International frameworks
and legal regulations
The COVID-19 pandemic has hit Europe and the European economy hard. In order to mitigate the consequences of the pandemic and to support the economic recovery in the member states, the EU has launched an EU Recovery Plan, among other things. The European Green Deal presented at the end of 2019 is the compass and guideline for the use of the funds: It formulates a sustainable economic strategy with the aim of reducing net emissions of greenhouse gases to zero by 2050 and decoupling the use of resources from growth.
In April 2021, the EU Commission significantly tightened its medium-term climate targets up to 2030. A corresponding climate taxonomy lists a classification system for ecologically sustainable economic activities for the first time. In addition, an EU supply chain law is to be introduced shortly, which will supplement national regulations on labor and human rights in various member states. All of this has the goal of transforming our economies in a direction in which future generations can live ecologically and socially justly.
Corporate Sustainability Reporting Directive - CSRD
On April 21, 2021, the European Commission presented a directive on corporate sustainability reporting (CSRD). This tightens the requirements for non-financial reporting (NFRD). The proposal contains a number of important requirements, such as:
- The requirement for an external audit of the reporting information (initially limited assurance)
- reporting in accordance with an announced mandatory EU standard for sustainability reporting; and
- the obligation for companies to digitally mark their reported information so that it becomes machine-readable and thus accessible to the capital markets.
One of the most important questions being asked now is: Does the CSRD apply to my company? If you meet 2 of the following 3 criteria, then the answer is "yes":
- More than 250 employees and/or
- 40 million euros turnover and/or
- €20m total assets
What is required of your company? The disclosure requirements include in particular information about:
- Business model and strategy, including resilience to risks, actions taken, compatibility with the goals of the Paris Climate Agreement, and the interests of your stakeholders;
- Concrete goals and reporting on progress towards achieving those goals, including setbacks;
- work of governing bodies on this issue;
- Introduction of guidelines and policies;
- Due diligence processes implemented in relation to sustainability issues, as well as any actions taken to prevent, mitigate or remediate adverse impacts; and
- Descriptions of your main risks and relevant indicators.
All such disclosures must include forward-looking and historical information, as well as qualitative and quantitative information. It's about the transparency of processes and metrics: what have you done, what are you planning to do, and how do you intend to achieve it? It is crucial that your company sets priorities; in other words: materiality. Expanding on the concept of materiality, the CSRD introduced a requirement for companies to report both how sustainability issues affect their performance, position and development (the "outside-in" perspective) and their impact on people and environment (the "inside-out" perspective). This is known as "double materiality". These reporting obligations are also in line with the Regulation on the Disclosure of Information on Sustainable Financial Instruments ("EU Taxonomy").
European Green Deal
The European Green Deal is a concept presented by the European Commission under Ursula von der Leyen on December 11, 2019 with the aim of reducing net emissions of greenhouse gases to zero in the European Union by 2050 and thus becoming the first continent to become climate-neutral .
The Paris Climate Agreement
A key requirement of the Sogs is climate protection. With the signing of the Paris Climate Agreement on December 12, it became binding under international law. The signatory states agreed to limit global warming to well below two degrees Celsius compared to the pre-industrial age, if possible even to below 1.5 degrees. Unlike the Kyoto Protocol, the Paris Agreement stipulates that all countries, including emerging and developing countries, draw up national plans, so-called "nationally determined contributions (NDCs)".
EU taxonomy
The Commission has prepared the rules in a taxonomy compass. In principle, an economic activity, such as investing in a new production facility, must serve one of six environmental goals and must not contradict any of them. These are:
- climate protection
- Adaptation to climate change
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Prevention and reduction of environmental pollution
- Protection and restoration of biodiversity and ecosystems
Companies must then indicate for 2021 how many of their activities take place in the areas covered by this taxonomy. A year later, they then have to indicate whether their activities are also ecologically sustainable according to the taxonomy or not - based on sales, their investments and their operating expenses.
The effect of the taxonomy can only be understood in the context of the EU's entire Sustainable Finance Package, which also includes comprehensive reporting obligations for companies and the financial sector. Since March 2021, financial service providers can no longer simply claim that a product is sustainable - if they do, they have to explain which criteria they apply.
In general, from 2022 onwards, the financial industry must continuously publish data on how many of its assets it holds in sectors for which environmental criteria are defined in the taxonomy - i.e. all in which sustainable investments can be made in the sense of an ecological transformation of the economy. Industries in which this is not possible because they can be replaced by other technologies are not part of the taxonomy anyway. Classic example: Steel is in there, you can't replace it, but you can produce it more ecologically. Coal power generation is out, there are alternatives.
Supply Chain Due Diligence Act
With the "Draft Law on Corporate Due Diligence in Supply Chains", EU companies will be obliged to better meet their global responsibility for respecting human rights and environmental standards.
In the future, companies will be responsible for the entire supply chain, graded according to their influence. The obligations are to be implemented by the companies in their own business areas and towards their direct suppliers. Indirect suppliers are also to be included as soon as the company of human rights v receives "substantiated knowledge" of injuries at this level.
The law specifies the form in which companies must fulfill their human rights due diligence. This includes, for example, the analysis of human rights risks, taking preventive and remedial measures, creating opportunities for complaints and the obligation to report on activities.
Environmental protection is also included in the draft law, insofar as environmental risks can lead to human rights violations. There are also plans to establish environmental obligations resulting from two international agreements to protect against the health and environmental hazards of mercury and persistent organic pollutants.
