Category Archives: EU Regulation

EUDR compliance – a guide to understanding deforestation due diligence obligations

Posted on by

ESRS E4, datapoints 24.d and 38.a, require companies to disclose adopted policies to address deforestation and relevant metrics.

EUDR, the EU Regulation on Deforestation-free Products (EU 2023/1115), introduces obligations relating to the placing or making available on the EU market, and exporting from the EU, of deforestation-related commodities and associated products.

The EU Commission has published a guide to help companies understand the level of due diligence required depending on the type of company, its position in the supply chain (first placing/downstream) and its size.

The document provides an overview of how the obligations apply illustrated through 11 supply chain scenarios.

You will find the document enclosed, and you can also download “EUDR compliance – a guide to understanding your position in beef, cocoa, coffee, palm oil, rubber, soy, and wood supply chains” here: https://data.europa.eu/doi/10.2779/4084343

In December 2024 the EU granted a 12-month additional phasing-in period, making the EUDR law applicable on 30 December 2025 for large and medium companies and 30 June 2026 for micro and small enterprises.

Traceability and transparency are at the heart of the system, to make the sustainability of supply chains a new standard.

⭕ Deforestation

Is defined as the conversion of forest to agricultural use, whether human-induced or not, which includes situations caused by natural disasters.

The assessment of whether the commodity has contributed to deforestation is conducted by looking backwards in time to see if the crop land was a ‘Forest’ at any time since the date specified in the Regulation (31 December 2020).

A forest that has experienced a fire and is then subsequently converted into agricultural land (after the cut-off date) would be considered deforestation under the Regulation.

In this specific case, an operator would be prohibited from sourcing commodities within the scope of the Regulation from that area (but not because of the forest fire).

Conversely, if the affected forest is allowed to regenerate, it would not be deemed deforestation, and an operator could source wood from that forest once it has regrown.

⭕ Forest degradation

Means structural changes to forest cover, taking the form of the conversion of:

🌿 primary forests or naturally regenerating forests into plantation forests or into other wooded land, or

🌿 primary forests into planted forests.

Wood products coming from such converted land cannot be placed on the market or exported.

Sustainable forest management systems can be employed and encouraged, provided they do not lead to a conversion that meets the degradation definition.

⭕ Which products are covered?

Palm oil, cattle, soy, coffee, cocoa, timber, rubber, and products derived from the listed commodities (such as beef, furniture, or chocolate)

See the full list of commodities in Annex I of the Regulation: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32023R1115&qid=1687867231461#d1e32-243-1

 

Source: https://green-business.ec.europa.eu/deforestation-regulation-implementation_en

 

Stay tuned for more CSRD, ESRS and VSME insights on our LinkedIn page >>

A just clean, digital and social transition

Posted on by

From the European Competitiveness Compass published on 29/1 and the EU Commission’s work programme 2025 published on 11/2:

To become more prosperous, competitive and resilient, EU citizens and businesses must be protected from unfair competition, obstacles to accessing capital, high energy costs and the imminent danger of climate change.

Europe must act in unison and play to its strengths and quickly harness its own pathway to innovation-based productivity growth towards a climate-neutral future.

⭕ Close the innovation gap

Innovation must be at the heart of European renewal.

The Draghi report shows that productivity growth is the result of a combination of two forces: disruptive innovation brought about by new, dynamic start-ups challenging incumbents; and efficiency gains in mature traditional industries applying these innovations.

A dedicated EU Start-up and Scale-up Strategy will be created to close the innovation gap.

⭕ Digitalise to lift Europe’s productivity growth

Digitalisation and diffusion of advanced technologies across the European economy are the second necessary ingredient to lift Europe’s productivity growth.

Overall, 70% of the new value created in the global economy in the next 10 years will be digitally enabled.

Digitalisation will also go hand in hand with simplification to reduce the reporting burden.

We will accelerate our path to a digital regulatory environment, and will propose to remove inefficient requirements for paper formats.

⭕ Promote clean tech and new circular business models to meet the objective of becoming a decarbonised economy by 2050

The EU needs to develop lead markets and policies to reward early movers.

Energy intensive sectors (steel, metals, chemicals…) are among the most vulnerable in this phase of the transition. These industries are also the backbone of the European manufacturing system, and produce inputs vital for whole value chains.

To accompany their transition, tailor-made action plans will be presented following the Clean Industrial Deal.

Resource efficiency and boosting circular use of materials helps decarbonisation, competitiveness and economic security.

The European remanufacturing market’s circular potential is projected to create 500,000 new jobs by 2030.

A Circular Economy Act proposal will serve to catalyse investment in recycling capacity. This will be accompanied by the roll-out of Eco-design requirements on important product groups.

⭕ The security environment is a precondition for EU firms’ economic success and competitiveness

In a global economic system fractured by geopolitical competition and trade tensions, the EU must integrate more tightly security and open strategic autonomy considerations in its economic policies.

