In brief
- On 3 April, the European Parliament approved the so-called 'stop-the-clock' element of EU omnibus proposals, delaying the application of the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD).
- As the EU backtracks on these key ESG regulations, China, meanwhile, presses on with the development and implementation of its own Corporate Sustainability Disclosure Standards (CSDS) regime.
- These contrasting strategies bring two competing narratives into sharper focus – deregulation in the hope of maintaining competitiveness in the current paradigm versus regulation to drive necessary market transformation.
- Regardless of regulatory requirements in terms of public disclosure, increasingly tangible physical, transitional and legal risks should be driving businesses to better understand their exposure to systemic risks, where they lack resilience, and where they need to transform to preserve future resilience and competitiveness.
China takes the lead?
18 months ago, few would have quibbled with the view that the EU was leading the way in legislating to enforce the proper evaluation and strategic integration of ESG impacts, risks and opportunities. But now the halo is slipping.
As covered in our previous article, the EU omnibus simplification package is set to slash the scope and substance of the CSRD and CSDDD. Indicative of the political pressure to reach a deal quickly, last week saw the European Parliament approve the 'stop-the-clock' element of those proposals, delaying the application of both flagship regulations.
Meanwhile, China presses forward apace with the development and implementation of its own CSDS regime (see the timeline below). Like the CSRD, this is rooted in a double materiality approach to the assessment and disclosure of ESG impacts, risks and opportunities, and their implications for resilience, profitability and valuation. But unlike the CSRD, whose mandatory scope is now being curtailed to cover only the largest companies (with more than 1,000 employees), the Chinese CSDS will eventually apply to large corporations and SMEs alike.
CSDS timeline
- February 2024: Under the auspices of the China Securities Regulatory Commission, China’s three stock exchanges issue ESG reporting guidelines, mandating disclosure by listed companies in 2026. Other companies are also encouraged to report on a voluntary basis.
Guidelines mirror international disclosure frameworks (e.g., ISSB and ESRS) by requiring disclosures relating to: governance; strategy; impact, risk and opportunity management; and metrics and targets.
They are also rooted in a double materiality approach to the assessment of ESG impacts, risks and opportunities.
- May–December 2024: In May, the Chinese Ministry of Finance publishes an exposure draft of its Corporate Sustainability Disclosure Standards – Basic Standards. Finalised standards are issued in December 2024, marking the first step in establishing a full suite of CSDS.
Equivalent to IFRS S1 and ESRS 2, and initially applying on a voluntary basis, the basic standards set out general requirements and provide the foundations for future mandatory and topical standards.
- 2025–2030: By 2027, a climate-related disclosure standard (equivalent to IFRS S2 and ESRS E1) will have been issued, with other topical standards and application guidelines to follow.
By 2030, the full suite of CSDS will be in place and have mandatory force.
It is expected that CSDS application will be phased in over time, starting with large, listed companies, before being gradually rolled out to unlisted large companies and SMEs.
Two competing narratives
The contrasting positions of China and the EU – one pressing on with stronger regulation, the other backtracking from its previous leadership position – reflect two very different views on competitiveness.
Fuelled by last September's Draghi report, the underlying premise of EU omnibus proposals is that the cost of complying with due diligence and disclosure obligations places European companies at a disadvantage versus US competitors.
According to this story, deregulation is vital to achieving a level playing field within the current global economic system.
However, the assumption that the present system can continue long-term is increasingly at odds with sustainability science and world events, which provide the foundations for the opposing viewpoint.
According to this alternative narrative, a paradigm shift is necessary, inevitable and already underway, with worsening impacts of ecological breakdown already upon us, and actuaries projecting that 50% of GDP could be destroyed as early as 2070 if we don't change course.
In this story, mandating that companies show a proper understanding of systemic risks and their contributions towards them, and disclose actions to address them, isn't an unnecessary cost to business-as-usual. It's a necessary investment in accelerating the transition to business-as-needed, helping to ensure future resilience and competitiveness in an increasingly unstable world.
One immutable business imperative
One way or another, sustainability and business resilience are very much boardroom topics of conversation again. And where those conversations should be focused isn't on the ups and downs of whether companies are in scope of regulations requiring public disclosure. They should be on the enduring case for thoroughly assessing ESG impacts, risks and opportunities.
As compound and cascading crises continue to escalate – from climate change and biodiversity loss to social inequality and geopolitical tensions – it's never been more important for businesses to fully understand where they are exposed to systemic risks, where they lack resilience, and where they may need to transform strategy, governance and value chain arrangements.
These are business critical insights that boards should want to know, irrespective of public disclosure obligations. That's why we continue to recommend a double materiality assessment of ESG impacts, risks and opportunities to our clients, even if they will no longer be (or never were) in scope of the CSRD.
How we can help
With so much in flux, these are challenging times for businesses and their sustainability teams. Mishcon Purpose's interdisciplinary team of lawyers and sustainability professionals can help you navigate this complexity, prepare to meet new compliance obligations, and capitalise on opportunities to innovate and build resilience.
We're offering a free 30-minute consultation to discuss your biggest ESG challenges and ways we can help, including:
- Briefing your board on the evolving regulatory landscape and how to reduce complexity by focusing on interconnections between various standards and regulations.
- Using diagnostic tools to determine the relevance of multiple UK and EU regulations with mandatory due diligence and/or disclosure obligations.
- Conducting a double materiality assessment of ESG impacts, risks and opportunities, to inform where your business may lack resilience and need to transform.
- Using the Mishcon Purpose Framework to help systematically weave these insights into your overall strategy, governance and risk management.