EU and UK upcoming legislative priorities
The Commission’s final work programme and annex published on 17 October 2023, sets out its legislative priorities for the next 8 months until the EU’s elections in June 2024. It also focusses on closing out existing files as well as reducing the administrative burden on European firms.
Similarly, the UK is also expected to hold a general election in 2024. As such, the UK government is looking to complete its work on tranches 1 and 2 of its Edinburgh reforms to deliver a Smarter Regulatory Framework for the UK and consider ways of reducing the burden for UK firms.
Common EU and UK themes of reducing the burden of reporting
One of the main themes coming out of the announcements from the Commission and the UK Government in the last couple of weeks has been a recognition of the reporting burden on companies and recognising the need to reduce it.
“Reducing administrative burdens” is one of the main aims of the Commission’s 2024 work programme as it is of the view that this is crucial to maintaining the competitiveness of European business. Indeed, it has set a target of reducing the burdens associated with reporting requirements by 25% without undermining policy objectives of the initiatives concerned.
It has done this by (i) adopting amendments to monetary thresholds for categorisation of companies to account for inflation and thus reducing the number of companies in scope for the Corporate Sustainability Reporting Directive (CSRD); (ii) delaying the deadline for the adoption of third-country and sector-specific standards under CSRD; (iii) reducing the number of benchmark administrators who fall within the scope of the EU Benchmarks Regulation (EU BMR); and (iv) facilitating data sharing between authorities overseeing the financial sector to avoid duplicative reporting (amongst other things).
In a similar vein, the UK Government has announced that it is withdrawing its draft corporate governance proposals, which would have added additional corporate and company reporting requirements. Instead it is proposing to set out options to reform the wider reporting framework. The UK Department for Energy Security and Net Zero (DESNZ) has also launched an open call for evidence to seek views on the adoption of the International Sustainability Standards Board (ISSB)’s standards and the costs, benefits and practicalities of reporting Scope 3 greenhouse gas (GHG) emissions which would be required under the ISSB standards.
European Union
CSRD-related changes
Amendments to the Accounting Directive to account for inflation and which will result in fewer companies being in scope for reporting under the CSRD
On 17 October 2023, following a short consultation period, the Commission adopted amendments to Article 3(13) of the Accounting Directive. It amends the monetary thresholds for the categorisation of companies referred to in Article 3(1) to (7) to account for the impact of inflation. The amendments increase the SME threshold by approximately 25% (slightly more in many cases after applying applicable rounding provisions). We understand that this means that 11,000 companies would no longer be in scope for CSRD.
Member States are required to apply these new thresholds at the latest from financial year 2024, with the possibility to opt for early application for financial year 2023. The Commission expects to adopt proposals in Q4 2023 with a requirement for Member States to apply transposing measures for financial years beginning on or after 1 January 2024, i.e. the first CSRD application date which will require initial reporting in 2025. Read our article here for more information.
Proposed Decision to delay the deadline for the adoption of third-country and sector-specific standards under CSRD
The Commission proposes to reduce the reporting burden for companies by delaying the date of adoption of the sector-specific European Sustainability Reporting Standards (ESRS) and the application of the ESRS for certain non-EU companies with business in the EU by two years (effectively until 2026). This is to allow companies to focus on the implementation of the first set of ESRS and to allow EFRAG more time to develop the sector-specific ESRS.
Following adoption by the European Parliament and Council, the proposed Decision will enter into force 20 days after it is published in the Official Journal of the EU.
Amendments to the EU BMR
The Commission published a legislative proposal to amend the EU BMR which aims to reduce the scope of the rules for benchmarks, the use in the EU of third-country benchmarks and certain reporting requirements1. The introduction of the EU BMR in 2018 has resulted in a significant burden for administrators as well as restricting the number of third-country benchmarks that can be used in the EU.
The proposed Regulation aims to address (i) the disproportionate registration burden on the administrators of non-significant benchmarks which arises as of the first use of a benchmark they offer; and (ii) the significant compliance burden on third country administrators which is potentially dissuasive and risks reducing the number and variety of benchmarks available to EU benchmark users.
The legislative proposal reduces the scope of the third-country rules to those benchmarks that are significant for the EU’s markets and limits the scope to EU benchmarks which are significant as well as EU Climate Transition benchmarks and EU Paris-Aligned benchmarks. Therefore, in future only administrators (both in the EU and non-EU) of critical benchmarks, significant benchmarks (which now have a quantitative threshold of EUR 50 billion), EU Climate Transition benchmarks and EU Paris-aligned benchmarks will be subject to the requirements under the EU BMR. This will therefore significantly reduce the number of administrators in scope: the Commission estimates that around 90% of the total number of administrators currently in scope are administrators of benchmarks that are less economically significant and therefore they will be taken out of scope.