The Single Market is critical to build continental size in a world of giants. It is today the home market for 23 million companies, providing goods and services to almost 450 million Europeans.

Removing remaining intra-EU barriers and expanding the Single Market will help competitiveness, by providing bigger markets, lowering energy prices and enhancing access.

Security and resilience can also become a driver for competitiveness and innovation.

⭕ Supporting people, strengthening our societies and our social model

Europe’s unique and highly treasured social model constitutes both a societal cornerstone and a competitive edge.

However, recent crises have challenged it by impacting the cost of living, housing and inequalities. This is further exacerbated by the rapid technological shifts, demographic change and sectoral transitions now under way.

A key focus of this Commission will therefore be to strengthen social fairness.

By safeguarding our social model and ensuring fairness in a transforming economy, we can drive prosperity, seizing the opportunities offered by the green and digital transitions.

 

The European Competitiveness Compass can be downloaded here >>>

The EU Commission’s Work programme 2025 can be downloaded here >>>

EU Green Taxonomy – simplification proposals

Posted on by

To unlock the full potential of the EU Taxonomy – a novel tool for steering investments towards a climate resilient, net-zero and sustainable economy – ongoing refinements and simplifications are essential.

In response to the European Commission’s mandate, the Platform on Sustainable Finance, an advisory body to the Commission, published a report on 5/2 with evidence‑based recommendations aiming at simplifying taxonomy reporting while enhancing its effectiveness.

The Platform estimates that the following 4 proposals will together contribute to reducing the reporting of non-financial companies by over 1/3 compared to the current state:

⭕ 1. More than one-third reduction in corporate reporting burden with:

➡️ Adjusting the OpEx KPI as a voluntary disclosure, except for R&D.
➡️ Introducing a materiality threshold for reporting the Turnover, OpEx, CapEx KPIs and the combined KPIs of financial companies, in line with the Accounting Directive.
➡️ Enhancing the alignment with financial reporting.
➡️ Simplifying reporting templates, with a clear reduction of data points to limit the reporting to information that is relevant for making business decisions.

⭕ 2. A simplified GAR that encourages green and transition lending:

➡️ Ensuring a symmetrical GAR with similar numerator and denominator composition.
➡️ Simplifying retail exposure reporting, focusing on substantial contribution.
➡️ Allowing for estimates and proxies for reporting, in conjunction with safe harbours to protect against greenwashing allegations.
➡️ The materiality principle should apply to the combined KPI for financial undertakings, excluding immaterial business segments not consolidated under the Accounting Directive.

⭕ 3. A practical approach to DNSH criteria:

➡️ Introducing a lighter compliance assessment process (regarding evidence of compliance, documentation and/or on EU regulations).
➡️ All DNSH criteria should be reviewed as part of the scheduled reviews of various delegated acts, prioritising their usability and practicality for financial and non financial companies.
➡️ Introducing a “comply or explain” approach for DNSH assessment of the Turnover KPI, as a temporary measure.

⭕ 4. Helping SMEs access sustainable finance:

➡️ Adopting a streamlined and voluntary approach for banks and investors’ exposures to unlisted SMEs.
➡️ Adopting a simplified approach to the Taxonomy for listed SMEs.

The use of estimates and proxies, combined with a streamlined DNSH assessment process, is essential for rapidly and significantly reducing the reporting burden on financial companies.

Additionally, both financial and non-financial companies will benefit from the introduction of a materiality approach, further enhancing proportionality and efficiency in reporting.

Source: Simplifying the EU Taxonomy to Foster Sustainable Finance

New EU rules on ESG ratings

Posted on by

On 24 April the European Parliament adopted new rules – with 464 votes in favour, 115 against and 13 abstentions – that will regulate the ecosystem of ESG rating activities to allow investors to make more considered investments and fight greenwashing.

Environmental, Social and Governance (ESG) ratings have an increasingly important impact on the operation of capital markets and on investor confidence in sustainable products.

The market of ESG ratings is expected to continue to grow substantially in the coming years.

The new rules aim to introduce a common regulatory approach to enhance the integrity, transparency, responsibility, good governance, and independence of ESG rating activities, contributing to the transparency and quality of ESG ratings.

As a rule, separate E, S and G ratings shall be provided rather than a single ESG metric that aggregates E, S and G factors.

⭕ If an ESG rating covers the E factor, information will also need to be provided on whether that rating takes into account the alignment with the Paris Agreement and any other relevant international agreements.

⭕ If an ESG rating covers the S and G factors, information must be given on whether that rating takes into account any relevant international agreements.

This breakdown should allow investors to better target their investment into one of the three areas, and have a clearer idea of the rated entity’s credentials.

ESMA will ensure the role to authorise and supervise ESG rating providers.

