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In this monthly edition of the Policy Digest, we explore regional policy developments spanning the entire lifecycle of non-financial reporting – from ESG data to the verification and assurance of sustainability reports.
In North America, Canada announced plans for the development of a sustainable investment taxonomy and to make mandatory climate disclosures for large and federally incorporated private companies. The two sustainable finance initiatives are designed to bolster the broader effort to mobilise private sector capital in support of the country’s transition to a net zero economy. Meanwhile in the US, California consolidated its climate disclosure laws into Senate Bill 219 (SB 219), effectively cementing the 2026 deadline for climate reporting for large companies operating in the state. The progress in sustainability reporting marks a significant breakthrough, especially in California, the world’s fifth largest economy by gross domestic product (GDP) and home to many of the largest Fortune 500 companies.
Across the Atlantic, the European Commission has opened infringement procedures by issuing formal notices to 17 Member States, urging them to ensure the timely transposition of the Corporate Sustainability Reporting Directive (CSRD) in preparation for the first reporting deadline in 2025. Throughout Europe, regulators focused on validation of sustainability reporting – the EU’s top auditing oversight body released guidelines on limited assurance of the European Sustainability Reporting Standards (ESRS) reports, while the French authority- Haute Autorité de L’Audit (H2A) – issued standards for the verification of sustainability information produced under the CSRD and Taxonomy Regulation. The EU’s real challenge lies in the implementation of binding sustainability regulation affecting global stakeholders. To address this, the Commission recently proposed a one-year delay in the implementation of the European Deforestation Regulation (EUDR) and issued guidance with aims to achieve the environmental outcomes, while considering varying capacities and levels of preparedness.
In the Asia Pacific region, Hong Kong took centre stage this month as regulators emphasised high alignment with the International Sustainability Standards Board (ISSB) standards. In addition, a new voluntary code of conduct for ESG ratings and data products providers was launched to enhance transparency around sustainability ratings, scores and data.
At a practical level, these global regulatory initiatives are designed to substantially improve the reliability of sustainability reports and credibly strengthen certification and verification audits through a procedural system of checks and balances.
NORTH AMERICA
California climate disclosure laws consolidated under SB 219
On September 27, 2024, California Governor Gavin Newsom signed Senate Bill 219 (SB 219) into law, merging and amending SB 253 (Climate Corporate Data Accountability Act) and SB 261 (Climate-Related Financial Risk Act). The two climate bills, commonly referred to as the California Climate Accountability Package, introduced the most extensive emissions disclosure requirements in the U.S. SB 253 requires all public and private entities doing business in California with over $1 billion in revenue to annually disclose their GHG emissions, including value chain emissions by 2026. SB 261 mandates companies with over $500 million in revenue to disclose climate risks, in line with the recommendations of the Taskforce for Climate-related Financial Disclosure (TCFD), by 2026.
The recently enacted SB 219 amends SB 253 by extending the California Air Resources Board’s (CARB) deadline to promulgate implementing regulations by six months, from January 1, 2025, to July 1, 2025. Reporting entities will still be required to prepare and disclose Scope 1 and 2 emissions in 2026, based on 2025 data even official guidance from CARB is not available in the interim. However, SB 219 allows CARB to specify a schedule for the disclosure of Scope 3 emissions, which was previously mandated to be disclosed 180 days after the Scope 1 and 2 emissions reports. The amendments also authorise subsidiaries to submit consolidated reports at the parent company level and decouple filing fees from the annual reporting fee under both SB 253 and SB 261.
SB 219 is landmark piece of legislation with widespread implications due to the size of California’s economy, which is currently the fifth largest in the world and is expected to overtake Germany as the fourth largest by the end of the year. SB 253 is estimated to apply to over 5,000 companies, 80% of which are privately held. Regulatory bodies and private stakeholders have raised several concerns about the implementation of SB 253 and SB 261, particularly for private entities. These concerns include the risk of double-counting emissions between suppliers and public entities, the potentially prohibitive compliance costs for private companies, and the requirement for private firms to disclose sensitive information, which could undermine their competitive advantage. Despite the importance of these regulations, the twin bills consolidated under SB 219 continue to face litigation due to the broad scope of entities covered. The final requirements and implementation timeline remain uncertain, as they may be affected by a pending lawsuit filed on January 30, 2024, in the U.S. District Court for the Central District of California. The lawsuit challenges the legality of SB 253 and SB 261 under the First Amendment, arguing that these laws overstep state regulatory authority beyond the scope of the federal Clean Air Act.
