A Rundown: The European Union’s sustainability regulations and how to comply
At a time when environmental and social responsibility practices are increasingly prioritized, the corporate world is undergoing a sustainability-centered transformation.
The European Union has introduced several regulations, including the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), and the European Sustainability Reporting Standards (ESRS) to ensure more sustainable corporate practices.
The European Union’s sustainability-centered regulations aim to increase transparency in corporate sustainability reporting and normalize the inclusion of sustainability metrics within business operations. Aside from ensuring sustainable business practices, the guidelines will allow companies to communicate their commitment to sustainability, which has shown to be vital in creating and maintaining robust relations with consumers and investors.
Significantly, European sustainable funds attracted inflows of €120 billion in the first quarter of 2021. In addition, a 2022 study by Nielsen IQ found that 78% of consumers say a sustainable lifestyle is important, and 30% are more likely to purchase products with sustainable credentials. These findings highlight the importance of complying with sustainability regulations and integrating environmentally friendly practices within business operations.
What are the European Union’s Sustainability Regulations?
The European Union’s larger efforts to spearhead a robust and sustainable economic environment include the following regulations and systems:
CSRD
Put in action in January 2023 as part of the European Green Deal, the CSRD requires companies to disclose their environmental, social, and governance (ESG) impacts and risks. It expands on the scope of the Non-Financial Reporting Directive (NFRD), including the double materiality concept (sustainability risks reporting) in its disclosures.
ESRS
Adopted in July 2023, the ESRS is a set of reporting standards that companies eligible for the CSRD must align their reporting with. The ESRS mandates companies to report on the impact of their operations on people, the environment, and how sustainability issues affect their financial performance.
EU taxonomy
Established in 2020, the EU taxonomy is a classification system that details sustainable economic activity.
CSDDD
Adopted in February 2022, the CSDDD is a directive that establishes corporate due diligence duty, requiring companies to identify, prevent, and mitigate negative human rights and environmental impacts of their operations.
SFDR
The Sustainable Finance Disclosure Regulation (SFDR) mandates financial market participants and financial advisors to disclose information on how they integrate ESG factors into their corporate practices. Those eligible must disclose the adverse impacts of investment decisions on sustainability, sustainability risks in investment processes, and renumeration for sustainability risks.
What are the differences between CSDDD, ESRS, SFDR and CSRD?
The main differences between the regulations are as follows:
Mandatory Directive vs. Reporting Standard: The CSRD and CSDDD are compulsory directives that all eligible companies must comply with. The CSDDD mandates companies to conduct due diligence in supply chain operations, while the CSRD mandates companies to report on their environmental and social impact activities. The ESRS is a standard reporting part of the CSRD that indicates what information companies must disclose.
Evolving Status: While the CSDDD has been finalized, a new version of the ESRS was released in 2023, and its components are expected to evolve.
Financial Market Participants: Unlike the CSDDD and CSRD, the SFDR regulates reporting on specific financial market participants, including financial advisors.
Which companies are affected by the regulations?
EU leaders have sought to implement various regulations to foster responsible corporate behavior. Here is a list of companies or relevant entities that currently must comply with them:
CSRD
All large EU companies and those listed in EU-regulated markets. These are companies with over € 20 million in total assets, a net turnover of €40 million, and over 250 employees.
SMEs and non-European companies that have a net turnover of €150 million in the EU and have at least one branch within the EU must also participate.
Here is a timeline of when specific companies must participate in CSRD reporting:
Companies that are already subjected to the NFRD must report on 2024 data by January 1, 2024
Large companies that were not previously subjected to the NFRD must participate by January 1, 2025
SMEs participate from January 1, 2026
Third-country companies participate from January 1, 2028
ESRS
Large companies, meaning companies with over 250 employees, €20 million in assets, or €40 million net turnover
Listed EU companies, including SMEs
Non-EU parent companies which have securities listed in EU markets with a net turnover of €150 million in the EU
The timeline of when specific companies must comply with the ESRS or begin reporting:
Companies that are already subjected to the NFRD must participate in ESRS reporting by January 1, 2024
Companies that are not subjected to the NFRD must participate in ESRS reporting from January 1, 2025
SMEs and small and non-complex credit institutions must participate in ESRS reporting from January 1, 2026
EU taxonomy
Companies with over 500 employees during the financial year must comply with the regulation.
CSDDD
EU companies with over 500 employees and a net worldwide turnover of over €150 million
If over half of their net turnover was produced in a high-risk sector (e.g., textiles, agriculture, and mineral production), EU companies with more than 250 workers and a net worldwide turnover of more than €40 million must comply.
Non-EU companies that generate a net turnover of more than €150 million in the EU
Non-EU companies that produce a net turnover of more than €40 million in the EU and where at least half of their worldwide turnover is generated in a high-risk sector
SFDR
All financial market participants and financial advisors within the EU, including insurance companies, investment firms, and credit institutions.
How can businesses comply with regulations like the CSDDD, CSRD, and ESRS?
Familiarize yourself with each regulation’s requirements and determine if your company must comply with them.
Evaluate reporting practices: This allows leaders to determine potential challenges in meeting the CSDDD, CSRD and ESRS requirements. Potential challenges may include insufficient available data and identifying environmental, social, and governance (ESG) risks. The information gathered will allow companies to develop reporting strategies, including more precise data collection practices.
Conduct site visits: As sustainable supply-chain operations are key to the CSDDD, analyzing supplier operations by visiting relevant locations where your products are made is integral to ensuring compliance.
Record and monitor current business practices: Doing so is essential to complying with each regulation’s requirements and ensuring that business practices align with acceptable standards. Using carbon footprint platforms can streamline the process, making it easier for businesses to comply with the regulations.
How can financial market participants comply with the SFDR?
1. Classify your products to ensure that they fit into one of the following three categories:
Article 6: funds that do not integrate sustainability into the investment process
Article 8: funds that integrate ESG or sustainability into the investment process
Article 9: funds that aim for sustainable investment
2. Disclose relevant information related to ESG policies, risks, impacts, and performance. These disclosures must be provided on pre-contractual documents, periodic reports, and websites.
3. Update your product documentation to reflect the SFDR requirements.
4. Ensure that you continue to comply with the necessary disclosures.
Final Words
While rules like the CSDDD, ESRS, SFDR, and CSRD may be challenging to navigate at first, complying with them is essential to future business success. Through the regulations mentioned, companies can better identify areas of improvement, manage business continuity risks associated with environmental issues, and promote sustainable practices that bolster stakeholder trust. Ultimately, complying with the regulations ensures longevity in business operations and contributes to building a sustainable corporate landscape.
At Footprint Intelligence, we take pride in making it easier for companies to comply with regulations and implement steps to achieve their decarbonization goals.