To ensure that ESMA is able to perform those supervisory tasks, ESMA should be able to impose penalties or periodic penalty payments.

ESMA shall publish annually on its website a list of ESG rating providers listed in the register, indicating their total market share in the Union.

The publication shall take stock of the market structure, including concentration levels and the diversity of ESG rating providers.

The current ESG rating market suffers from deficiencies and is not functioning properly, mainly due to

⭕ the lack of transparency on the characteristics of ESG ratings, their methodologies and their data sources and

⭕ the lack of clarity on how ESG rating providers operate.

Confidence in ratings is being undermined and they do not sufficiently enable users, investors and rated entities to take informed decisions as regards ESG-related risks, impacts and opportunities.

Once the new text is formally approved by Council, the new regulation enters into force on the 20th day following that of its publication in the Official Journal of the European Union.

It shall apply from 18 months after the entry into force.

Sources:

Press release

Legislative train

The EU CSDDD explained

Posted on by

The Green Deal, EU’s growth strategy, sets out that all EU actions and policies should pull together to help the EU achieve a successful and just transition towards a sustainable future.

It also sets out that sustainability should be further embedded into the corporate governance framework.

The Corporate Sustainability Due Diligence Directive (CSDDD) is a key component of this strategy, along with the Corporate Sustainability Reporting Directive (CSRD).

CSRD is an “obligation to publish”, while CSDDD is an “obligation to act”. As such, they are complementary. Companies complying with CSRD will not need to report separately on due diligence, nor on its transition plan for climate change mitigation.

CSDDD in-scope companies, in short

  • EU companies with more than 1000 employees (calculated on a full-time equivalent basis) and a net worldwide turnover of more than 450 M€ in the last financial year
  • EU companies under franchising or licensing agreements in the EU, with royalties of more than EUR 22,5 million, provided that the ultimate parent company had a worldwide net turnover of at least 80 M€ in the last financial year
  • Non-EU companies, including ultimate parent company of a group that on a consolidated basis generated a net turnover of more than 450 M€ in the EU in the last financial year
  • Ultimate parent companies are jointly liable with their subsidiary for a failure of the latter to comply with its CSDDD obligations

Entry into force

  • 2027: > 5 000 employees and > 1 500 M€ net worldwide turnover
  • 2028: > 3 000 employees and > 900 M€ net worldwide turnover
  • 2029: > 1 000 employees and > 450 M€ net worldwide turnover

Due diligence obligations

Companies shall conduct risk-based human rights and environmental due diligence by carrying out the following actions – coherent with the six steps defined by the OECD Due Diligence Guidance for Responsible Business Conduct:

  • Integrate due diligence into their policies and risk management systems in accordance with Article 5.
  • Identify and assess actual or potential adverse impacts in accordance with Article 6 and, where necessary, prioritise potential and actual adverse impacts in accordance with Article 6a.
  • Prevent and mitigate potential adverse impacts, and bring actual adverse impacts to an end and minimize their extent in accordance with Articles 7 and 8.
  • Provide remediation to actual adverse impacts in accordance with Article 8c.
  • Carry out meaningful engagement with stakeholders in accordance with Article 8d, in particular to gather the necessary information on actual or potential adverse impacts.
  • Establish and maintain a notification mechanism and complaints procedure in accordance with Article 9.
  • Monitor the effectiveness of their due diligence policy and measures in accordance with Article 10.

And:

  • Publicly report on due diligence in accordance with Article 11, by publishing on the website an annual statement, or by complying to sustainability reporting requirements under CSRD. From 2029, companies need to make the reporting digitally accessible on the European Single Access Point (ESAP)
  • Retain documentation regarding the actions adopted to fulfill their due diligence obligations for the purpose of demonstrating compliance, including supporting evidence, for at least 5 years or as long as there is an ongoing judicial or administrative proceeding under the CSDDD.

The company shall

  • Take appropriate measures to identify and assess actual and potential adverse impacts arising from their own operations or those of their subsidiaries and, where related to their chains of activities, those of their business partners.
  • Map their own operations, those of their subsidiaries and, where related to their chains of activities, those of their business partners, in order to identify general areas where adverse impacts are most likely to occur and to be most severe.
  • Based on the results of that mapping, carry out an in-depth assessment of the own operations, those of their subsidiaries and, where related to their chains of activities, those of their business partners, in the areas where adverse impacts were identified to be most likely to occur and most severe.
  • Prioritise requesting such information, where reasonable, directly from business partners where the adverse impacts are most likely to occur.

As a last resort, company shall be required to refrain from entering into new or extending existing relations with a business partner in connection with or in the chain of activities of which potential adverse impacts has arisen that could not be prevented or adequately mitigated.

Scope of responsibility, in short

The CSDDD contains a risk-based approach: an in-scope company has the obligation to take measures if it is directly responsible for the CSDDD-risks and actual impacts.

