During Global Goals Week, in New York, the attention of world leaders was focused on progress in achieving the UN Sustainable Development Goals (SDGs), an interconnected global agenda for sustainable development. Against this backdrop, there is now an opportune time for businesses to take stock and ensure that their ESG strategy is in keeping with the evolving regulatory landscape and key voluntary developments. There are two topical developments to keep abreast of and consider in the context of your ESG Strategy: the new EU Corporate Sustainability Due Diligence Directive (CS3D); and the Task Force on Inequality and Social-related Financial Disclosures (TISFD).
CS3D
After extensive debate and negotiation, we have seen the CS3D come into effect on 25th July 2024. It requires those entities within its scope to undertake environmental and human rights due diligence, in effect, mandating the longstanding approach of the OECD Multinational Guidelines for Responsible Business Conduct. More specifically, it requires companies to conduct risk-based environmental and human rights due diligence. CS3D further obliges companies to design and implement a climate transition plan, and to review and update it annually.
CS3D has brought together social capital and natural capital with its dual focus on addressing adverse harm to the environment and human rights, thereby encouraging a people-centric approach to sustainable business. It also extends the geographical area of focus to global value chains requiring those within scope to conduct due diligence of their operations, those of their subsidiaries and in the chain of activities of business partners. In this respect, it is likely to have global reach beyond those in direct scope. It will affect businesses in the value chain of those direct scope as its requirements are cascaded across the value chain. With a phased-in approach to implementation and significant penalties for non-compliance, businesses should be exploring whether their ESG strategy needs a refresh to meet these new demands, and whether it will enable them to issue in this new era of corporate responsibility, as called for under the CS3D.
TISFD as a key development in the voluntary sphere
It can be easy to focus on mandatory sustainability requirements, but any effective horizon scanning should also keep a watching brief on key developments in the voluntary sphere. These are often placed on a mandatory footing to accelerate their uptake (e.g. TCFD).
The Taskforce on Inequality and Social-related Financial Disclosures, is one such development to follow, which was launched on 23 September 2024. It will become the third taskforce related to sustainability-related financial disclosures, alongside the TCFD and TNFD.
TCFD as a framework for considering climate-related financial risks and opportunities
In 2017, the Taskforce on Climate-related Financial Disclosures (TCFD) published its Final Report with a set of 11 recommendations for addressing systemic risk in the financial system from climate-related risks. At the time, it was novel in its approach to forward-looking information, and in identifying opportunities as well as risks. Its set of recommendations covered four core elements of governance, strategy, risk management, and metrics and targets. These recommendations have been made mandatory in multiple jurisdictions worldwide, including the UK. At the start of this year, the International Sustainability Standards Board (ISSB) took over the monitoring of climate-related financial disclosures from the TCFD and embedded the recommendations in its standards.
TNFD as a framework for considering nature-related financial risks and opportunities
Six years after the publishing of the TCFD recommendations, the Taskforce on Nature-related Financial Disclosures Recommendations were launched in September 2023. These offer companies and financial institutions with a risk management and disclosure framework to identify, assess, manage and, where appropriate, disclose nature-related issues. They were designed to be consistent with the approach, language and structure of the TCFD and ISSB. In April 2024, ISSB embarked on a project to consider nature-related reporting requirements. It is only a matter of time before these too are made mandatory, falling in the footsteps of the TCFD.
TISFD as a new framework for considering inequality and social-related risks and opportunities
At the end of this month, the TISFD recommendations are expected to be launched. We can glean a hint of what is likely to be in the framework from the contents of the consultation papers on its scope, mandate and governance released by its Working Group of more than 20 public and private sector organisations. The consultation suggests that the recommendations will include a global disclosure framework, an organising framework for understanding key social and inequality-related concepts, and a body of evidence on impact and risk channels. It will also likely include guidance on metrics and targets and on identifying and assessing material inequity and social-related impacts, dependencies risks and opportunities. Both of which will also be helpful in CS3D implementation.
The Working Group has proposed that the intended outcome of the TISFD's work is:
"to reduce, short, medium and especially long-term financial risks, to strengthen financial stability and resilience, to improve macro-level economic outcomes, and ultimately to deliver better outcomes for people, including greater respect for human rights and increased human development and well-being".
A reinforcing underlying objective of this would be "companies and financial institutions understanding their impacts and dependencies on people and strengthening their identification, measurement, management and disclosure of inequality and social-related impacts and the associated financial risks and opportunities.".
There appears likely to be a shared emphasis on identifying, measuring and managing inequality and social-related impacts in the TISFD recommendations as there is on identifying, assessing, managing, mitigating, preventing and ceasing adverse human rights impacts in the CS3D. According to the consultation documents, the TISFD has the potential to serve as a unifier across TCFD and TNFD: It may advise "on the interlinkages between climate change, biodiversity loss, and social issues, to guide market actors in contributing to a just transition."
Conclusion – what does this mean for your current ESG strategy?
A key takeaway from the new TISFD and the emphasis on human rights and environmental impacts in the CS3D is that for a just transition, nature, climate, inequality and social-related risks and impacts need to be considered in a coherent and integrated manner not in isolation. Does your ESG strategy extend beyond climate and take into account nature-related impacts and dependencies and inequality and social-related issues? If this is the direction of travel, is your ESG strategy fit for purpose or is it time for refresh? Failing to plan for these developments is a plan to fail. To assess your level of preparedness for the CS3D and maximise your efforts try our complimentary CS3D Self-Assessment Diagnostic tool available at DWF Self-Assessment Tool..
How can we help?
DWF's multi-disciplinary Sustainable Business and ESG practice work with you to place business goals, purpose and core values at the centre of change, and create opportunities for strategic growth and business transformation. Reach out to us for practical consulting-led legal advisory support in meeting the challenges of the CS3D and the forthcoming TISFD to ensure that your ESG strategy evolves with regulation and good sustainable business practice. ESG Advisory Services | DWF (dwfgroup.com)
To find out more about the points raised in this article please contact Nadine Robinson or Tracey Groves.
