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Over the past few years, the European Commission has been dealing out sustainable finance regulations and proposals like there’s no tomorrow.

And 2024 is set to be the biggest year yet for ESG regulation. The first reporting period for the CSRD, a potential overhaul of the SFDR, and the enforcement of the CSDDD are just some of the changes on the cards.

But the stringency of most of these regulations still hangs in the balance. In 2023, we saw political and investor pushback, which led to delays and dilution across the board.

In the last couple of years, the Sustainable Finance Disclosure Regulation (SFDR) has taken a real beating.

In 2022, we saw the great reclassification, with more than 350 funds reclassifying from Article 9 to 8 due to confusion over the definition of ‘sustainable investment’. Then, in April 2023, the European Commission clarified that it was leaving the definition of sustainable investment up to interpretation; “financial market participants must carry out their own assessment… and disclose their underlying assumptions.”

To top it all off, in September, the European Commission announced the launch of its wide-ranging consultation on the regulation, which could result in removing Article 8 and 9 altogether.

When I asked Audra Walton, ESG lead at Cheyne Capital, what she thought of a potential SFDR overhaul, she said some degree of revising was inevitable. SFDR catalysed the European sustainable investment world, but as with any complex regulation, learnings will need to be integrated and improvements made, she added.

Regulations that developed later, such as the Sustainable Disclosure Requirements (SDR), have the advantage of more time, according to Walton. She said she will be keeping a close eye on the interplay between the SDR and the SFDR this year, particularly to see if SFDR adopts fund labelling rules such as those outlined in the SDR.

It is not just the lack interoperability of regulations across jurisdictions that is getting market attention.

Sukhvir Basran, partner and ESG co-chair at Cadwalader said that many of her clients are grappling with understanding the interoperability of EU sustainability regulations. According to Basran, multiple interrelated and evolving regulatory regimes is making the sustainability regulation landscape a lot more difficult to navigate.

For example, the European’s Corporate Sustainability Reporting Directive (the CSRD) was watered down back in August 2022, which meant that many of the reporting requirements that were previously mandatory are now optional.

She said that review of regulations is sometimes necessary and that flexibility around SMEs is important. However, she added that that the impact of “watering down” on other regulations need to be considered. In particular, the watering down of the CSRD has presented problems for investors who need these data points from corporates in order to comply with the SFDR.

This year, 9fin has partnered with the European Leveraged Finance Association (ELFA) to help solve this disconnect. Our collaboration aims to develop a market-driven solution to the challenges that surround ESG data in private markets through an end-to-end data collection process. Read more here.

2024 marks the first CSRD reporting period and so investors (should) at least have some more standardised ESG data to work with by 2025.

While the majority of LevFin issuers (with 250+ employees and/or €40 million in turnover) won’t have to report until 2026 (based on 2025 data), the first reporting period will reveal a lot about what companies deem material to their businesses, and how many are serious about their ESG risks and considerations.

Cheyne’s Walton highlighted that she is positive about the first CSRD reporting period. Despite reporting being based on materiality, she expects all companies within a sector to be reporting on the same metrics within the first few reporting cycles, and that investors will get comparable data.

She added, “if you’re not disclosing what your peers are disclosing, you may be at a disadvantage for capital raising or selling”.

When the Corporate Sustainability Due Diligence Directive (CSDDD) was first announced, it seemed almost too good to be true, according to Sasja Beslik, chief investment strategy officer at SDG Japan.

The directive would mark a revolutionary change on governance-level regulation by holding corporates accountable for environmental and human rights issues within their supply chains. In this way, the CSDDD would expand business’ liability from their internal operations to their subsidiaries and value chain.

The final draft of the CSDDD was released on 20 January but it still requires final approval by the European Parliament, the European Commission and the European Council.

The approval is meeting resistance from Germany and Italy, which have indicated that they will abstain from CSDDD. This pushback has already killed three votes on the proposal (the most recent vote was on 28 February).

Despite international pressure, and ongoing negotiations, it is still unclear whether CSDDD has the support it needs to be pushed over the line. On 28 February, France suggested increasing the employee threshold of companies under the scope of the directive, from companies with 500 employees to 5,000 employees. Richard Gardiner, the head of public policy at the World Benchmarking Alliance highlighted that this “would exempt about 80% of the current companies from scope”.

According to Bloomberg, Germany doesn’t expect there’ll be another attempt at getting CSDDD passed until after EU parliamentary elections.

Cadwalader’s Basran thinks that the CSDDD, or some form of it, will eventually enter into force given the strong support from the market for this regulation. But, she added that delays seem to be inevitable. Despite this, she said that many of her clients are already analysing or considering how they should implement this.

When talking about the importance of the regulation itself, Basran argues that “it is absolutely necessary to look at supply chains” if we are to address human rights violations which often occur at a later stage of the supply chain.

Although the SFDR, CSRD and CSDDD may be in the limelight for 2024, there are a few other regulations that investors will be keeping an eye on (and these may not involve any new acronyms).

In the second quarter of this year, there will be further guidance around the use of ESG and sustainability terms in fund names. Back in December, the EU’s securities watchdog dropped plans to include a 50% threshold or those with sustainability-related terms to allocate at least 50% of their assets to sustainable investments as defined by the SFDR. The new guidance should provide some welcome clarity to investors.

The EU is also revising its packaging and packaging waste directive. According to Forbes, this revision could be a pivotal moment for the packaging sector, although the directive must be agreed before the European Parliament elections in June 2024. Walton said that this directive will affect many of Cheyne’s portfolio companies.

She said that most businesses operating in a sector where they’re liable for those new rules are relatively prepared already, adding that she’s yet to come across a company that will be completely caught out.

Finally, the EU regulation on deforestation-free products is due to enter into force in 2024. Read 9fin’s sector selector piece focused on the food industry to find out more about how to assess companies’ preparedness for this regulation. If companies do not comply, they could be fined up to 4% of their turnover in an EU state.

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