European regulations related to sustainability and corporate transparency are becoming increasingly important, and include different directives and regulations, each with specific, but interconnected purposes.
The CSRD, CSDDD, SFDR and the European Taxonomy work together to create a regulatory ecosystem aimed at promoting sustainability and corporate transparency. Regulations intersect at various points, reinforcing each other and ensuring that European companies are accountable not only for their financial performance, but also for their environmental and social impact.
Here is an overview of the four main regulations:
Corporate Sustainability Reporting Directive (CSRD)
The CSRD is an update to the previous Non-Financial Reporting Directive (NFRD) and aims to expand and strengthen sustainability reporting requirements for European companies. Coming into force in 2024, with gradual impacts until 2026, it requires companies to provide more detailed and structured information on various aspects of sustainability, including environmental, social and governance (ESG) factors.
Key features:
– Broader coverage than NFRD, extending reporting requirements to more companies, including medium-sized ones.
– Request for information on environmental and social impacts, strategies and corporate risks related to sustainability.
– Introduction of uniform European Sustainability Reporting Standards (ESRS).
– Alignment with other European and international regulations (e.g. European Taxonomy and SFDR).
Objective: To provide comparable and relevant information to investors and decision-makers, promoting transparency and corporate responsibility regarding sustainability.
Corporate Sustainability Due Diligence Directive (CSDDD)
The CSDDD is a directive that aims to introduce due diligence obligations for companies in relation to the impact of their activities on people and the environment along the entire value chain.
Key features:
– Companies must identify, prevent, mitigate and address the negative impacts on human rights and the environment caused by their own activities and those of their supply chain.
– The company is required to implement climate and sustainability plans in line with the goals of the Paris Agreement.
– Legal liability for companies that fail to comply with due diligence obligations.
Objective: To push companies to manage environmental and social risks arising from their operations and supply chains, promoting corporate responsibility.
Sustainable Finance Disclosure Regulation (SFDR)
The SFDR is a regulation that concerns the transparency of information provided by financial market participants regarding sustainability risks. Coming into force in March 2021, it obliges financial institutions (e.g. investment funds, insurance companies) to provide details on the environmental and social impact of their products.
Key features:
– Classification of financial products into three categories:
- Products that promote environmental or social characteristics.
- Products that pursue a sustainable investment objective.
- Unsustainable products.
– Transparency on how ESG risks are integrated into investment decision-making processes.
– Contribution to combating greenwashing, providing investors with accurate information on the sustainability of financial products.
Objective: To increase the transparency of financial products in terms of sustainability, allowing investors to make informed decisions and stimulating sustainable finance.
European Taxonomy
The European Taxonomy is a classification system that defines clear and standard criteria for determining whether an economic activity can be considered environmentally sustainable. Entered into force in 2020, it is part of the European Green Deal package of measures.
Key features:
– Key environmental objectives:
- climate change mitigation,
- adaptation to climate change,
- sustainable use and protection of water and marine resources,
- transition to a circular economy,
- pollution prevention and control,
- protection and restoration of biodiversity and ecosystems.
– Activities must contribute substantially to one of these objectives and not significantly harm others (“Do No Significant Harm” – DNSH).
– Integration with reporting regulations (e.g. CSRD) to ensure that the information provided by companies is consistent with the taxonomy.
Objective: To establish guidance for investors, companies and policymakers on what can be considered a sustainable investment, supporting the transition to a low-carbon economy.
Interconnections between CSRD, CSDDD, SFDR and European Taxonomy
Alignment of objectives and standards:
– The CSRD obliges companies to report on their environmental and social impacts in line with the European Taxonomy, ensuring that the information provided is consistent with the sustainability objectives defined by the Taxonomy.
– The SFDR requires financial institutions to assess ESG risks in their products and refer to the European Taxonomy to define and classify sustainable investments.
– The CSDDD, complements the due diligence actions that companies must implement, strengthening the reporting required by the CSRD and supporting the objectives of the Taxonomy.
Regulatory consistency:
– The CSRD and SFDR both require transparent and standardized information on corporate behavior in terms of sustainability. Companies must ensure consistency between the data reported in their sustainability report and the information provided to investors through SFDR regulations.
– The European Taxonomy serves as a common guide for the classification of sustainable activities for both corporate reporting (CSRD) and finance (SFDR).
Legal liability and risks:
– The CSDDD aims to strengthen the responsibility of companies along the entire value chain, requiring a more careful management of risks related to negative impacts on the environment and human rights. This, in turn, affects the transparency required by the CSRD and the assessment of risks that investors need to consider according to the SFDR.
Risk management and transparency:
– The integration of CSRD, CSDDD and SFDR provides a comprehensive framework to ensure that companies not only identify ESG risks, but also implement corrective actions and provide clear and accessible information to financial markets and stakeholders.
