ESG 2024

2024: A Year of ESG Reporting, Due Diligence on ESG, and Global ESG Evolution

As we navigate through the 2020s, the ESG landscape continues to evolve at a rapid pace. The year 2024 stands out as a pivotal period, marked by significant regulatory developments and shifting priorities across the globe. This introduction to Chambers and Partners’ ESG Guide 2024 aims to provide an overview of the key trends and themes that are shaping the ESG agenda globally.

The rise of the EU Corporate Sustainability Due Diligence Directive and climate litigation

2024 is undoubtedly the year of the Corporate Sustainability Due Diligence Directive (CSDDD). The adoption by the EU of the CSDDD represents a milestone in mandatory due diligence on sustainability issues. This directive mandates companies to identify, prevent and mitigate adverse human rights and environmental impacts in their operations and supply chains. The final text – albeit a compromise – sets a new standard for corporate accountability and transparency.

The impact of the CSDDD extends beyond the EU, as companies operating globally will have to comply with its stringent requirements. This directive is expected to drive significant changes in corporate behaviour, pushing companies to adopt more sustainable practices and improve their ESG reporting.

Furthermore, we observe a new surge in climate litigation throughout the world, targeting both companies and governments. A few examples are mentioned here.

ECHR climate cases in 2024

In April 2024, the European Court of Human Rights (ECHR) issued rulings on the obligations of EU member states to protect human rights in the face of climate change. EU member states have an obligation to take effective measures to meet climate change targets and to address the serious adverse effects of climate change, the ECHR ruled.

Advisory opinion on climate change obligations of states at the International Court of Justice

On 29 March 2023, the United Nations General Assembly adopted the request led by Vanuatu for the ICJ to deliver an advisory opinion on the obligations of states in respect of climate change and submitted the request to the ICJ. The request specifically asks for an opinion on the responsibility of states towards (vulnerable) states – in particular, Small Island Developing States (SIDS) – and towards present and future generations affected by the adverse effects of climate change. A large number of states submitted written statements and the first public hearing in the case is scheduled for December 2024.

Milieudefensie v Shell (appeal) and Smith v Frontera

On 12 November 2024 the Court of Appeal of The Hague, the Netherlands, overturned the judgment requiring Shell to reduce CO2 emisssions by 45% by 2030. The crux of the ruling is that the Court of Appeal finds that Shell is obliged by an unwritten standard of care and human rights to reduce its CO2 emissions, but rejects the injunction sought by Milieudefensie. Such an injunction would require that Shell is obliged to specifically reduce its CO2 emissions by 45% by 2030 and that Shell is in danger of breaching that obligation. In the Court of Appeal’s view, this is not the case:

• Milieudefensie has insufficiently argued that Shell will not meet its reduction target of 50% for scope 1 and scope 2 emissions
• There is insufficient ground to impose on Shell a specific reduction obligation of 45% by 2030 for scope 3 emissions
• The requested injunction in relation to scope 3 emissions would be ineffective because other market participants could take over any activities that Shell would cease, such as the sale of oil and gas. As a result, no CO2 reduction would be achieved.

Incidentally, the Court of Appeal suggests that a ban on Shell's proposed investments in new oil and gas fields might be allowable, because of the lock-in effect.

The initial ruling in the Milieudefensie v Shell case in 2021 was a global first and gave rise to numerous other climate cases worldwide. For instance, the New Zealand Supreme Court recently allowed a similar case (Smith v Frontera) to proceed. In that case, the claimant is arguing that the GHG-emitting activities of New Zealand’s seven largest emitters amount to breaches of common-law duties of public nuisance and negligence.

The Court of Appeal’s rejection of the reduction in the Miliedefensie v Shell case may put these climate case in a different light.

Global ESG trends and regulatory developments

North America

In the USA, ESG issues have become a focus of regulatory and political debate. The SEC has been at the forefront, proposing new rules for climate-related disclosures. However, these proposals have faced legal challenges, reflecting polarised views on ESG regulation. The upcoming Presidential election adds another layer of uncertainty, as the outcome could significantly influence the direction of ESG policies.

Canada, on the other hand, has been proactive in integrating ESG considerations into its regulatory framework. The Canadian Securities Administrators (CSA) has introduced climate-related disclosure guidelines, emphasising the importance of transparency and accountability.

