The Future Of Green -
The European Union
Green Deal Paul Walsh BA LLM (UWA)
ESG Management Law Division
The Green Deal Introduction
The European Green Deal is a set of policy initiatives by the European Commission with the aim of making the European Union climate neutral by 2050. The plan includes increasing the EU’s greenhouse gas emission reductions target for 2030 to at least 50% compared with 1990 levels. The plan also involves reviewing existing laws and introducing new legislation on the circular economy, building renovation, biodiversity, farming, and innovation1.
The Green Deal is a coordinated set of policies and legislation designed to lower the European Union’s global warming emissions to zero over the next 30 years. The plan requires a transformation of the EU’s economy across a range of sectors including transport, construction, agriculture, industry, and energy. The EU has allocated over €1 trillion in funding mechanisms to facilitate the Green Deal
European Union Key Green Strategies
The overarching aim of the European Green Deal is to reach net-zero greenhouse gas emissions within the EU and deliver a pollution-free environment by 2050. Advances in transport, agriculture systems and ecosystems and biodiversity are all required, as well as efforts to further develop a circular economy that ensures products can be reused and recycled. From 2021 to 2027, 35 percent of the EU’s research funding will be dedicated to developing climate-friendly technologies.
Some of the main initiatives under the European Green Deal are:
European Climate Law, to enshrine the 2050 climate-neutrality target in law
European Climate Pact, to engage citizens and all parts of society in climate action
2030 Climate Target Plan, to reduce net greenhouse gas emissions by at least 55%
Carbon Border Tax, to prevent carbon leakage and ensure a level playing field
Review of the Energy Taxation Directive, to align taxation with climate objectives
Circular economy action plan, to promote resource efficiency and reduce waste
Biodiversity strategy, to protect and restore nature and ecosystems.
Farm to Fork strategy, to ensure healthy and sustainable food systems
Link to EU Commission Website Here
The Corporate Sustainability Reporting Directive (CSRD
The Corporate Sustainability Reporting Directive (CSRD) is a proposed directive by the European Commission that aims to increase transparency on corporate performance in terms of sustainability. It is expected to be effective from 01 January 2024 for those entities already subject to the Non-Financial Reporting Directive (NFRD) and from 01 January 2025 for all other large companies. The scope of reporting entities has expanded, and it is estimated that the number of entities affected by these new regulations will increase fivefold. This means that the reporting obligation would also apply to family-run and private equity-owned enterprises. The content of the report has been comprehensively expanded, and new, binding EU sustainability reporting standards will be adopted. The purpose is to create more uniformity in application, to replace the current patchwork of standards across the EU and in Ireland.
EU Companies Under The Directive
Almost 50,000 companies are expected to be impacted by CSRD, making up some three quarters of business in the European Economic Area. CSRD will apply to all:
Companies listed on regulated markets in the EU (apart from listed micro-enterprises), and large companies. The CSRD classifies a large company as one that meets two out of three of the following criteria: more than 250 employees, a turnover of over €40 million and over €20m total assets. These companies will also have to take into account information at subsidiary level.
Listed SMEs, although there will be a transitional period when SMEs can opt out until 2028. However, there are big benefits for SMEs to comply with the reporting.
Non-EU companies with a net turnover of €150 million in the EU, and with at least one subsidiary or branch in the union.
The Directive and Ireland
The Corporate Sustainability Reporting Directive (CSRD) is a proposed directive by the European Commission that aims to increase transparency on corporate performance in terms of sustainability. It is expected to be effective from 01 January 2024 for those entities already subject to the Non-Financial Reporting Directive (NFRD) and from 01 January 2025 for all other large companies.
The CSRD will have a significant impact on companies in Ireland. Almost all large Irish public and private companies will be subject to mandatory sustainability reporting in accordance with the European Single Reporting Standard (ESRS). The definition of a ‘large company’ is when, on its balance sheet date, two of the following three criteria are met: more than 250 employees on average during the financial year, a balance sheet total in excess of 20 million euros, or a net turnover in excess of 40 million euros.
The timeline for the implementation of the CSRD is ambitious. Given the significance of the proposed CSRD obligations, companies need to start preparing for its implementation now.