Otherwise, the responsibility extends to a general duty of care of the in-scope company.

The CSRD applies to a company’s value chain whereas the CSDDD applies to a company’s ‘chain of activities’ meaning:

  • activities of a company’s upstream business partners related to the production of goods or the provision of services by the company,
  • including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of the products and development of the product or the service, and
  • activities of a company’s downstream business partners related to the distribution, transport and storage of the product, where the business partners carry out those activities for the company or on behalf of the company.

The CSDDD does not cover the disposal of the product, nor the activities of a company’s downstream business partners related to the services of the company.

Combating climate change (article 15)

Companies shall adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, that the business model and strategy of the company are compatible with the:

  • transition to a sustainable economy
  • limiting of global warming to 1.5 °C in line with the Paris Agreement
  • objective of achieving 2050 climate neutrality targets.

The transition plan shall be updated every 12 months and include a description of the progress the company has made towards achieving the targets.

Companies that report a transition plan for climate change mitigation in accordance the sustainability reporting requirements under CSRD shall be deemed to have complied with the adoption obligation.

The design of the transition plan referred to in the first subparagraph shall contain:

  • time-bound targets related to climate change for 2030 and in five-year steps up to 2050 based on conclusive scientific evidence and including, where appropriate, absolute emission reduction targets for greenhouse gas for scope 1, scope 2 and scope 3 greenhouse gas emissions for each significant category;
  • a description of decarbonisation levers identified and key actions planned to reach targets referred to under point (a), including where appropriate changes in the undertaking’s product and service portfolio and the adoption of new technologies;
  • an explanation and quantification of the investments and funding supporting the implementation of the transition plan;
  • a description of the role of the administrative, management and supervisory bodies with regard to the plan.

System of control, penalties and liability

  • An administrative supervision and sanctions, including “naming and shaming” and maximum penalties of not less than 5% of the net worldwide turnover of the company in the financial year preceding the fining decision (article 20).
  • Strong possibilities for civil enforcement, as in-scope companies will be liable for damages caused by a breach of their obligations under the CSDDD (article 22).

An in-scope company can be held liable for damages caused to a natural or legal person, provided that the in-scope company intentionally or negligently failed to comply with the obligations under the CSDDD, and as a result of such failure to comply, damages to the natural or legal person’s legal interest protected under national law was caused.

An in-scope company cannot be held liable if the damage was caused only by its business partners in its chain of activities.

You are welcome to contact us if you need to put a policies and risk management system in place to comply with – and report on – CSDDD and CSRD.

Source: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CONSIL:ST_6145_2024_INIT

#getCSRDready, #CSRD, #ESRS, #CSDDD, #ESG, #Strategy, #Governance, #SustainabilityReporting, #Digitalisation, #Cleerit

Provisional EU agreement on ESG rating activity regulation

Posted on by

The EU has reached a provisional agreement on a proposal for a regulation on environmental, social and governance (ESG) rating activities.

The objective is to boost investor confidence in sustainable products.

ESG ratings have an increasingly important impact on the operation of capital markets and on investor trust in sustainable products.

The new rules aim to strengthen the reliability and comparability of ESG ratings by improving the transparency and integrity of the operations of ESG ratings providers and preventing potential conflicts of interests.

⭕ Under the new rules, ESG rating providers will need to be authorized and supervised by the European Securities and Markets Authority (ESMA) and comply with transparency requirements, in particular with regard to their methodology and sources of information.

⭕ The agreement clarifies that ESG ratings encompass environmental, social and human rights or governance factors.

⭕It foresees the possibility to provide separate E, S and G ratings. However, if a single rating is provided, the weighting of the E, S and G factors should be explicit.

ESG risks are drivers of traditional financial risks, so ESG factors are not new to credit assessments.

According to Fitch, ESG considerations have been themes of credit analysis for many years, but until recently have not drawn specific attention.

➡ We are just learning how to change the lens through which we look at companies.

The European Banking Authority’s June 2021 report states that “ESG risks can also impact the financial system and economy as a whole, with potential systemic consequences”.

Fitch underlines that this illustrates why ESG is so pertinent in the credit world today.

Fitch also reminds us that “governance is key”, and has always been of fundamental importance in the credit decision process.

➡ “Governance overall is the most dynamic ESG factor from a credit perspective. Poor governance could severely impact aspects of a company’s risk profile.”

The paper concludes that “it is therefore of critical importance for companies to take a strategic view of governance factors and risks, and incorporate these widely into their long-term planning”.

Therefore, it comes as no surprise that the EU, CSRD and the reporting standards ESRS, focus so much on governance and risk management.

➡ If you are aiming for a good ESG and credit rating, get your IROs (impacts, risks & opportunities) under control.

Sources: EU Press release and FitchLearning