ESG trends and ESG regulationsEurope's commitment to ESG

The EU Strategy for Sustainable Development (EU SDS) of 2001 was first formulated during the 2001 Gothenburg European Council. The primary aim of this strategy was to achieve a continuous improvement in the quality of life for present and future generations.

To meet its goals, this strategy supplemented the Lisbon Strategy, which was an action and development plan for the economy of the European Union between the period 2000 and 2010. The Lisbon Strategy was utilized to supplement growth and jobs by including the sustainable agenda in the political decisions and actions.

Thereafter in 2004, a new commission worked towards accessing the developments made by the EU SDS which led to several alterations.

The new commission reviewed the strategy and understood that while the EU SDS was good on paper, the implementation lacked focus. To counter the worsening changes, the commission introduced the Revised Sustainable Development Strategy.

The revised EU-SDS put forth a mandatory framework for all the EU member states. It also included cross-cutting measures, economic instruments, implementation, and monitoring mechanisms.

The revised EU SDS also shared a concrete action plan for seven key challenges in sustainable development. These seven challenges are:

• Climate change and clean energy
• Sustainable transport
• Sustainable consumption and sustainable production
• Conservation and management of natural resources
• Public health
• Poverty and sustainable development
• Social inclusion, demography, and migration

Adopted by the European Parliament in 2013, the Accounting Directive amended the previous Directive to establish a single set of high-quality accounting standards to be used by businesses when preparing their annual and consolidated financial statements.

The Accounting Directive issued requirements for enterprises in the public sector undertakings, listed companies, and credit institutions. These requirements were crucial, and organizations had to follow them for the preparation, presentation, consolidation of financial statements, and much more.

In retrospect, the Directive’s various measures to recognize and measure financial statements also meant that they reduced the comparability of the information published in financial statements.

The Non-Financial Reporting Directive came into effect across all EU member states in 2018. It helped European enterprises bring transparency and accountability to their environmental, social and governance issues.

The NFRD required businesses to publish a non-financial report on their ESG performance together with their annual management report. Once done, the NFRD would evaluate the non-financial performance to help implement a sustainable change into their business approach.

Then, 11 December 2019 saw new updates on the NFRD with the help of the views collected from stakeholders across the world. As per Plan A.earth, NFRD applied to approximately 11,700 organizations and groups across the Europe Union. These include corporations and public-interest companies such as insurance corporations.

With growing demands and constant change, the NFRD has been said to be amended by the Corporate Sustainability Reporting Directive (CSRD).

Developed by the EU to promote sustainable finance, the EU taxonomy is a classification system designed to identify common environmentally sustainable economic activities. As per Carbontrust, EU Taxonomy regulation applied to organizations subjected to non-financial reporting. The rules stated that large organizations had to disclose the extent of their activities to meet their criteria.

This taxonomy has been set upon a few technical screening criteria that defined whether an economic activity should be considered environmentally sustainable. The criteria covered six environmental objectives namely-

• Climate change mitigation,
• Climate change adaptation,
• Sustainable use and protection of water and marine resources,
• Transition to a circular economy,
• Pollution prevention and control,
• Protection and restoration of biodiversity and ecosystems.

As per Intuition.com, Sustainable Finance Disclosure Regulation or SFDR was created to enable institutional asset owners and retail clients to comprehend, analyze and monitor the sustainability characteristics of investment funds by standardizing sustainability disclosures.

The SFDR focuses on enhancing transparency and integrity and supporting a more sustainable economy. It does so by establishing a framework for the financial market to disclose climate-related and environmental information.

This regulation consists of two main sections:

• The first established general disclosure requirements applicable to financial market participants.
• The second established specific disclosure requirements for investment firms and asset managers about their investment products.

With the recent development across the world, the Corporate Sustainability Reporting Directive (CSRD) was created to ensure that organizations publicly disclose information related to the risks, opportunities, and impact of their activity on the environment and society.

They ensure this directive by requiring enterprises to disclose information about their ESG performance in their annual reports.

The qualifying enterprises for CSRD should have over five hundred employees listed either on the EU’s regulated markets or have at least one-third of their total worldwide annual revenues generated from the sale of goods or services within the EU.