Irish Companies and the CSRD
It is estimated that the number of entities affected by the CSRD will increase fivefold compared to the previous Non-Financial Reporting Directive (NFRD). This means that the reporting obligation would also apply to family-run and private equity-owned enterprises. The number of Irish-based companies covered is likely to grow significantly. Ireland is home to numerous subsidiaries of overseas multinationals, mainly from the US and UK. These Irish-based entities haven’t had mandatory sustainability reporting requirements, and this will change under the CSRD. There are over 1,000 direct foreign investment companies in Ireland, employing over 11% of the Irish Workforce.
Double Materiality
The Corporate Sustainability Reporting Directive (CSRD) introduces a ‘double materiality perspective’, meaning that companies have to report about how sustainability issues affect their business and about their own impact on people and the environment.
Recital 25 of the draft CSRD elaborates on the double-materiality perspective that was introduced already in the Directive 2013/34/EU. Regarding both perspectives (impact materiality and financial materiality) the recital emphasizes that ‘undertakings should consider each materiality perspective in its own right, and should disclose information that is material from both perspectives and information that is material from only one perspective.’ As a consequence, information on sustainability matters which is material from one or both of these perspectives (‘double materiality’) should be included in the reports.
EU Taxonomy
The EU taxonomy is a classification system that defines criteria for economic activities that are aligned with a net-zero trajectory by 2050 and the broader environmental goals other than climate. It is a cornerstone of the EU’s sustainable finance framework and an important market transparency tool that helps direct investments to the economic activities most needed for the transition, in line with the European Green Deal objectives.
The Taxonomy Regulation establishes the framework for the EU taxonomy by setting out four conditions that an economic activity must meet in order to qualify as environmentally sustainable. A qualifying activity must: contribute substantially to one or more of the six environmental objectives; do no significant harm to any of the other environmental objectives; be carried out in compliance with minimum social safeguards; and comply with technical screening criteria.
Taxonomy Criteria
The six environmental objectives established by the Taxonomy Regulation are:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems.
The Taxonomy Regulation was published in the Official Journal of the European Union on 22 June 2020 and entered into force on 12 July 2020.
CSRD Legal Summary
CSRD Overview:
The CSRD, which entered into force on January 5th, establishes new requirements for corporate sustainability reporting.
Member states are required to transpose the CSRD into their national laws by June 16th, 2024.
The CSRD represents a substantial expansion of the reporting obligations compared to the previous Non-Financial Reporting Directive (NFRD).
Applicability:
The CSRD applies to various categories of companies, including: a. Large EU Companies: Referring to EU entities or EU consolidated groups that surpass at least two of the following criteria:
Balance sheet total of €20 million.
Net turnover of €40 million.
Average of 250 employees during the financial year. b. Non-EU Undertakings with Substantial EU Turnover: Non-EU companies meeting specific turnover requirements and having at least one subsidiary that qualifies as a large undertaking or listed entity, or an EU branch generating net turnover exceeding €40 million in the prior financial year. c. Listed SMEs: Small and medium-sized undertakings with securities admitted to trading on an EU regulated market, excluding micro undertakings.
Reporting Requirements:
The CSRD introduces detailed qualitative and quantitative sustainability disclosures, to be provided alongside financial information.
The directive uses the term "sustainability" deliberately to emphasize that sustainability issues can impact the financial performance of companies.
Companies must include sustainability information in a clearly identifiable dedicated section, covering both the impact of sustainability factors on their business and the external impacts of their activities on the environment and society.
The disclosed information should encompass the company's business model, strategy, sustainability due diligence, and risks.
EU undertakings are obligated to report on the resilience of their business models and strategies concerning sustainability risks, the opportunities arising from sustainability factors, and their plans for aligning their business models with a sustainable economy and climate goals such as limiting global warming to 1.5°C and achieving climate neutrality by 2050.
