European Union

Sustainable development is one of the European Union’s fundamental policy objectives. Over the decades, EU lawmakers have introduced a raft of treaties and regulations that manage how European companies impact the environment, workplace and corporate governance. 

Sustainability provisions are in the Treaty of Amsterdam, the Treaty of European Unionthe Sustainable Development Strategy, the Better Regulation Agenda, the Environmental Action Program, the Non-financial Reporting Directive and the Green Deal. The EU’s sustainability policy direction is in part guided by the United Nation’s 2030 Agenda and 17 Sustainable Development Goals, of which it was an instrumental contributor. 

The EU’s aims are economic growth, price stability, competitive market economy, full employment, social progress and the protection and improvement of the environment across all member states. Yet, being the world’s largest trading bloc, the implications of EU sustainability policies on companies that wish to do business with or in Europe will be substantial. This is already observed in the effects that the Registration, Evaluation, Authorization and Restriction of Chemicals, or Reach, has had on the global chemicals industry and many other industries. The Green Deal and the updated Non-Financial Reporting Directive will likely have a similar impact outside of the EU. 

NFRD: Landmark Directive 

The NFRD is the EU’s landmark sustainability legislation. Designated Directive 2014/95/EU, the NFRD is considered one of the first major steps toward widespread mandatory sustainability provisions and was fully adopted by all 28 EU member states, as was, by 2018. The current version of the NFRD aims to enable investors, consumers and other stakeholders to evaluate large companies’ non-financial performance and foster a more sustainably responsible operations.

The directive requires companies operating in the EU with a workforce of 500 people or more to disclose their non-financial information and describe their impacts and mitigation strategies related to five areas of their business: the environment, Society and workforce, executive diversity, human rights, and anti-corruption and bribery. 

Organizations covered by the NFRD are described by the legislation as “listed companies, banks, insurance companies and other companies designated by national authorities as public-interest entities.” The NFRD gives companies the latitude to select from the plethora of reporting frameworks the one that aligns with ISO 26000. The resulting non-financial statement can exist outside of the annual report and be submitted separately. 

As a supplement to the NFRD, the European Commission published its guidelines on disclosing environmental and social information in 2017, then in 2019 the guidelines on reporting climate-related information. The guidelines aim to “help companies disclose high quality, relevant, useful, consistent and more comparable non-financial … information in a way that fosters resilient and sustainable growth and employment, and provides transparency to stakeholders,” says the EU in its guidelines on non-financial reporting.  

The NFRD’s stipulations will potentially be strengthened to support the goals of the Green Deal and the proposed Corporate Sustainability Reporting Directive. Some of this support could be derived from stakeholder opinions gathered during the European Commission’s 2020 Inception Impact Assessment on the Revision of the Non-Financial Reporting Directive. Feedback included, among other things, that even smaller companies should be mandated to disclose. 

“A significant current development is the European Commission’s review of the [NFRD], which aims to ensure mandatory sustainability reporting by all companies of over 250 employees in the European market, an effort GRI fully supports,” Thijs Reuten, the head of policy at the Global Reporting Initiative, told Sustainability InSite. 

There are about 25 million active enterprises in the EU. Of those, 6,000 employ more than 500 people, whereas 50,000 have a staff more than 250. Companies are only compelled to report and not to make adjustments to their operations. Sweden and Finland already require that companies of 250 staff or more should disclose and in Greece it is a few as 10. 

The consultation also reported that it was “hard for investors and other users to find non-financial information even when it is reported.” Critics point to companies’ exemption from disclosing non-financial statement with management reports.  

The NFRD has been criticized for not being forward-looking enough. Critics also point to the variances in codifying the directive into individual member states’ laws. Companies are responsible for compliance and must also be aware of national variations across the bloc. They argue that the side effect of disharmony is increasing the complexity of compliance efforts for companies with operations throughout the bloc. This could rule out certain countries as destinations to establish operations by non-EU entities. Lastly, there are concerns that the NFRD’s broad approach may not suffice to reach the climate goals it set out to achieve in the first place. 

Corporate Sustainability Reporting Directive

In 2021, the EU proposed a new directive that would amend and extend the scope of the NFRD. The draft directive will apply to all large companies and companies listed on regulated markets. It will also lay out more detailed reporting requirements, including a requirement to report according to mandatory EU sustainability reporting standards. This expanded scope could cover 50,000 enterprises in the EU zone.

Other aims of the CSRD include transparency for investors; tag the disclosed information with a digital marker so that its machine readable for integration with the Capital Markets Union action plan; so-called double materiality, whereby companies report their impacts as well as the impact climate change has on the organization; and provide clarity for ESG investors.

EU Taxonomy Regulation 

The EU Taxonomy Regulation is a classification system that sets out a list of what it considers are environmentally sustainable economic activities. It seeks to address the lack of standardized definitions and processes in environmental, social and governance reporting. The regulation does this by providing a classification system that investment firms must use to classify investments based on NFRD data, as well as other data sets, with a longer-term aim to replace voluntary systems in Europe. 

Published in June 2020, it has six main objectives: the mitigation of climate change, adaptation to climate change, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems. It is estimated that it will cover industries that generate 80% of all greenhouse gas emissions in the bloc.

The regulation currently encompasses environmental factors, but social and governance will be included by the end of 2021. The environmental classification system came first in order to meet the first Paris Agreement deadline in 2020, which virtually every country missed. 

The Taxonomy Regulation’s first delegated act came into force Jan. 1, 2022, and covers sustainable activities for climate change adaptation and mitigation. The European Commission started consultations on the second delegated act, which will cover the remaining objectives. Delegated acts are non-legislative acts adopted by the European Commission that serve to amend or supplement the non-essential elements of the legislation. In the meantime,

Sustainable Finance Disclosure Regulation 

Under the Sustainable Finance Disclosure Regulation, investment companies must disclose the environmental sustainability of their investments, as well as the veracity of any ESG claims. The SFDR and the Taxonomy Regulation provide investment companies with a compliance framework with the Paris Agreement climate targets and the UN 17 SDGs. 

Emissions Trading System 

The cap-and-trade style Emissions Trading System is the cornerstone of the European Union’s plan to reduce carbon emissions by 55% by 2050. According to the EU, it limits omissions from more than 11,000 heavy energy using installations, including power stations and industrial plants, as well as airlines operating between EU member states plus Iceland, Liechtenstein and Norway. 

The scheme, set up in 2005, now covering about 45% of the EU’s greenhouse gas emissions and limits emissions from the largest emitting companies. It works by setting a gradually lowering cap on the total quantity of greenhouse gases that can be emitted by a participant installation. Companies can receive or buy allowances that must be surrendered at the end of each year; otherwise heavy fines are imposed. 

Participant companies can trade allowances or keep spare ones to cover future emissions. As the cap is reduced, fewer allowances are available which drives up their value and makes energy saving more financially attractive.

Additional Regulations and Initiatives

Ecodesign Directive: framework to set mandatory ecological requirements for 40 energy-using and energy-related product groups.

Sustainable Products Initiative: initiative to revise the Ecodesign Directive and propose additional legislative measures as appropriate, with the aims to make products on the EU market more sustainable.

Ecodesign for Sustainable Products Regulation: proposed regulation to expand the existing Ecodesign Directive, published March 30, 2022.

Circular Economy Action Plan:  a collection of 54 legislative and non-legislative actions aimed to transition the European economy from a linear to a circular model and four legislative proposals on waste. The plan was adopted in 2015 and ended in 2020.