Lights, Camera, Action!
As Christmas decorations have been tidied away and we have made a start at a crisp new year, we wanted to take a moment to reflect on the past 12 months and share 2022’s most important milestones and evolutions in the realm of sustainability with all of you.
It is no exaggeration to say that 2022 has been a year of great momentum for climate action and for sustainability reporting, with highly influential developments on both global and regional levels.
In consequence of Russia’s invasion of Ukraine in February 2022, the past year has been a challenging one for climate action. With a large-scale cut-off of Moscow gas deliveries to Europe, some countries have reverted to coal power as a backup solution, putting a strain on the EU’s 2030 greenhouse gas (‘GHG’) reduction target of 55%.
Yet, Frans Timmermans, vice president to the European Commission, stated that “rather than weakening the EU’s climate ambition, the war in Ukraine has acted as a wake-up call for Europeans to speed up the transition away from fossil fuels”.
By the time he headed towards the Sharm El-Sheikh Climate Change Conference – known as COP27 – in November, he announced that the EU’s GHG emission reduction target will even be increased from 55% to 57%. The press release by the EU Parliament that soon followed his statement confirmed that its members agreed to increase the EU carbon sinks target, which, in turn, increases the EU’s 2030 GHG reduction target to 57%.
COP27 brought together around 45.000 participants from 190 different countries to share ideas and build partnerships. The conference closed with a milestone agreement on “loss and damage” financing for vulnerable countries which are severely impacted by climate change. Further, despite fierce discussions on its feasibility and some countries trying to renege on the target of limiting temperature rise to 1.5C, COP27 has kept this goal alive and in line with the 2015 Paris agreement. The topic of fossil fuels was intensely debated but, despite several countries being adamant on phasing down all types, no concrete agreement was reached.
Still, though more action and sound commitment are needed for the planet, COP27 is a certain step towards more climate justice.
A few weeks later, the UN Biodiversity Conference or COP15 took place in Montreal. On 19 December, the Kunming-Montreal Agreement was signed by nearly 200 countries, aiming to protect the world’s land and oceans and to prevent biodiversity loss.
One of the most significant points of this deal is an agreement to protect 30% of nature and restore 30% of degraded ecosystems globally (on land and sea) by 2030, making this agreement one of the biggest land and ocean conservation and restoration commitments in history. Governments also agreed to reduce the extinction risk and rate of all species tenfold by 2050. A third major element in the final text is the explicit recognition of indigenous peoples’ rights and territories.
As the Kunming-Montreal agreement is not legally binding, its success will effectively depend on its implementation by the signing countries. It does, however, present us with a tremendous opportunity to put our degraded nature on a path to recovery.
Sustainability Reporting and Finance
Moving to the subject of sustainability reporting, the European Commission kicked off the year with a proposal on the Corporate Sustainability Due Diligence Directive (‘CSDD’), on which the Council of Europe took position at the beginning of December.
With this text, the EU presents a corporate accountability regime to protect the environment and human rights across large companies and their value chains. The new directive, when adopted, will require some large EU and non-EU companies to set up due diligence practices to identify, monitor and remedy any negative impacts of their activities on human rights and the environment.
With its comprehensive and far-reaching requirements, the prospective CSDD is broadly considered to be one of the most ambitious corporate law reforms to ever be proposed, anywhere in the world.
The CSDD proposal complements other EU regulatory initiatives, such as the Corporate Sustainability Reporting Directive (‘CSRD’). Indeed, both are important components of the European Green Deal and steppingstones towards a sustainable future for Europe.
The CSRD was adopted by the EU Parliament on 10 November. This new directive vastly expands the number of companies covered by its reporting rules from around 11.700 under the existing sustainability reporting framework – the 2014 Non-Financial Reporting Directive – to around 50.000 in the years to come. Its primary aim is to provide investors with comparable, reliable and accurate data and, by doing so, bringing sustainability and financial reporting on equal footing.
The required disclosures under the CSRD will have to be made in accordance with a common framework of European Sustainability Reporting Standards (ESRS). Much faster than anticipated, these standards have been developed and approved by the European Financial Reporting Advisory Group (EFRAG).
A first significant development in sustainable finance was introduced by the European Securities and Markets Authority (‘ESMA’), which, in February 2022, published its Sustainable Finance Roadmap 2022-2024. As investor preferences shift to environmentally friendly financial products and the European Union strives to meet its commitments on tackling climate change, advancing the sustainability agenda has become essential to ESMA. This Roadmap is a milestone in their sustainable finance work and clearly states their top priority: the fight against greenwashing. This publication will play a key role in ESMA’s contribution to the European Green Deal and in protecting European investors along this ongoing journey towards sustainable finance.
Only a few weeks later, ESMA’s American counterpart, the US Securities and Exchange Commission (‘SEC’) proposed a new rule with the potential to ring in a new era for climate disclosure practices for publicly listed companies in the United States. This new regulation would require the companies within its scope to provide certain climate disclosures in their registration statements and their annual reports. With this landmark proposal the SEC, too, seeks to provide a clear framework for standardised, consistent and reliable climate information. The main aim of these new provisions is to help investors and other stakeholders to understand how climate change can affect the companies they work with or allocate capital to. As the SEC is working on finalising its controversial new “climate rule”, both opponents and supporters are making a last push to influence the agency, stalling the rule-making process. However, if adopted, this rule will shift climate reporting in the United States from being largely voluntary to being regulated for public companies.
Data is Key
2022 has been a year of positive development on different topics of climate action. Both on the global and regional levels, different authorities have taken a clear stand on sustainable development, striving for continued economic progress within the planetary boundaries. Key areas in this evolution over the past year are the structural reduction targets for GHG emissions, reaffirmed commitments to limiting global warming and a historic initiative to limit biodiversity loss.
Another development that has further crystallised in the course of 2022 is sustainability reporting and its move out of the voluntary zone into the sphere of regulation and standardisation. For the companies under these new and upgraded regulations, flexibility in this area is gradually traded for the necessary comparability and reliability of reported data.
In this context, it is important to keep in mind that these requirements regarding sustainability reporting find their raison d’être in climate action targets, such as those found in European Green Deal or the 2015 Paris agreement, and, in turn the achievement of those targets relies on adequate information and reporting.
Indeed, the key takeaway from 2022 is that accurate and credible sustainability data is no longer a “nice to have”, but an absolute must. Increasingly required by regulators and expected by investors and customers, the demand for sustainability related information is making its way from large and publicly held companies down to the smaller companies in their entire value chain.
The aforementioned milestones throughout the past year mark a clear dedication to climate action and sustainability reporting initiatives, and an accompanying blistering pace going into 2023.
We are here to help
If you would like to know more about these developments and how they may impact you, then do not hesitate to get in touch with us.