Current ESG-Related EU Legislation

In today’s business world, a strong environmental, social, and governance (ESG) approach is more than just about being compliant; it’s a true value driver for companies. ESG efforts are increasingly essential for business growth, fostering brand trust, resilience, and market opportunities. In this article we provide a high-level overview of the current ESG-related legislation applicable to the EU, with the objective to help companies align with legal standards while also gaining competitive advantages.

The Paris Agreement

The 2015 Paris Agreement, a legally binding international treaty, aims to limit global warming to less than 2°C (ideally 1.5°C), as a way to combat climate change. Through Nationally Determined Contributions (NDCs), it encourages nations to cut emissions, and to create business opportunities in renewable energy and sustainable sectors. Each country sets its own emission reduction targets (NDCs) and updates them every five years, ideally making them more ambitious. This treaty has resulted in numerous rules and regulations within the EU and served as the starting point for many sustainability initiatives across the region.

The Effort Sharing Regulation (ESR)

The ESR, adopted and in force since 2018, sets binding emission reduction targets for EU countries in areas like road transport, heating of buildings, agriculture, etc. The regulation’s goal is 40% emission reduction by 2030.

In addition, the revised Land, Forestry and Agriculture Regulation, also aims to contribute to the EU’s climate goals. It was originally adopted in 2018 and strives for climate neutrality in the land, forestry, and agriculture sectors by 2035. Further, it aims to achieve this by boosting carbon removal in land use, forestry and agriculture through practices like carbon farming, using long-lasting carbon-storing materials and protecting and restoring ecosystems.

The European Green Deal

Launched in 2019, the European Green Deal is the EU’s strategy to reach climate neutrality by 2050. It sets obligations to maintain sustainable practices in energy, industry, and agriculture, aiming for a circular economy, reduced pollution and healthy ecosystems.

Sustainable Finance Disclosure Regulation (SFDR)

The SFDR, adopted in 2019, is an EU initiative to promote sustainable investments. Effective since March 2021, the SFDR mandates that financial market participants and advisors provide transparency at both the entity and product levels. They must disclose how they integrate ESG factors into their investment decisions and their financial services. Additionally, they are required to reveal the sustainability impact of their overall business and of individual financial products, including any adverse impacts on ESG factors.

The EU Taxonomy

The EU Taxonomy for Sustainable Activities, launched in July 2020, is a classification system for companies to help investors identify environmentally sustainable activities. It provides a clear standard for investments by defining criteria for economic activities to qualify as sustainable and it combats “greenwashing”. This system is key to the EU’s goal of directing investments toward activities that support climate targets.

The Renewable Energy Directive

The revised Renewable Energy Directive, originally adopted in 2009, came into effect in November 2023. It sets a binding target of at least 42.5% renewable energy in the EU by 2030. It aims to accelerate renewable energy projects by shortening approval periods and it creates so-called “Renewables acceleration areas”. These areas are dedicated zones that each EU country must have in place by February 2026 for at least one type of renewable energy (like solar, wind, or hydrogen).

The Corporate Sustainability Reporting Directive (the CSRD)

The Corporate Sustainability Reporting Directive (the CSRD), entered into force on January 5, 2023, and contains sustainability reporting standards to enhance corporate transparency and accountability. Effective from 2025 for large companies (smaller companies will follow), the CSRD requires comprehensive ESG disclosure obligations for corporates, covering their environmental impacts, social responsibility, and governance practices.

ESG-related Legislation’s Impact on Companies

ESG frameworks significantly impact the business of companies. Their business decisions and strategies will have to take into account the ESG-related legislation with growing priority. Also, the governance of companies is affected by many of these rules. They establish standards for business ethics, anti-corruption measures, and whistleblower protections, fostering transparency and accountability.

This may be considered as a burden however, by following ESG governance obligations, companies can build a strong ethical culture, earning stakeholder trust and supporting long-term sustainability.

Ultimately, ESG requirements can transform governance from mere compliance into a strategic asset.

Feeling overwhelmed by the EU’s evolving ESG regulations and their impact on your business or curious to learn more about the ever-changing ESG landscape?

Our expert consultants are here to help you confidently navigate these complex rules. With our support, you won’t just be compliant – you’ll turn these regulations into an opportunity for competitive advantage.

Contact us to find out more:  info@rockwatercompany.com | info@rockwaterlegal.com