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EU Sustainability Regulations mean good things for the planet and a lot more compliance for companies. Read here for a handy decoder summary from Joel Makower of GreenBiz.
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EU Sustainability Regulations
They’ve been plenty busy across the pond.
Over the past year or so, a series of regulations and proposed rules have been handed down by the European Union affecting companies based or operating on that continent, including thousands of U.S. firms. It’s a dizzying and confusing array of initiatives, not to mention the acronyms that go with each.
Just last week, the European Parliament endorsed a Corporate Sustainability Due Diligence Directive, or CSDDD, the latest unwieldy moniker among a portfolio of initiatives that govern corporate reporting and marketing claims.
Here’s a cheat sheet of what’s new:
Corporate Sustainability Due Diligence Directive (CSDDD) aims “to establish a European framework for a responsible and sustainable approach to global value chains, given the importance of companies as a pillar in the construction of a sustainable society and economy.” Simply put, it requires companies to take responsibility for their environmental and social impacts as well as those of their suppliers
Who must comply: EU companies with more than 250 employees and about $43 million revenue — or those with parent companies of more than 500 employees or that have global revenue of at least $161 million. Non-EU companies with revenue of $43 million within the EU or with parent companies with at least $161 million revenue and at least $43 million generated in the EU.
What it mandates: It requires companies to conduct due diligence of the potential impact of operations and supply chains on the environment and human rights; mitigate risks and develop policies and procedures to address those risks; publicly report efforts to address environmental and human rights risks; evaluate the effectiveness of due diligence procedures at least once every 12 months; and establish grievance mechanisms that enable employees and stakeholders to raise concerns.
Status: Draft approved by the European Parliament and Council, to be finalized during 2023.
Corporate Sustainability Reporting Directive (CSRD) requires that companies disclose sustainability issues from a “double materiality” perspective, meaning companies must provide third-party audited reports describing how such issues affect their business as well as how their business affects people and the environment. The CSRD replaces the Non-Financial Reporting Directive, adopted in 2014 by the EU, which required companies to provide nonfinancial disclosure documents — known to most of us as “sustainability reports.”
Who must comply: European companies meeting two of the following three conditions: $43 million in net revenue, $22 million in assets or 250 or more employees. It applies to non-EU companies if they have substantial activity in the EU, including a physical presence: specifically, net revenue of $161 million in the EU for each of the last two consecutive years and a listed EU subsidiary that generated a net turnover greater than $43 million in the preceding year.
What it mandates: Companies must disclose information on “sustainability matters” that affect the company, including such matters as the resilience of the company’s business model and strategy to sustainability risks; and plans that align with the 1.5 degree Celsius global warming target under the Paris Agreement.
Status: The rule will start applying between 2024 and 2028, depending on company size, starting with the largest (over 500 employees) on Jan. 1.
European Sustainability Reporting Standards (ESRS) aims for interoperability with various reporting standards, such as those from the International Sustainability Standards Board, the Task Force on Climate-related Financial Disclosure, and the Global Reporting Initiative, to avoid double disclosure efforts by companies. Sector-specific standards are planned for release starting in 2024.
What it mandates: ESRS establishes guidelines on the topics and indicators companies should include in their sustainability reports, including on climate change, water and resource management, biodiversity, human rights, labor practices, diversity and anti-corruption measures. The ESRS also introduces the concept of double materiality, expands a company’s reporting boundary to its entire value chain, and significantly impacts the scope, volume and granularity of information to be disclosed.
Who must comply: EU companies that meet at least two of the three criteria: more than 250 employees, more than $43 million in revenue or more than $22 million in total assets. Non-EU parent companies whose securities are listed on EU-regulated markets with EU revenue of more than $161 million.
Status: Companies will be required to report under the ESRS starting between 2024 and 2026 depending on company size.
There’s an alphabet soup bowlful more on the way. For example, the Green Claims Directive, adopted in March, aims to eliminate greenwashing across EU markets by setting out detailed rules for how companies should market their environmental impacts and performance. A recent study by the European Commission of 150 environmental claims found that 53.3 percent provided “vague, misleading or unfounded information on products’ environmental characteristics.” It will apply to EU companies and non-EU companies making environmental claims aimed at EU consumers. The proposal is going through the lengthy process of approval by the European Parliament and the EU Council, after which it will need to be adopted by member states.
And then there’s Prohibiting Products Made with Forced Labor on the Union Market Regulation (PPMFLR), which aside from winning the prize for the most awkward acronym would prohibit products made with forced labor on the EU market. The proposed regulation was adopted by the EU Commission in September and needs to be blessed by the European Parliament and the EU Council.
Of course, we’re still waiting for the U.S. Securities and Exchange Commission to issue its rules to require climate change disclosure in the annual reports and registration statements of public companies. Expect those this fall — followed, no doubt, by months or years of legal wrangling in U.S. courts. That, after all, is the American way.
