SLCP & ESG Part 2: Legislative shifts in ESG reporting- From voluntary to mandatory
A Global Overview
After exploring the evolution of several key ESG reporting standards and frameworks in SCLP’s first ESG brief, we will now look at mandatory ESG reporting, specifically covering developments in the EU, US, UK, and Australia.
Within this evolving regulatory landscape, the legislative surge underscores the demand for reliable social and labor data from supply chain workers. Positioned as a key player in this field, SLCP plays a crucial role in providing reliable and actionable social and labor data that can be used as source for reporting.
European Union
The EU’s Corporate Sustainability Reporting Directive (CSRD) entered into force in January 2023. The directive represents a substantial advancement from the Non-Financial Reporting Directive (NFRD), extending its coverage to a greater number of companies and broadening the spectrum of mandatory disclosures. While the CSRD currently applies exclusively to EU-incorporated companies, an expansion is anticipated. Starting in 2028, non-EU companies with substantial operations in the EU must report on a global basis.
By compelling companies to disclose information on a broad range of subjects, including human rights, environmental impacts, labor conditions and climate change, the CSRD ensures a thorough and transparent overview of their sustainability initiatives. A noteworthy advancement introduced by the CSRD is the concept of double materiality, which goes beyond solely demonstrating how ESG aspects affect a company's operations, but also mandates companies to state their impact on a broad range of sustainability concerns. This shift not only enhances accountability, but also increases the understanding of a company's overall influence on sustainability. Companies under the CSRD scope will have to report in compliance with European Sustainability Reporting Standards (ESRS) adopted by the European Commission as delegated acts. The first set of sector-agnostic ESRS, drafted by the European Financial Reporting Advisory Group (EFRAG) has already been adopted and comprises twelve standards, two cross cutting standards and ten topical standards on environmental, social and governance matters. The first group of companies will have to apply the standards in financial year 2024, reporting in 2025. It is worth noting that the sector-specific ESRS are currently due for June 2024, however there is currently a proposal from the EU Commission regarding their delay until 2026, which could be counterproductive for the established objectives.
The United Kingdom
The UK Government, has a history of actively addressing social issues within the workplace, notably with the Modern Slavery Act 2015 (MSA). This legislation mandates businesses with an annual turnover surpassing £36 million to disclose annually the measures taken to eradicate modern slavery from their operations and supply chains. The Act has a global reach, extending its jurisdiction beyond national borders to include corporations operating within any part of the UK, regardless of their place of incorporation, given they meet the specified turnover threshold. A crucial aspect of compliance is the comprehensive evaluation mandated for parent companies, requiring an examination of their entire group structure to determine the inclusion of subsidiaries within the regulatory scope. This evaluation includes overseas subsidiaries, necessitating disclosure regarding their involvement in the group's supply chain.
In September 2020, a set of proposed amendments to the Act emerged. However, the timeline for their implementation remains uncertain, contingent on “when Parliamentary time permits”.
Australia
Similar to the UK Australia's Modern Slavery Act 2018 mandates a significant commitment to corporate transparency and responsibility. The legislation requires entities operating within Australia and generating a collective revenue exceeding AUD 100 million to produce and submit annual statements. These documents provide a thorough account of the modern slavery risks in both local and global operations and supply chains, along with detailed information on the measures implemented to mitigate these risks. By doing so, the Australian Modern Slavery Act not only adheres to legal requirements but also fosters a culture of ethical responsibility and supply chain transparency, showcasing Australia's dedication to eradicating modern slavery in business practices.
The United States
Here, a parallel, but somewhat more constrained movement is happening towards mandatory ESG reporting obligations.
Amid a divided political landscape, in March 2021, the US Securities and Exchange Commission (SEC) took a bold step by establishing a dedicated climate and ESG task force. This task force aims to proactively identify misconduct regarding ESG aspects, starting by analyzing issuers disclosure of climate risks to identify any gaps under existing regulations.
California, leading the way in ESG legislation in the US, recently passed the Climate Corporate Data Accountability Act (SB 253) by the State Assembly in September 2023. The Transparency in Supply Chains Act (S.B. 657) is another noteworthy legislation from California, addressing the global challenges of slavery and human trafficking. The primary objective of the legislation is providing consumers and businesses with crucial information about companies' initiatives to combat slavery and human trafficking within their supply chains. By making this information available, consumers can factor these efforts into their purchasing decisions, motivating companies to enhance their efforts in addressing these critical issues. The legislation acknowledges that slavery and human trafficking are crimes under various laws and are pervasive globally, including in California and the US. Recognizing the hidden nature of these crimes, the legislature emphasizes the unintentional promotion of such practices through the purchase of tainted goods.
To ensure compliance, the law applies to companies meeting specific criteria, such as identifying as retail sellers or manufacturers, conducting business in California, and having annual global gross receipts exceeding $100,000,000. Covered companies are mandated to disclose information on their websites or through written disclosures, fostering transparency and informed consumer decision-making. The disclosures must encompass five key areas: verification, audits, certification, internal accountability, and training.
Moving to the east, the state of New York is progressing with the proposed Fashion Sustainability and Social Accountability Act (FSSAA). The New York State Department of Law is leading this initiative, signaling a broad approach to addressing sustainability and social responsibility within the fashion industry.
These collective efforts at both federal and state levels exemplify a growing commitment in the United States to strengthen regulations and oversight concerning ESG matters. As these initiatives develop, they are expected to play a crucial role in shaping corporate practices and fostering a more sustainable and accountable business environment.
Reliable and Actional Data is Key
The global shift toward mandatory ESG reporting marks a significant step in recognizing the importance of addressing human rights, environmental, and ethical governance risks within corporate operations. This evolution in regulatory frameworks and corporate strategies underscores the critical need for transparency and accountability.
Reliable and actionable data is at the heart of credible ESG reporting -essential for companies to disclose their environmental and social impact. However, the complexity of data collection and analysis poses challenges. Here, multi-stakeholder initiatives (MSIs) like SLCP are invaluable, providing standardized data and streamlined processes that aid not only in regulation compliance but in effective decision-making towards responsible business practices.
As regulations and expectations around sustainability continue to evolve, adopting ESG reporting and utilizing tools like SLCP's Converged Assessment Framework (CAF) becomes essential for businesses thriving in an era of heightened sustainability and accountability.
