Keeping tabs on the EU ESG regulations

European Union (EU) policymakers are paving the way regarding environmental, social and governance (ESG) and sustainability regulations, and U.S. companies need to understand what might be in store for them.

What are the EU ESG regulations?

In 2019, the European Commission presented the European Green Deal, which provided the European Union with a road map for developing a sustainable economy through policymaking. The European Green Deal represented a commitment to solving climate and environmental-related challenges. As stated by the European Commission, “The EU has the collective ability to transform its economy and society to put it on a more sustainable path” [1].

Two key directives from the European Green Deal are the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR), which significantly impact the EU market but can also impact US organizations.

To drive transparency and consistency in sustainability reporting, the EU introduced the CSRD, which requires companies to report on the impact of corporate activities on the environment and society. This directive provides investors and stakeholders with the information necessary to assess investment risks arising from climate change and other sustainability issues. It is comprehensive and covers various environmental, social, and governance topics. The CSRD is centered on double materiality, meaning organizations must disclose financial material ESG impacts and those that could materially impact broader society. The directive has been in effect since January 2023, but disclosures are not required until 2025.

The European Commission recognized that to achieve their ambitions, as set out by the European Green Deal, significant investment would be required. As part of this goal, the EU introduced the SFDR to combat greenwashing, steer the flow of capital toward sustainable investments and encourage transparency in the financial market. The SFDR requires financial market participants and financial advisers to disclose sustainability risks that could cause a material negative impact on the value of an investment. Released in tandem with the SFDR, the EU Taxonomy Regulation is a green classification system defining criteria for investments aligned with a net zero trajectory by 2050 and other environmental goals set forth by the European Green Deal. The SFDR has been in effect since March 2021.

How does it affect my business?