found here. 

Who is impacted by the reporting regulations?

The reporting regulations primarily affect large companies. In the UK, this includes businesses with £500 million in turnover or more than 500 employees. However, it’s likely that the scope for participating companies will broaden in the future. 

What’s next?

Both the UK and the EU are expected to continue refining their ESG reporting frameworks. This includes potential alignment with international standards such as the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and the Sustainability Accounting Standards Board (SASB) standards. We can also expect to see mandatory requirements for some businesses to disclose net zero transition plans that outline how they will adapt as the UK moves closer to its 2050 low-carbon economy target. 

This article was inspired by Omnevue: ESG reporting regulations explained:  https://www.omnevue.com/knowledge/regulation-explained/.