Navigating European Union Sustainability Regulations for Companies

The European Union (EU) has extensive regulations spanning various sectors, such as energy, waste management, agriculture and finance, to promote and reinforce sustainable practices. By understanding the regulatory landscape and integrating sustainability into core business practices, companies can comply with current regulations and position themselves as leaders in sustainability, gaining a competitive advantage in the process.

The EU Regulatory Framework

Companies should identify regulations that have a direct impact based on their sector, size and operational footprint in the EU. An overview of the EU's sustainability regulations is below:

• The European Green Deal, passed in 2019, is the EU's overarching strategy for a green transition, with the goal of reaching climate neutrality by 2050. Embedded within this deal is the Sustainable Finance Framework, comprising key elements like:
  • The Corporate Sustainability Reporting Directive (CSRD), which now replaces the Non-Financial Reporting Directive (NFRD), has been at the forefront of implementing sustainability regulations to combat climate change, protect the environment and ensure sustainable growth. The CSRD seeks to:
    • Improve transparency and accountability around corporate Environmental, Social, Governance (ESG) performance to enable investors and stakeholders to make more informed decisions based on comparable ESG disclosures
    • Accelerate the integration of ESG considerations into corporate business practices to support the transition to a more sustainable, inclusive economy
    • Strengthen rules around non-financial sustainability disclosure
  • EU Taxonomy Regulation, which came into effect in 2021, sets out criteria to determine if economic activity is sustainable
  • Sustainable Finance Disclosure Regulation (SFDR), which came into effect in 2021, also defines rules for non-financial and financial information disclosure
  • The European Sustainability Reporting Standards (ESRS), adopted by the European Commission in 2023, is a binding reporting standard that EU entities must comply with. The ESRS covers numerous ESG topics, double materiality and requires all reported data to be audited by an external third party. While CSRD and ESRS are interconnected, they serve distinct functions:
    • The CSRD sets the overarching legal framework and reporting obligations to ensure consistency and transparency in how companies report their sustainability performance
    • Within the CSRD, the ESRS provides a detailed roadmap for companies to achieve compliance, outlining the necessary steps and requirements for disclosure

The requirements for non-financial reporting, as set out by the ESRS, are defined within 12 sector-specific standards. The standards are grouped by general cross-cutting and topic-specific standards across ESG topics.

Complying with EU Regulations:

Under the CSRD, the first wave of impacted companies will need to begin reporting in 2025, based on data from 2024. Impacted companies are large entities that exceed at least two of the following criteria: 1) more than 500 employees, 2) a balance sheet of more than EUR 17 million, or 3) a net turnover of more than EUR 34 million.

Assess Your Current Position

Conduct a sustainability audit by evaluating your company's current sustainability practices, emissions, waste management and resource use. Prepare a gap analysis and compare your current practices against the requirements of relevant EU regulations to identify areas of opportunity. This may involve investing in new systems, processes and training.

Double materiality, a new requirement under the ESRS, expands the scope of topics considered material within your disclosure. Under double materiality, you will need to consider the financial impact of sustainability on your business and your business activities' impact on society and the environment.

Develop a Sustainability Strategy

Based on your audit and gap analysis, set clear sustainability objectives that align with EU regulations and your business goals. Ensure sustainability is integrated into your business model, operations and decision-making processes. To comply with ESRS, you must disclose your organization's governance processes, strategy and business model in relation to the material sustainability topics identified in the double materiality assessment.

Implement and Monitor

Develop an action plan to identify and achieve your sustainability objectives, including timelines, responsibilities and resources. Regularly monitor your progress against your objectives and adjust your strategy as needed. Newmark advises that you define clear performance metrics and targets against which to measure your progress on an ongoing basis.

Seek Expert Advice as you Prepare to Report and Disclose

Navigating EU sustainability regulations demands proactive adaptation and compliance efforts from businesses. Familiarize yourself with the reporting and disclosure requirements relevant to your business and ensure that your sustainability reporting is transparent, accurate and in line with EU guidelines and standards. Companies may need to establish new data collection mechanisms or enhance existing ones for comprehensive sustainability reporting. Consider consulting with legal experts specializing in EU regulations and sustainability to ensure full compliance and leverage opportunities within these regulations.

Newmark Global Corporate Services (GCS), ESG professionals and Gerald Eve can partner with clients to facilitate compliance with current regulations and anticipate future requirements. Staying informed about evolving regulations and sustainability trends is vital in this dynamic regulatory landscape.