Overview
EU perspective
The EU's current legislative agenda on ESG issues is unprecedented and it will affect all companies doing business in the EU, whether they are based in the EU or not. The objectives underlying these initiatives include sustainability, human rights and the environment. At the same time, many of these requirements are also means to achieving level the playing field and constitute novel types of trade barriers.
- ESG-related due diligence and related reporting
2023 saw the emergence of two key instruments laying down ESG-related due diligence and related reporting obligations: the Corporate Sustainability Reporting Directive (CSRD), adopted in January, and the Corporate Sustainability Due Diligence Directive (CS3D), whose adoption the Council and the Parliament agreed on just before the end of the year.
- The CSRD lays down reporting requirements for certain (EU and non-EU) large undertakings and groups. The reporting requirements under the CSRD are very broad, covering environmental, social and governance factors, climate change, biodiversity, circular economy, workforce, consumers, etc. As for the CS3D, this Directive will require in-scope (EU and non-EU) companies to carry out due diligence in their supply chains to address human rights and environmental, including climate change, concerns.
- As a result of these instruments, and in particular the CS3D, in-scope companies will have to map and adequately audit their supply chains, and to some extent value chains. Moreover, even if not covered, non-EU companies could be indirectly impacted as a result of EU operators imposing obligations on their suppliers, or potentially disengaging from them.
Similar to those initiatives, the proposed Forced Labor Regulation (FLR) and the recently adopted EU Deforestation Regulation (EUDR) will also require companies to carefully review, and potentially restructure, their supply chains to ensure that they comply with each measure. Specifically, the FLR, once adopted, will ban the making available on the EU market of any products made with forced labor. The EUDR, which only applies to specific commodities and products, prohibits the placing or making available thereof on the EU market if these are not deforestation-free.
The EU has also sought to level the price of carbon between domestic products and imports through the recently adopted Carbon Border Adjustment Mechanism (CBAM). Under CBAM, which will be fully operational as of January 1, 2026, EU importers of certain products will have to cover the carbon price that these products would have cost under EU emissions trading rules.
- Product-related ESG initiatives
New rules on green claims, unfair commercial practices and product liability are being discussed and finalized by the European Parliament and the Council of the EU as 2024 starts. Once adopted, these rules will provide ground for consumer NGOs and other companies or individuals to challenge the labeling or marketing of companies placing products on the EU market and potentially claim damages under the new product liability rules.
Companies should already assess existing claims towards the criteria contained in the proposed rules, and adapt their marketing practices and claims accordingly.
The EU legislature has also reached agreement on a novel type of regulation : the Eco-Design Sustainable Products Regulation (ESPR), which sets the framework for the Commission to adopt eco-design parameters for groups of products. These eco-design parameters will include requirements related to recyclability, carbon foot print or presence of substances of concern. Textiles and construction products are expected to be among the priority groups to be subject to new rules, while the scope of products to be eventually covered under the ESPR is very broad.
UK perspective
A number of trends can be discerned from UK ESG developments during 2023, the effects of which will extend into 2024 as initiatives find their way into legislation and enter an implementation phase, demanding greater focus on sustainability.
There has been a sustained focus on defining consistently and clearly what ESG means, as well as standardizing ESG reporting.
In May 2024, the UK Financial Conduct Authority will introduce an anti-greenwashing rule for all authorized firms to ensure sustainability-related claims are fair, clear and not misleading. New rules will come into force in December 2024 requiring authorized firms to introduce product labels to help investors understand what their money is being used for, and marketing requirements so products cannot be described as having a positive impact on sustainability when they don't. A draft voluntary Code of Conduct for ESG ratings and data providers also has been put out to consultation, with the goal of encouraging market integrity.
In addition, the Digital Markets, Competition and Consumers Bill is expected to progress through the UK parliament. If passed, among other things, it is expected to give extensive new enforcement powers to the UK Competition and Markets Authority (the "CMA"). The CMA has expressed an intention to tackle "greenwashing" and is expected to bring more enforcement actions against companies that make false eco-friendly and sustainability claims.
Supply chain resilience and transparency also has been prioritized, with the UK announcing at COP28 details of its plans for implementing the forest risk commodities regime created by the Environment Act 2021. This often has been combined with a focus on ethics and integrity, epitomized by the recent introduction of a wide-ranging private members bill in the House of Lords calling for the introduction of mandatory environmental and human rights due diligence in the UK.
A sustained focus on climate change and the energy transition has been evident. For example, as part of its action on industrial decarbonization to meet net zero, the UK government has announced its intention to introduce a UK carbon border adjustment mechanism, focusing on the most emissions intensive industrial goods imported in to the UK from the aluminium, cement, ceramics, fertilizer, glass, hydrogen, iron and steel sectors.
We expect to see these, and other initiatives develop and progress in 2024. Given the potential for the UK's approach to differ from that of the EU in some of these areas, businesses operating across Europe will need to carefully monitor developments to ensure that their compliance controls remain fit for purpose across all applicable regulatory regimes.