Compliance Timeline:
The CSRD implementation will be phased in over a series of years: a. Financial years starting on or after January 1, 2024: Public-interest entities that qualify as large undertakings or parent undertakings of large groups and have an average of over 500 employees during the financial year. b. Financial years starting on or after January 1, 2025: Other EU large undertakings and parent undertakings of large groups. c. Financial years starting on or after January 1, 2026: Listed SMEs (excluding micro undertakings), certain small and non-complex credit institutions, and captive insurance and reinsurance undertakings. d. Financial years starting on or after January 1, 2028: Non-EU undertakings meeting the turnover requirements specified in the CSRD.
European Sustainability Reporting Standards:
The European Commission is mandated to adopt delegated acts that provide detailed European sustainability reporting standards.
These standards are currently being developed by the European Financial Reporting Advisory Group (EFRAG).
The expectation is that the first set of standards will be adopted in June 2023.
Ensuring Compliance:
Companies falling under the scope of the CSRD must take operational measures to ensure compliance with the new reporting obligations.
It is crucial to update the audit process to enable robust measurement and reporting of sustainability factors, allowing for independent assessment by external auditors.
While the exact reporting requirements are still under development, companies should initiate the compliance process promptly due to the substantial work involved
Social Impact
The Corporate Sustainability Reporting Directive (CSRD) requires companies to report on how sustainability issues, such as climate change, impact their business and how their operations in turn affect people and the planet – a unique principle called ‘double materiality’ discussed above.
Companies will need to be more detailed in their sustainability reporting, covering issues such as environmental, social and human rights, plus governance factors. Reports must cover: social matters and treatment of employees; respect for human rights; anti-corruption and bribery; diversity on company boards (in terms of age, gender, educational and professional background). These provisions will have a profound impact on organizations reporting under the CSRD provisions in terms of organizational structures, cultural transformations, diversity, equity and inclusion. The Green Deal is clearly the most significant development in the future of work ever committed by the EU as it commits the EU to becoming the world's leading sustainable entity in terms of environmental, social, and financial governance by 2050.
Timelines
The CSRD will phase-in as follows:
Financial years starting on or after January 1, 2024: Public-interest entities that are large undertakings or parent undertakings of a large group and have an average of more than 500 employees during the financial year.
Financial years starting on or after January 1, 2025: Other EU large undertakings and parent undertakings of a large group.
Financial years starting on or after January 1, 2026: Listed SMEs (other than micro undertakings) and certain small and non-complex credit institutions and captive insurance and reinsurance undertakings. However, for financial years starting before January 1, 2028, these SMEs may opt out of sustainability reporting if they briefly state in their management report why sustainability information has not been provided.
Financial years starting on or after January 1, 2028: Non-EU undertakings meeting the turnover requirements under the CSRD.
The European Commission is required to adopt delegated acts that provide detailed European sustainability reporting standards. These standards are being developed by the European Financial Reporting Advisory Group (EFRAG), and it is expected that the first set of standards will be adopted in June 2023.
Companies affected by the CSRD must now take operational steps to ensure compliance with the new rules. Notably, the audit process will need to be updated to ensure that sustainability factors are robustly measured and reported, allowing for independent assessment by external auditors. While this may pose challenges in the short term due to the ongoing development of sustainability reporting requirements, companies should initiate the compliance process sooner rather than later, given the substantial work involved
CSRD In A Nutshell
Sustainability information must be provided alongside financial information in directors' annual reports.
The term 'sustainability' is used instead of 'non-financial' to highlight the impact of sustainability on a company's financial performance.
The sustainability information should be included in a dedicated section that is clearly identifiable.
The reporting must cover the following areas:
Environmental factors
Social factors
Human rights factors
Governance (ESG factors)
The information should address the impact of sustainability factors on the company's business and the external impacts of its activities on people and the environment.
The reporting should cover the company's business model, strategy, sustainability due diligence, and sustainability risks.
EU undertakings must report on the resilience of their business models and strategies in the face of sustainability risks.
Companies must disclose the opportunities arising from sustainability factors.
The reporting should outline the company's plans to ensure its business model is compatible with the transition to a sustainable economy.
Companies should align their strategies with the goal of limiting global warming to 1.5 °C, as per the Paris Agreement.
The objective of achieving climate neutrality by 2050 should also be addressed.