In addition, going forward, EU benchmarks users should not need to individually verify the regulatory status of administrators of benchmarks they wish to use, instead they should be able to consult the ESMA register to check that the particular benchmark is not subject to a public notice prohibiting its use.
There have not been many changes to the third country regime as the Commission is of the view that many of the perceived issues have been addressed by limiting the scope of the legislation.
The proposal will now pass to the European Parliament and Council to negotiate and it is likely the Commission will aim for this to be completed by March 2024. The proposed Regulation will enter into force 20 days after it is published in the Official Journal of the EU and is stated to apply from 1 January 2026.
In the meantime, the Commission has adopted a delegated regulation which extends the transition period for the third country regime until 31 December 2025. This delegated regulation is expected to enter into force before the end of the year when the current transitional period expires, thereby avoiding a potential cliff edge. It is therefore helpful that the Commission is now looking to provide a longer term solution in its recent proposal.
Other relevant provisions included in the EU 2024 work programme
We note that the EU has also included many other proposals in its 2024 work programme. The most relevant for the sustainable finance industry, which have not been discussed above are:
- EU Taxonomy: the clarification that no assessment is needed for activities that are not material to their business and where they lack evidence or data to prove compliance with the technical screening criteria of the EU Taxonomy; and
- Data sharing arrangements: the Commission also proposes to facilitate data sharing between financial authorities overseeing the financial sector and to avoid duplicative reporting. See annex for more details.
United Kingdom
Call for evidence on Scope 3 emissions
On 19 October 2023, the UK Department for Energy Security and Net Zero (DESNZ) published an open call for evidence, UK greenhouse gas emissions reporting: Scope 3 emissions. Following the release of the International Sustainability Standards Board (ISSB) standards (which includes requirements to report Scope 1, Scope 2 and Scope 3 greenhouse gas (GHG) emissions), the DESNZ is calling for evidence as to the costs, benefits and practicalities of Scope 3 GHG emissions reporting to help inform the government’s decision as to whether to endorse the ISSB standards in the UK. The DESNZ is also seeking views on the current Streamlined Energy and Carbon Reporting (SECR) framework to inform a Post-Implementation Review of the policy. SECR requires reporting of Scope 1 and Scope 2 emissions, but reporting of Scope 3 is largely voluntary. SECR aims to increase awareness of energy costs and emissions by providing them with data which informs measures to increase energy efficiency and reduce impact on climate change as well as increasing transparency for the benefit of investors and stakeholders.
The closing date for comments is 14 December 2023.
UK has withdrawn draft corporate governance proposals to simplify corporate reporting
On 16 October, 2023, the UK Government has withdrawn draft regulations, originally published in July 2023, which would have added additional corporate and company reporting requirements to UK large listed and private companies. The proposed requirements included an annual resilience statement, distributable profits figure, material fraud statement and triennial audit and assurance policy statement to be included in annual reports. The proposal was withdrawn following the Smarter regulation non-financial reporting review: call for evidence on the wider non-financial reporting regime and concerns that the additional reporting requirements would have resulted in additional costs and layers of corporate information.
The Government will instead set out options to reform the wider framework, including establishing a new Audit, Reporting and Governance Authority to replace the existing Financial Reporting Council.
Review of the UK BMR
Although the UK Benchmarks Regulation is included amongst the list of core regulatory retained EU law files that the UK government plans to review and update for the UK market, it is not within the first or second tranches of files that are currently under review and were expected to be completed by the end of 2023.
There have been no announcements as to which legislative files might be included within tranche 3 yet, work on which is expected to be completed around 2025. It is possible the UK Benchmarks Regulation might be included within tranche 3 but this is not certain. HM Treasury has extended the transitional period for the third country regime under the UK BMR until 31 December 2025 which means it has some time to consider whether there might be merit in putting in place a more permanent solution as the EU is now doing with its recent proposal. In the meantime, the UK government may look across to the changes that the EU is currently contemplating and consider whether any might be appropriate for the UK. It will be important for market participants to keep track of developments and monitor any divergence.
Final Thoughts
It is helpful that both the EU and the UK are aligned in looking at how they can reduce the administrative and in particular the reporting burden on market participants.
With elections on the horizon next year in both the EU and the UK, there might be a change in the political dynamics which could result in changes to the legislative agenda. Market participants will need to monitor any relevant developments, including any divergence of approach in the EU and UK regulatory regimes.
Our Sustainable Finance & Investment practice brings together a multidisciplinary global team to support our clients in this mission-critical area.
This note is intended to be a general guide and covers questions of law and practice. It does not constitute legal advice.