Europe

Europe continues to lead the way in ESG regulation. In addition to the CSDDD, the EU Corporate Sustainability Reporting Directive (CSRD), the European Green Deal and the EU Taxonomy Regulation are driving significant changes in the way companies report and manage their environmental impact. The focus on sustainable finance is also gaining momentum, with the EU Sustainable Finance Disclosure Regulation (SFDR) setting standards for financial market participants. Finally, the increased focus on greenwashing and sustainable product design – with the proposed EU Green Claims Directive and the recently enacted Ecodesign Regulation, respectively – is expected to have a large impact on market participants in Europe (and beyond).

Asia-Pacific

The Asia-Pacific region is witnessing a growing emphasis on ESG issues, driven both by regulatory initiatives and market demand. Countries such as Japan and South Korea are enhancing their ESG disclosure requirements, while China is integrating ESG considerations into its corporate governance framework. The region’s rapid economic growth and increasing environmental challenges make ESG a critical area of focus.

Africa and the Middle East

ESG factors have become increasingly important in Africa and the Middle East, especially considering that the region has been identified as one of the most vulnerable to the adverse effects of climate change. There is a noticeable trend towards the codification of ESG standards and reporting frameworks. As regards environmental sustainability, several countries have adopted legislation focusing on energy transition, security and efficiency.

Latin America

In Latin America, ESG issues are gaining traction – albeit at a slower pace compared to other regions. Brazil and Mexico are leading the way with regulatory initiatives to improve corporate transparency and sustainability. However, political and economic instability in the region poses challenges to the consistent implementation of ESG policies.

Key themes in 2024

Climate change and environmental sustainability

Climate change remains a central theme in ESG discourse. The increasing frequency of extreme weather events and the distortion in value chains due to the effects of climate change underline the urgent need to transition to a low-carbon economy. Mitigating these effects and managing the financial, physical and transition risks of climate change are driving regulatory and corporate action. Companies are under pressure to set ambitious carbon reduction targets and improve their climate resilience.

Social responsibility and human rights

Social issues, including human rights, labour practices, and community engagement, are gaining prominence. The CSDDD’s focus on human rights due diligence highlights the growing importance of social responsibility in corporate governance. Companies are expected to adopt more robust policies to address social risks and ensure ethical practices throughout their supply chains.

Governance and accountability

Good governance is the cornerstone of effective ESG management. Companies are being held to higher standards of accountability, with increased scrutiny from regulators, investors, and stakeholders. This is reflected in the recent growth of ESG and sustainability provisions in Corporate Governance Codes around the world. Board diversity, executive compensation, and anti-corruption measures are key areas of focus, as companies seek to build trust and demonstrate their commitment to ethical governance.

Outlook for 2025 and beyond

Looking ahead to 2025, several key developments are expected to shape the ESG landscape:

• US Presidential election – the outcome of the 2024 US Presidential election will have a significant impact on ESG policies. A change in administration could lead to shifts in regulatory priorities, impacting climate-related disclosures, corporate governance, and social responsibility initiatives.
• Global economic trends – economic conditions in different regions will influence ESG priorities. By way of example, the ongoing energy transition and the push for sustainable finance will drive investments in green technologies and infrastructure, while policymakers balance the interest to address generally high inflation levels.
• Climate targets – it has already been widely reported in the news that the climate goals of the Paris Agreement seem to be getting out of sight. There has also been a call from more than 15,000 scientists to act sooner rather than later. We are thus at a crucial point; additional measures may be (or have to be) taken to meet the targets. This could put additional pressure on companies.
• Technological advancements – innovations in technology, such as AI and blockchain, are expected to improve ESG data collection, analysis, and reporting. These advancements will enable companies to better manage their ESG risks and opportunities.
• Stakeholder engagement – the role of stakeholders, including investors, customers and employees, will continue to be crucial in driving ESG performance. Companies that actively engage with their stakeholders and respond to their concerns will be better positioned to succeed in the evolving ESG landscape.
• Diverging ESG regulations – companies that are active across jurisdictions are facing increasing regulatory pressure from a variety of ESG regulatory initiatives, posing impediments to global trade.

In conclusion, 2024 marks a significant year for ESG developments, with the CSDDD setting a new benchmark for corporate sustainability. As we move forwards, companies will need to navigate a complex and dynamic regulatory environment, while embracing the opportunities presented by the global shift towards sustainable and responsible business practices.