Compiled by Paul Walsh BA LLM (UWA)
Nurturing an ESG Culture
Nurturing an ESG culture requires actively engaging, training, and empowering employees as they form the foundation of any organizational culture. Without their full support, the cultural change necessary for ESG transformation will not occur, hindering progress on the journey towards ESG integration.
Executing and Embedding Cultural Change
Executing and embedding cultural change throughout an organization is a complex task that demands buy-in from both the C-suite and the shop floor. This alignment of the entire workforce with ESG values and behaviours is crucial. Without cultural change, organizations will face resistance from management and employees, which can impede the successful integration of environmental, social, and governance considerations into every aspect of their business. To achieve ESG transformation, it is crucial to define what ESG cultural change means and take key actions to drive it.
The Importance of Cultural Change
Executing and embedding cultural change across an organization is challenging, requiring buy-in from all levels, from the leadership to the shop floor. Without cultural change, organizations will struggle to integrate environmental, social, and governance considerations into their business practices. According to a recent survey of employees in ESG-related roles, 84% believe cultural change is crucial for successful ESG transformations, with both senior leadership and employees playing a critical role. ESG culture should be authentic, transparent, and inclusive, reflecting the organization's identity, promoting open communication, and involving all employees. Successful ESG cultural change requires commitment from top management, employee engagement, and alignment of the entire workforce towards ESG goals.
Comprehensive Cultural Change
Executing and embedding cultural change across an organization is complex and requires buy-in from the C-suite to the shop floor, along with realignment of the entire workforce to embrace ESG values and behaviours. Without cultural change, organizations will face resistance from management and employees, making it difficult to integrate environmental, social, and governance considerations into every aspect of their business. To achieve successful ESG transformations, organizations must define and reinforce critical behaviors consistent with the new ESG strategy, while also driving change from both the top and bottom of the organization. This comprehensive cultural change should penetrate all areas of the business, including governance, operations, remuneration, and communication, and requires a commitment of financial and human resources. Management's full backing is essential for the successful implementation of ESG cultural change.
Key Actions for ESG Cultural Change
Implementing and embedding cultural change is a crucial step for the success of an ESG transformation. Without it, organizations may face resistance from management and employees, hindering the integration of environmental, social, and governance considerations into their business practices. However, achieving cultural change across the entire organization is a complex task that requires buy-in from the C-suite to the shop floor. To drive ESG cultural change effectively, organizations should focus on four key actions:
Governance and Top-Down Steering:
Effective leadership sets the direction and leads by example.
Senior management must actively demonstrate their commitment to ESG values and align the organization's goals with ESG principles.
Bottom-Up Pressure:
Successful ESG cultural change is driven from both the top and the bottom of the organization.
Employees must embrace and incorporate ESG values and behaviours into their daily work.
Middle management also plays a crucial role in driving ESG changes and ensuring alignment across the organization.
Values and Behaviours:
Cultivating a transformation-friendly culture is essential.
Organizations should nurture values and behaviours related to responsibility, trust, collaboration, and innovation.
These values should be aligned with the organization's authentic identity to create a coherent and sustainable ESG culture.
Key Performance Indicators (KPIs):
Implementing clear and measurable ESG KPIs such as organization scans supported by incentive systems can help drive ESG cultural change. These KPIs should measure the progress and process of the ESG transformation, providing insights into the organization's performance and guiding decision-making.
It is important for leaders to pay close attention to how the cultural changes are affecting all levels of the organization and understand the preferences and priorities of employees. Different aspects of ESG may have varying relevance to individuals based on their roles and seniority. Therefore, a one-size-fits-all approach may not be effective, and all aspects of ESG should be integrated into the transformation journey to ensure inclusivity and avoid leaving any employees behind.
Cultural change is vital for the success of an ESG transformation. Organizations should focus on governance and top-down steering, bottom-up pressure, values and behaviours, and KPIs to drive effective ESG cultural change. By implementing these key actions, organizations can integrate ESG values and behaviours into their culture and achieve a successful ESG transformation. The commitment of leadership and the power of communication are the keys to sustainable transformation in a positive ESG culture.