As of June, 2023
In the past year or so, the European Union has implemented a range of regulations and proposed rules that impact companies operating in or based on the continent, including numerous U.S. firms. These initiatives, accompanied by their associated acronyms, create a complex and bewildering landscape.
Recently, the European Parliament approved a directive called the Corporate Sustainability Due Diligence Directive (CSDDD), adding to the already extensive set of measures that regulate corporate reporting and marketing assertions.
Here’s a cheat sheet of the latest regulations:
The Corporate Sustainability Due Diligence Directive (CSDDD)
The Corporate Sustainability Due Diligence Directive (CSDDD) aims to establish a European framework for responsible and sustainable practices in global value chains. Its main goal is to hold companies accountable for their environmental and social impacts, as well as those of their suppliers. Simply put, the directive requires companies to take responsibility for their overall sustainability performance.
Who must comply: The directive will introduce obligations for EU companies, and non-EU companies operating within the EU, regarding actual and potential human rights adverse impacts and environmental adverse impacts with respect to their own operations and those of their subsidiaries and other entities in their value chain.
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: Proposed Directive on Corporate Sustainability Due Diligence (CSDD) The proposed Directive will oblige companies within scope to monitor their chain of activities to identify and mitigate adverse human rights and environmental impacts arising from their operations, their subsidiaries and their chain of activities.
Status: Draft approved by the European Parliament and Council, to be finalized during 2023.
The Corporate Sustainability Reporting Directive (CSRD)
The Corporate Sustainability Reporting Directive (CSRD) requires that companies disclose sustainability issues from a “double materiality” perspective. Meaning companies must provide third-party audited (assurance) 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.” The purpose of the Green Deal is to make Europe the first climate-neutral continent by 2050.
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: Firms falling into scope of CSRD must report on their governance structures, strategy and business models and the output of a materiality assessment in relation to material sustainability matters and topics for their undertaking. 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.
The European Sustainability Reporting Standards (ESRS)
The European Sustainability Reporting Standards (ESRS) will be the standard of sustainability reporting that companies will have to adopt in the coming years according to the deadlines set for different categories of companies.
The ESRS are standards that define the rules of the Corporate Sustainability Reporting Directive (CSRD). They set the structure and disclosure requirements that companies, banks and insurance companies in scope will need to report on.
The 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.
The Green Claims Directive
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.
The Directive aims to eliminate misleading environmental messaging across EU markets and address greenwashing concerns by setting out the EU’s first set of 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.
The Prohibiting Products Made with Forced Labor on the Union Market Regulation (PPMFLR)
The Prohibiting Products Made with Forced Labor on the Union Market Regulation (PPMFLR), would prohibit products made with forced labor on the EU market.
The European Commission proposed a regulation on September 14, 2022, to ban products made with forced labor, including child labor, from the European Union (EU) market. The legislation aligns with the EU’s efforts to promote fair employment globally.
The proposed regulation applies to all products within the EU market, including domestically produced goods, exports, and imports, irrespective of the sector. Member States would be responsible for enforcing the regulation, with national authorities authorized to remove products made with forced labor from the market after conducting investigations. Customs authorities would identify and intercept such products at EU borders. The file is currently under the purview of the Committee on the Internal Market and Consumer Protection (IMCO) in Parliament, with Maria-Manuel Leitão-Marques serving as the rapporteur.
The U.S. Securities and Exchange Commission (SEC)
Finally, The U.S. Securities and Exchange Commission (SEC) has issued a rule proposal to standardize the way organizations make climate-related disclosures. The rule proposal would require US publicly traded companies to disclose annually how their businesses are assessing, measuring and managing climate-related risks. This would include disclosure of greenhouse gas emissions as a measure of exposure to climate-related risk
According to Thomson Reuters the reporting timeline will potentially span from 2024 to 2027 with a legal obligation to report. Once the rules are finalized companies will need to consider the full timeline and regulations with which they’ll have to comply under the SEC’s climate rules.
