In today’s rapidly changing world, with climate change causing significant effects on the planet and people’s lives, the European Union (EU) has positioned itself at the forefront of integrating sustainability into multi-national policies that will impact businesses everywhere. With a comprehensive suite of regulatory frameworks, the continent has developed a multifaceted and forward-looking approach that is deeply rooted in protecting the environment and local populations for generations to come.
But navigating all these regulations and timelines can be complex; many are still being fleshed out in terms of their scopes, details and timelines. Let’s unpack some of the key EU regulations and what they may mean for your business.
The TCFD focuses on the financial implications of climate change. Originating from the Financial Stability Board (FSB) in 2015, the TCFD recommends organizations disclose their climate-related financial risks and opportunities in their financial statements. Although TCFD disclosures are currently voluntary, they have gained global recognition and support from financial institutions, governments, and industry associations worldwide. As of October 2021, it had over 2,600 supporting organizations, including more than 1,000 financial institutions.
The TCFD covers four key themes: climate governance, strategy, risk management, and metrics/targets for reducing greenhouse gas emissions. It places significant emphasis on scenario analysis, which involves assessing the potential impacts of different climate change scenarios on a company’s financial performance and resilience.
Read more about the TCFD here
On January 5, 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. This directive aims to standardize and improve the quality of data issued by companies with regards to sustainability. It requires them to provide sustainability statements, in line with a set of standards developed by an independent body called the European Financial Reporting Advisory Group (EFRAG). Beginning in 2024, companies will commence reporting in accordance with the CSRD, with the first reports expected to be published in 2025.
The CSRD is mandatory for all companies that meet at least two of the following conditions:
June 26, 2023, marked a significant moment when the International Sustainability Standards Board (ISSB) introduced its first-ever sustainability (IFRS S1) and climate (IFRS S2) financial disclosure standards, collectively referred to as the ISSB Standards. These standards represent a crucial milestone as they provide a consistent framework for reporting environmental, social, and governance (ESG) responsibilities. This move is set to transform the landscape of ESG reporting, making it a more integral part of corporate financial statements.
From next year, companies can start using the ISSB framework, and the first set of reports following these standards is expected to be available to investors by 2025. Whether the adoption of ISSB will be made mandatory is for individual countries to decide. The World Economic Forum will submit regular updates to the ISSB on the progress made by companies in adopting the standards.
On May 16, 2023, the European Union (EU) formally implemented the Carbon Border Adjustment Mechanism (CBAM). This regulation’s primary objective is to ensure a balanced economic environment by preventing “carbon leakage.” It will initially target sectors that develop products with a high potential for carbon leakage, such as iron, steel, cement, electricity, hydrogen and fertilizers. As the CBAM is gradually phased in, its scope and coverage will expand. A carbon fee will be imposed on companies importing goods into the EU if those goods are manufactured with emissions exceeding the limits set by EU standards. This levels the playing field for EU producers and protects the European market from products produced with lax environmental standards.
The European Council has greenlit the EUDR regulation, with the compliance cut-off set for December 2024. This regulation is structured to counteract deforestation and encourage sustainable supply chain practices. Businesses and traders must demonstrate that their sourcing doesn’t contribute to deforestation for specific commodities entering the EU. This entails pinpointing, evaluating, and mitigating deforestation risks within their supply routes. Non-compliance could result in penalties, which can amount to as much as 4% of an organization’s revenue. Commodities sourced from countries including Malaysia, Indonesia, Brazil, Argentina, and a list of others, like India and Vietnam, will face the most significant scrutiny under this regulation.
The EU Taxonomy is a classification system, providing a structured framework to identify environmentally sustainable economic activities, aligning with the European Green Deal’s objectives. As mandated by the Taxonomy Regulation, the Commission crafted a list of these activities, introducing specific technical criteria for each environmental goal. This initiative mandates companies under the Corporate Sustainability Reporting Directive (CSRD) to specify in their annual reports the proportion of their activities compliant with the activities covered by the EU Taxonomy and comply with the criteria set in delegated acts.
Europe’s proactive stance on environmental regulations and frameworks highlights the region’s commitment to sustainability. For companies, understanding and integrating these regulations into their operations and long-term strategies is critical in order to safeguard doing business in the EU. However, the regulations can be complex. If you need more information on these specific regulations and how OPTEL’s traceability solutions can help.
Is your company preparing for upcoming ISSB standards?
ISSB standards for financial disclosures related to sustainability, IFRS S1 and climate IFRS S2, were released June 26, 2023. Learn more.
Understanding the EU Taxonomy: a New Era for Sustainable Investments
The EU Taxonomy is a classification system, which outlines a framework for what can be considered an environmentally sustainable economic activity. Its goal is to guide investors, companies, etc. toward environmentally friendly investments.
The EU’s Carbon Border Adjustment Mechanism (CBAM) Regulation
To counter carbon leakage, the EU officially published the Carbon Border Adjustment Mechanism (CBAM) on May 16, 2023. CBAM is a tariff imposed on imported goods based on their carbon footprints.
