Understand EU Policies and Regulations

The EU has been at the forefront of global efforts to address climate change with a range of policies and regulations aimed at reducing greenhouse gas emissions. As a result, companies that do business in the EU market may be impacted by these regulations. In particular, companies need to understand the EU Corporate Sustainability Reporting Directive (CSRD) and the supporting European Sustainability Reporting Standards (ESRS). CSRD will require companies to disclose how sustainability risks and opportunities affect financial performance, as well as the impact of companies’ operations on people and the environment. This will extend beyond what many companies are already reporting today, and any company with operations in EU countries (if generating a net turnover in the EU of >€150m) will need to prepare for these new reporting requirements from 2024 (first disclosure due in 2025 with data from 2024).

Additionally, companies should be aware of the European Union Emissions Trading System (EU ETS), which is a cap-and-trade system aimed at reducing emissions from power and heat generation, industry, aviation, and maritime transport – and the Carbon Border Adjustment Mechanism (CBAM) which applies duties to the import of certain energy-intensive products. Companies operating in Europe, including non-EU companies, may be subject to emissions allowances or other requirements under this system. 

Even if your business is not covered by the new reporting requirements, you may still feel the impact of these changes, as supply chain emissions will be part of the scope of affected companies, so suppliers of EU companies may receive ESG questionnaires to provide data to their clients. Therefore, it is crucial for companies with significant EU operations to prepare for regulatory requirements by evaluating how they will be affected and educating their team internally to be prepared for upcoming changes.

The EU Corporate Sustainability Reporting Directive (CSRD)

Companies with an EU presence should start preparing for the new CSRD requirements.

CSRD will require companies to disclose the full range of sustainability matters (Environment, Social and Governance) covering risks and opportunities that affect both financial performance, as well as the impact of companies’ operations on people and the environment (double materiality). This rule impacts global companies with operations in EU countries, including non-EU companies, in the below phased approach:

Financial year 2024 (publish in 2025)

• Companies previously subject to the Non-Financial Reporting Directive (NFRD) (large listed companies, large banks and large insurance undertakings – all if they have more than 500 employees), as well as large non-EU listed companies with more than 500 employees.

Financial year 2025 (publish in 2026)

• Other large companies, including other large non-EU listed companies

Financial year 2026 (publish in 2027)

• (Option to opt-out) Listed SMEs, including non-EU listed SMEs

Financial year 2027 (publish in 2028)

• (Option to opt-out) Listed SMEs, including non-EU listed SMEs

Financial year 2028 (publish in 2029):

• Listed SMEs, including non-EU listed SMEs
• Non-EU companies that generate over EUR 150 million per year in the EU and that have in the EU either a branch with a turnover exceeding EUR 40 million or a subsidiary that is a large company or a listed SME will have to report on the sustainability impacts at the group level of that non-EU company

The new requirements extend beyond what many companies are already reporting and will have a much wider scope than the previous Non-Financial Reporting Directive (NFRD). This new rule also goes beyond what the Security and Exchange Commission’s (SEC) proposed rule on climate-related disclosures requires.

Though it may be a few years until your company is impacted, companies with significant EU operations should start to prepare. Consider the following actions to start planning now:

• Evaluate how your organization will be affected by the CSRD.
• Educate your team internally.
• Perform an assessment comparing your company’s current reporting with the CSRD’s new requirements—and consider how this relates to the SEC’s climate disclosure rule.
• Establish a reporting process, recognizing the double-materiality perspective of the requirements that ask companies to report their financial and impact perspective.
• Stay up to date and communicate with advisors to prepare for future plans.

Even if your business is not covered by the new reporting requirements, you may still feel the impact of these changes, as supply chain emissions will be part of the scope of affected companies, so suppliers of EU companies may receive ESG questionnaires to provide data to their clients.

