ESG: keeping track of recent regulatory developments

In 2023 we witnessed a further rapid development of the EU regulatory framework on ESG. The European Commission remains committed to the EU’s ambition to become the first carbon-neutral continent by 2050. As in previous years, this results in no time to waste on the legislative front, with a continuing flow of new ESG regulation that is expected to have a major impact on companies operating in the EU. We have highlighted a number of key regulatory developments that should be a priority topic for companies to consider.

Following the formal publication of the Corporate Sustainability Reporting Directive (CSRD) in December 2022, the European Commission has been hard at work to finalise the Level 2 European Sustainability Reporting Standards (ESRS), which further complete the CRSD framework The standards cover the full range of environmental, social, and governance issues, including climate change, biodiversity and human rights. They provide information for investors to understand the sustainability impact of the companies in which they invest. In doing so, CSRD is on track for its entry into force as from 2025, which will be gradual based on company size.

In addition, the past year saw the second reporting cycle under the new EU Taxonomy Regulation (EUT), which required companies in scope of the non-financial reporting directive (NFRD) (i.e. large EU PIEs) to report on taxonomy eligibility and alignment in relation to climate change mitigation and climate change adaptation, as the first two environmental objectives under the EU Taxonomy Regulation. Perhaps more importantly, significant progress was also made on finalising the Regulatory Technical Standards (RTS) for the remaining 4 environmental objectives. These will come into effect as from next year, thereby significantly expanding the scope of Taxonomy reporting.

Developing the right ESG reporting under CSRD and EUT is a serious challenge for many organizations. The amount of ESG metrics is vast and varies by industry, company size and complexity. In addition, there are many different measurement and reporting frameworks worldwide.

In December 2023, the EU Council and the European Parliament reached a provisional deal on the corporate sustainability due diligence directive (CSDDD), which aims to enhance the protection of the environment and human rights in the EU and globally. The due diligence directive will set obligations for large companies regarding actual and potential adverse impacts on human rights and the environment, with respect to their own operations, those of their subsidiaries, and those carried out by their business partners.

The due diligence directive lays down rules on obligations for large companies regarding actual and potential adverse impacts on the environment and human rights for their business chain of activities which covers the upstream business partners of the company and partially the downstream activities, such as distribution or recycling.

The directive also lays down rules on penalties and civil liability for infringing those obligations; it requires companies to adopt a plan ensuring that their business model and strategy are compatible with the Paris agreement on climate change.

CSDDD is expected to be formally adopted in the next year and may become applicable as from 2026.

Given the impact of the directive on corporate due diligence processes, CSDDD should already be on companies’ regulatory horizon.