Our Deloitte Sustainability Regulation Outlook 2024

Time is running out to act on #climatechange. In Europe, the transition to a lower carbon and more sustainable society is reshaping the economy, creating new opportunities, and altering the cost of doing business.

For companies, the implications are stark. Failing to become more sustainable will leave them vulnerable to the loss of revenue and reputation, as well as to litigation and regulatory penalties.

Regulation is an important driver of these changes, and a critical consideration for #companies as they plan how to meet the commitments they have made to transition their own businesses. 2024 will be a pivotal year for the roll out of sustainability-related regulations.

Several key sustainability initiatives will be finalised and EU Parliament elections in June (2024) and will determine the direction and level of ambition of the next wave of the EU’s sustainability legislative activity.

Our 德勤 Sustainability Regulation Outlook explores the most pressing developments in the year ahead and what these mean for business strategies and operating models.

Sustainability reporting enters a decisive phase

Sustainability reporting sits at the heart of the EU’s green strategy. Over the next few years, the journey towards greater transparency of companies’ sustainability credentials through disclosures will accelerate. The focus for companies in 2024 is to address corporate sustainability reporting requirements. Significant effort and resources will need to be dedicated to meet these requirements. The real opportunity for companies from reporting requirements, however – and the longer-term effectiveness of their approach – will come from looking beyond the compliance task to consider the broader ramifications of the regulations across their entire business and operating models.

If positioned correctly, these projects can help drive a wider set of changes to harmonise understanding of and embed a firm’s sustainability strategy across the organisation.?The European and international reporting landscape is changing.

Now is the time that ambition for greater transparency needs to be put into practice. In 2024, all eyes are on the CSRD and corresponding European Sustainability Reporting Standards (ESRS).

For the largest companies the obligation, at this stage with a requirement for limited assurance, begins as early as January 2025, for the 2024 fiscal year. The Commission plans to evaluate the shift from limited assurance to reasonable assurance no later than October 2028.

CSRD has a material extraterritorial impact. Large companies headquartered outside of the EU with listed equity and debt securities on an EU-regulated market are in general also captured by the CSRD reporting rules. Further, subsidiaries outside of the EU may need to provide sustainability information to parent companies based in the EU, in addition to complying with disclosure requirements prescribed by the jurisdiction in which they are incorporated.

Enhanced CSDDD due diligence rules will also come into play

The Corporate Sustainability Due Diligence Directive (CSDDD) is a major piece of EU legislation that will require large EU companies (those with a net global turnover of over €150m and more than 500 employees) and large non-EU companies (those with an EU-wide revenue of over €300m) to conduct environmental and human rights due diligence across their operations, subsidiaries and value chains already from 2027.

The scope of the CSDDD will extend to more companies in the years to follow. We expect the compliance burden the CSDDD presents to be significant, especially for companies with extensive, international value chains.

Consequently, the 2027 implementation date is challenging. The requirements of the CSDDD are expected to dovetail with CSRD and will also be the first piece of EU legislation that mandates companies to adopt a climate transition plan.

Companies should consider whether they are looking at sustainability reporting holistically and understand the links between the CSRD and other regulatory requirements, such as the CSDDD, or the EU Taxonomy Regulation (EU Taxonomy).

Interoperability of European and international standards is in focus for policymakers

Looking beyond the EU, international standards are also evolving. The International Sustainability Standards Board (ISSB) is expected to build on the two standards it published in 2023, with work underway on several topics: #biodiversity, #ecosystems, and #ecosystem services;?#humancapital;?#humanrights; and?connectivity in reporting.

The ISSB has collaborated closely with the European Financial Reporting Advisory Group (EFRAG) – the body responsible for creating the ESRS – to ensure that the ISSB standards and ESRS are consistent as far as possible, and to avoid duplication in reporting against both sets of standards.

In 2024, EFRAG and the ISSB are expected to publish a table showing how the standards align and where incremental disclosures may be needed to meet both sets of standards. Several countries, including the UK, have committed to adopting the ISSB standards.

Reporting on emerging topics

We expect clarity in 2024 on whether or how the finalised framework from the Taskforce on Nature-related Financial Disclosures (TNFD) will be implemented in EU and international reporting frameworks. We expect it to be incorporated into the ISSB. As a result, companies may choose to focus on broader environmental issues beyond their initial climate change disclosures and consider their capability to report on other emerging topics such as #biodiversity or #circularity, among others.

Enforcement actions

According to CSDDD, civil society as well as trade unions and ombudsmen can initiate civil proceedings on behalf of a victim, which means that companies may be found liable for damage caused by their activities.?

Even though many legislative acts that make up the EU Green Deal, including CSDDD, have yet to take effect, companies are already having to contend with litigation risks stemming from comparable pieces of legislation in France or Germany.

The German Supply Chain Due Diligence Act, applicable from 1 January 2023, has already resulted in a number of cases filed against major global brands. If litigation materialises it may not only affect companies’ ability to raise capital, but also their reputation and brand.

Averting greenwashing risks

Companies are responding to the green transition in different ways, from innovating their business models and working with new partners in the value chain, to marketing their environmental credentials and linking variable pay to sustainability goals. At the same time, investors, customers and wider civil society are increasing their expectations of companies where the green transition is concerned. To minimise their exposure to greenwashing risk, companies must ensure there is no mismatch between what they say they are doing and what they are doing.

Heightened litigation risk and regulatory scrutiny

Companies should not only consider new regulations when assessing the regulatory environment around greenwashing. Action by advertising or competition authorities, or litigation by investors and civil society, may also generate greenwashing risk, possibly sooner than new regulations. Consumer-facing industries, especially those selling and advertising more frequently purchased and essential items, are more likely to experience these impacts.

In recent years there has been an increase in allegations of greenwashing that have materialised in legal action and in complaints to supervisory, advertising and oversight authorities.

Claims have been based on alleged misrepresentation and breaches of responsible advertising or fair competition legislation or standards, as well as accusations of fraud. The financial and reputational consequences of these actions can be severe, including on share prices.

We expect litigation and supervisory sanctions to continue as more stringent sustainability regulations emerge, clarifying and increasing the obligation on companies to be transparent and accountable. In response companies may be tempted to stop making any environmental claims. But remaining silent may increase exposure to accusations of ‘greenhushing’, inviting further stakeholder scrutiny.

About the authors

This article is based on the Deloitte EU sustainability regulation | Deloitte Insights Simon Brennan Ruth Kilsby Ramon Bravo Gonzalez Magda Puzniak-Holford Adithya Subramoni

This objective of this article is to provide an insightful overview of the Sustainable Outlook for 2024.

Please do feel free to contact any of your Deloitte contacts, including: Anthony Gaughan Anne-Marie Malley Tom Harris Daniele Strippoli Katherine Lampen Matthew Guest Steven Lizars Emily Cromwell Simon Brennan Steve Farrell Jessica Hodges David Rakowski Ido Eisenberg, CFA Priyank Patwa William Mitchell Isha Gupta Amirah Khan Florence Arke James Milner Max Goodman Thorben Heidrich and Yasmin Abbaspour

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