European Sustainability Reporting Standards (ESRS) Required by CSRD

The first set of ESRS came into effect in January 2024. It is a mandatory system of sustainability standards that applies to companies that fall within the scope of CSRD. These sector-agnostic standards define the methodology and technical details on how companies should report under CSRD. Sector-specific standards are also expected to follow in the years to come with the first batch scheduled latest by June 2026.

Companies that are required to report under ESRS will be ready to report under ISSB standards on climate-related disclosures, as ESRS has a broader scope than ISSB, and interoperability has been defined. Please note this interoperability is not bidirectional, and companies reporting under ISSB climate disclosures will not suffice to comply with ESRS, but companies can decide to voluntarily report under ESRS and hence, be compliant with both.

The European Union Emissions Trading System (EU ETS)

The EU ETS is a cap-and-trade system that was established in 2005 to reduce emissions from industry and power generation. The EU ETS covers emissions from power generation, industry, and aviation and will soon be expanding to roads and buildings.

In 2022, the EU ETS was revised under the Green Deal to align with the EU’s new target of reducing emissions by 55% by 2030. The revised EU ETS includes a tighter emissions cap as well as new measures to address carbon leakage. Companies that operate in Europe may be subject to emissions allowances or other requirements under this system.

Here are some important things to know about this revision: 

• If a company has operations in the EU and is covered under the EU ETS, then it will need to acquire and surrender allowances to cover emissions.
• Industrial sectors covered include:
  • energy-intensive industry sectors, including oil refineries, steel works, and production of iron, aluminum, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals;
  • aviation within the European Economic Area and departing flights to Switzerland and the United Kingdom;
  • maritime transport (new in 2024).
• Companies not operating in the EU may be indirectly impacted by EU ETS and may have to purchase emission allowances if importing goods into the EU to cover production emissions.

Investing in emission reduction measures and measuring and disclosing your company’s carbon footprint can help you comply with carbon pricing and regulatory requirements like EU ETS. Consulting with policymakers will also help you to understand this changing framework.

The EU Carbon Border Adjustment Mechanisms (CBAM)

The EU’s new CBAM imposes a carbon price on imported goods based on their carbon footprint. The CBAM requires importers to purchase offsets associated with their imports. Companies that export to the EU may be subject to this mechanism in the aluminum, cement, electricity, fertilizers, hydrogen, and iron and steel sectors.

It is quite possible that the CBAM will be expanded and replicated in other jurisdictions during the coming years as countries seek to protect domestic industries which are subject to climate regulation and pricing.

Green Deal Industrial Plan: Net Zero Industry Act and the Critical Raw Materials Act

The EU has adopted two pieces of legislation as part of a “Green Deal Industrial Plan”: the Net Zero Industry Act (NZIA) and the Critical Raw Materials (CRM) Act. With these pieces, the Commission aims to establish a regulatory environment that will boost European industry in areas considered crucial for the EU to reach net zero by 2050.

The NZIA is meant to spur domestic EU production of clean technologies. Main provisions include:

• At least 40% of the annual deployment needs for strategic net-zero technologies manufactured in the EU by 2030.
• Supporting 8 strategic net zero technologies: i) solar photovoltaic and solar thermal technologies; ii) onshore wind and offshore renewable energy; iii) batteries and storage; iv) heat pumps and geothermal energy; v) electrolyzers and fuel cells; vi) biogas/biomethane; vii) carbon capture and storage (CCS); and viii) grid technologies.
• Proposals for Net-Zero Strategic Projects, Accelerating CO2 capture and storage, facilitating access to markets, Net-Zero Industry Academies, accelerated permitting, Net-Zero Europe Platform and the European Hydrogen Bank.

The CRM Act aims to secure the EU’s supply of CRMs necessary to power the transition. Main provisions include:

• Extract more in Europe – 10% by 2030.
• Refine – 40% in the EU by 2030.
• 15% of the Union’s annual consumption of strategic raw materials comes from recycling.
• Provision on joint purchasing of raw materials.

These laws have provisionally been agreed upon and are close to formal adoption. Keep up to date with this legislation by following the EU Commission’s website.