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Canada launches sustainable investment taxonomy and expands mandatory climate disclosures for federally incorporated companies
The Government of Canada has announced plans to develop a made-in-Canada sustainable finance taxonomy aimed at mobilising private investment to support the country’s net-zero goals. The Taxonomy will serve as a critical tool for investors, banks, and asset managers alike to identify both green and transition investments. Under the new Taxonomy, qualifying green activities will encompass low or zero-emission technologies such as green hydrogen, solar, and wind energy, while transition activities will focus on decarbonising emission-intensive sectors critical for the net-zero transition, such as lower-emission steel production.
The framework for classifying green and transition activities will be based on scientifically credible, Paris-aligned pathways. Initially, the Taxonomy will concentrate on six hard-to-abate sectors: electricity, transportation, buildings, agriculture, manufacturing and extractives, including natural gas, with a focus on significantly decarbonising existing operations. Canada’s Taxonomy is scheduled for development within 12 months and will be interoperable with global taxonomies to promote cross-border green financial flows. This initiative is part of the government’s broader efforts, as confirmed in the 2023 Fall Economic Statement and Budget 2024, to launch both a sustainable investment taxonomy and mandatory climate disclosures.
As part of the Taxonomy development, Canada has also announced the expansion of mandatory climate disclosures under the Canada Business Corporates Act for large, federally incorporated private companies. The scope and applicability of the regulation has not yet been formalised. However, the Canadian government has confirmed that small- and medium sized businesses will be exempt and can opt-in to disclose climate-related financial information. Canada has already imposed mandatory climate reporting for financial institutions and separately, is set to finalise ISSB-aligned sustainability disclosure standards.
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EUROPE
European Commission initiates infringement procedures on CSRD Implementation
The European Commission has issued formal notices to 17 Member States for missing the 6 July, 2024 deadline to transpose the Corporate Sustainability Reporting Directive (CSRD) into national law. Formal letters were sent to Belgium, Czechia, Germany, Estonia, Greece, Spain, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Poland, Portugal, Romania, Slovenia and Finland, directing them to respond and finalise the transposition within two months. The Commission has noted that the delay in transposition undermines harmonised reporting and investor decision-making. Under the EU’s infringement procedure, the Commission can initiate legal action against any Member State that does not adhere to EU laws, beginning with a formal notice. This will be followed by a reasoned opinion necessitating compliance, and potentially a referral to the court for penalties.
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EU Commission creates guidelines for limited assurance of sustainability reports
The EU Commission, on 30 September 2024, released guidelines for limited assurance on sustainability reporting. The Committee for European Oversight and Auditing Bodies (CEOAB) provides a framework for conducting assurance engagements in line with the Corporate Sustainability Reporting Directive. The Guidelines explicitly state that it “should be read in conjunction with any national rules applicable to assurance on sustainability reporting” and does not supersede national level requirements issued by the relevant national competent authorities (NCAs).
The CSRD requires large companies subject to the Non-Financial Reporting Directive (NFRD) to prepare sustainability statements according to the ESRS from 2025. These statements must undergo limited assurance by statutory auditors or other independent assurance service providers (IASPs) in accordance with a national standard until a more comprehensive EU wide standard is adopted by 1 October, 2026. The non-binding guidelines emphasise the importance of auditors’ professional judgment and critical assessment of both qualitative and quantitative sustainability data. Auditors are required to verify that sustainability information meets ESRS standards, follows a process of double materiality, and is free from material misstatements. While the limited assurance framework is in place, a shift to reasonable assurance is expected by October 2028, pending a feasibility study.
The European Commission will likely adopt the International Standard on Sustainability Assurance 5000 (ISSA 5000), which was recently approved by the IAASB on 20 September 2024. The ISSA 5000 standards are expected to be finalised in December 2024 with final guidance and application materials set to release in early 2025.
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France releases national standard for ESRS auditing
France’s top authority for auditing – Haute Autorité L’Audit – has published guidelines for the certification of sustainability information under the Corporate Sustainability Reporting Directive (CSRD) and Article 8 of the Taxonomy Regulation. The document outlines the processes for conducting limited assurance audits and assessing compliance with the European Sustainability Reporting Standards (ESRS) through the lens of double materiality. The guidelines emphasise the verifier’s responsibilities to ensure that the entity’s process for preparing and publishing sustainability information complies with the ESRS. Additionally, a verifier must evaluate the accuracy and relevance of the sustainability information published, ensuring that sustainability statements are not misleading. The guidelines have been developed to ensure consistency across the EU, in line with the CEAOB and international audit standards and will be revised once the European limited assurance standard is published (expected by October 2026). It covers detailed steps for verifiers, including collaboration with auditors, use of external experts, understanding the entity’s governance structure, and assessment of internal control systems related to sustainability reporting.
