🌍 Evolution of ESG Regulations in the EU: A Changing Regulatory Landscape
In 2024, the European Union positions itself at the forefront of ESG (Environmental, Social, Governance) regulation, introducing significant legislative measures that will shape the future of corporate sustainability.
The Corporate Sustainability Reporting Directive (CSRD), in particular, is set to revolutionize how companies engage with sustainability.
With the implementation of the CSRD, businesses must adapt to an ever-evolving regulatory context, facing challenges and opportunities arising from a heightened focus on transparency and corporate responsibility.
This regulatory movement reflects a global trend towards a deeper, more structured commitment to sustainability and ESG reporting, as evidenced by similar initiatives in other countries, such as the United States, where the SEC is ramping up its rules regarding greenhouse gas emissions disclosure.
🔍 The CSRD and the Definition of New Reporting Standards
Starting January 1, 2024, the CSRD will replace the previous Non-Financial Reporting Directive (NFRD), significantly expanding the scope of reporting requirements. Companies will be required to provide detailed information related to their strategy, governance, and sustainability policies, including aspects such as greenhouse gas emissions, water resource utilization, biodiversity, working conditions, and impact on local communities.
The disclosure of sustainability goals and transition plans is also anticipated, along with the implementation of due diligence processes in relation to environmental and social risks and impacts associated with corporate operations, business relationships, and value chains.
This new approach to reporting is based on the principle of "double materiality", considering a topic material if it can reasonably affect the company's cash flows, access to financing, or cost of capital in the short, medium, or long term, or if it significantly impacts people or the environment.
🌱 EU Taxonomy Reporting Obligations
With the introduction of the EU Taxonomy Regulation in 2020, a classification system was established, defining criteria for economic activities aligned with a net-zero trajectory by 2050, along with broader environmental objectives. Businesses within the scope of the Non-Financial Reporting Directive (NFRD) now have to report on the extent to which their activities substantially contribute to six specified EU environmental goals. Starting in 2024, this obligation will extend to more companies with the adoption of the Corporate Sustainability Reporting Directive (CSRD).
The CSRD significantly broadens the scope of reporting requirements, expanding from the current 11,000 companies covered under the NFRD to about 50,000 companies.
The regulation also includes a feedback mechanism for stakeholders, allowing them to propose amendments to the list of sustainable activities.
🔗 Adoption of CSDD: Impacts on Businesses
The Corporate Sustainability Due Diligence Directive (CSDDD) is another significant EU legislative initiative that will impose a sustainability due diligence duty on companies to identify, prevent, mitigate, and account for specific adverse human rights and environmental impacts in their operations, subsidiaries, and value chains.
Applicable to large EU companies with over 500 employees and a global turnover of over €150 million, as well as smaller companies in high-impact sectors, the CSDDD will have an indirect impact on any supplier to a company within its scope.
The rules are expected to come into force first for group 1 companies, and two years later for group 2 companies.
🌐 Upcoming Revolutions: Feedback on SFDR and Greenwashing
The Sustainable Finance Disclosure Regulation (SFDR), introduced in March 2021, requires EU financial market participants, such as authorised alternative investment fund managers, to disclose information to investors regarding, for example, sustainability risks and consideration of adverse sustainability impacts in their investment processes.
The European Commission initiated two consultations to review the framework's potential shortcomings, particularly focusing on issues such as legal certainty, usability, and the regulation's role in combating greenwashing.
A report on the next phase of SFDR's development is expected in Q2 2024.
This approach reinforces the importance of transparency and accountability in corporate sustainability practices, highlighting the growing focus on greenwashing and the need for effective preventive measure.