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EU proposes one-year delay to the implementation of the EU Deforestation Regulation (EUDR)
The proposed delay would make the EUDR effective from December 2025 for large companies and June 2026 for micro and small enterprises. The Commission proposed postponing the implementation of the law after global partners expressed concerns about their readiness to comply. The EUDR is a key legislative reform to address nature-related risks in the supply chain. The law bans the sale of deforestation-linked products in the EU, imposing due diligence obligations on companies and suppliers dealing with commodities such as palm oil, cattle, soy, coffee, cocoa, timber, and rubber, along with by products. Since the EUDR’s adoption in 2023, suppliers have called for guidance and measures to promote fair participation and strengthen their capabilities to meet the standards, ensuring a more balanced impact on small-scale producers.
On 26 September 2024, the Commission released guidance to clarify key concepts and definitions, including traceability obligations and product scope, to ensure consistent interpretation of the law by companies and enforcement authorities. Additionally, the Commission and the European External Action Service have introduced a strategic framework for international cooperation on the EU Deforestation Regulation. This framework outlines five priority actions, such as support for smallholders, eight key principles, including a human rights-centered approach, and various implementation tools like dialogue and financing. A new IT system for due diligence statements will be operational by December, and the Commission is enhancing international cooperation through transparent country benchmarking to classify deforestation risk. The Commission has urged the European Parliament and the Council to approve the extension by the end of the year.
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ASIA-PACIFIC
HKICPA publishes exposure drafts for Hong Kong sustainability reporting standards
The Hong Kong Institute of Certified Public Accountants (HKICPA) has proposed new sustainability disclosure standards supporting “full convergence” with the ISSB standards. The proposed standards – HKFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and HKFRS S2 Climate-related Disclosures (HK EDs) – will apply to publicly accountable entities such as listed companies, banks, fund managers, insurance firms, and Mandatory Provident Fund trustees. Hong Kong’s Vision Statement, released earlier this year, outlined interoperability as a key policy priority to promote consistency and comparability of sustainability reporting for Hong Kong businesses. The HKICPA is seeking public feedback on the proposed standards, with the consultation period open until 27 October, 2024. The standards are expected to come into effect in August 2025.
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Hong Kong introduces industry-led voluntary code of conduct for ESG rating and data product providers
A working group of investors and data providers, sponsored by the Hong Kong Securities and Futures Commission (SFC), have published a voluntary Code of Conduct (CoC) for ESG ratings and data products providers in Hong Kong. This code aims to establish a globally consistent framework for ESG ratings and data providers operating in the country, promoting transparency, governance, and quality in their services. The Code is aligned with the International Organization of Securities Commissions’ (IOSCO) recommendations and focuses on key principles, including governance, quality, conflict of interest management, transparency, and stakeholder engagement. Providers opting into the Code are required to complete a self-evaluation, embed the Code into their operations, and publish a self-attestation within six months for ratings providers and one year for data providers. The International Capital Market Association (ICMA) will oversee the Code’s maintenance and publish the name of the signatories to the code. However, ICMA is not responsible for investigating or confirming adoption. This voluntary code is considered a lighter-touch approach to enhancing transparency among ESG ratings and data providers.
Hong Kong joins regional peers, including Singapore, Japan and South Korea, in introducing a principles-based CoC for the self-regulation and attestation of ratings and data providers’ practices and processes. Thus far, India and the European Union are the only jurisdictions imposing mandatory regimes for the regulation of ESG ratings and data providers.
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Other News and Resources
- The World Bank Group and the IFRS Foundation will partner to promote the adoption of ISSB standards in emerging markets and developing economies (EMDEs). Read More.
- The International Auditing and Assurance Standards Board (IAASB) approved the International Standard on Sustainability Assurance 5000 (ISSA 5000). Read more
- GFANZ publishes Draft Guidance on ‘Transition-Informed’ Indexes. Read more
*ESG Book manages the world’s largest repository of sustainability reporting provisions with over 2,800 regulations across more than 80 jurisdictions globally. If there is a recent ESG regulatory development we have missed, we would like to hear from you and invite you to contribute below.
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