The ESG Regulations Handbook

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THE ESG HANDBOOK

European Regulations

Table of Contents

ESG in Europe

Former BlackRock CIO for Sustainable Investing, Tariq Fancy ended his talk at Tedx Toronto by emphasising three things we can no longer afford to do:

1) believe that our individual actions alone can create the kind of systemic change required without also mandating major corporations to operate differently.

2) believe that our major power is as consumers rather than as citizens to enact systemic change.

3) answer inconvenient truths with convenient fantasies.

He ends his talk by saying: "When relying on good sportsmanship doesn't work, it is time to call in the referees."

He is pointing us to the fact that policy, legislation and regulation is necessary for the kind of systemic changes that are required to solve complex issues such as climate change. The EU is emerging as a global leader in ESG regulation and in the years to come ESG will be of relevance to most if not all businesses operating in or doing business with the EU. That is why we must learn more about the new regulations.

Reporting Landscape

ESG stands for Environmental, Social and Governance. It refers to three domains that companies are required to report on aside from financial disclosures. More ESG regulations are being rolled out every year as the EU attempts to achieve its climate targets.

The upcoming regulations draws on existing established ESG disclosure templates and guidelines such as the GRI. This makes it easier for organisations to predict the kind of compliance procedures, data points and disclosures they will have to enact once the regulation comes into effect.

The following pages contain an overview of the ESG reporting landscape.

Frameworks for reporting 01 02

Aspirations

& Goals

ESG regulations aspire to a higher goal and purpose. These aspirations are drawn from documents such as:

The Greenhouse Gas Protocol Principles of Responsible Investment

UN Global Compact

UN SDGs or the Sustainable Development Goals.

Global Reporting Initiative (GRI)

Sustainability Accounting Standards Board (SASB)

Task Force on Climate-Related Financial Disclosures (TCFD/TNFD)

International Standards Organisation (ISO)

Other relevant EU directives

GRI

The GRI or the Global Reporting Initiative is one of the oldest and most established reporting mechanisms with regard to voluntary ESG disclosures and reporting.

The GRI standards are modular in nature. That means that only the first three standards are universally applicable to all kinds of businesses. The rest of the standards are divided up into an expanding list of topical and sector specific standards.

This approach has allowed the GRI to become one of the most comprehensive leading standards for ESG reporting around the world. Many upcoming EU legislations borrow heavily from the GRI both in language and in practice. If legislation is missing or yet to arrive for your industry, it will benefit your organisation to become familiar with the GRI standards.

CSRD

The Corporate Sustainability Reporting Directive (CSRD) is an EU directive that requires a broader set of large companies, as well as listed SMEs, to provide detailed non-financial information about their Environmental, Social, and Governance (ESG) performance. The CSRD also mandates that sustainability information must be externally audited.

The new rules apply to the reports published in the 2025 for the financial year 2024. Until then the Non-Financial Reporting Directive (NFRD) applies. The companies covered by the NFRD are around 12,000 and this will be expanded by the CSRD to cover over 50,000 companies.

The directive outlines the disclosure requirements for information related to:

Environmental matters such as bio-diversity and pollution, Social matters such as labor, customer and human rights, Governance matters such as anticorruption and bribery and diversity on company boards.

CSRD

What, when & for whom?

Any company that meets two of the following three criteria:

+250 Employees

+Eur 40 million in turnover

Who is covered? 01 03

European Sustainability Reporting Standards

ESRS are standardised disclosures for companies that fall under CSRD. They are based on the GRI and ISSB. These include 800 datapoints & 80 disclosures.

2024: Companies covered by NFRD 2025: Large companies not covered by NFRD

2026: Listed SMEs and smaller noncomplex credit institutions

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What to do right now?

ESRS

Datapoints & disclosures

The European Sustainability Reporting Standards (ESRS) aim to harmonise the disclosures and data points that companies in various industries will be required to submit as a result of the CSRD. The ESRS expands the granularity, scope & volume of sustainability related data that companies are required to disclose. The first set of 12 standards were released on 31st July 2023. The ESRS has a total of 800 data points and 80 disclosures.

Companies are required to report on how their activities and their supply chains affect people and the environment. Sector specific standards will soon follow. The ESRS will apply from 2024 but will be phased in over the next 1-3 years. A double materiality assessment is also mandated.

ESRS

ESRS 1 General Requirements

Here are some of the highlights and recommended Appendixes.

Double Materiality

Sustainable Due Dilligence

Value chain

Time horizon

Transitional provisions

Appendix I & III

Disclosures & Datapoints

ESRS 1

Appendix F

Flowchart of which disclosures to be included

ESRS 2

Appendix C & E

Double materiality

Financial materiality

Financial materiality will require the disclosure of the risk posed by climate change and sustainability matters on a company's financial performance in the short, medium and long term. Materiality will be assessed in terms of the likelihood (risk) and the size of the potential financial effect.

Impact materiality

Impact materiality will require the disclosure of the company's actual & potential material impact on people and the environment in the short, medium and long term. This includes the company's upstream & downstream value chain. Materiality will be assessed in terms of severity and likelihood of impact.

EU Taxonomy

The EU Taxonomy is a system developed by the European Union (EU) to classify environmentally sustainable economic activities. It provides a standardised approach to determine which activities contribute to the EU's environmental objectives. The taxonomy aims to combat greenwashing and guide investments towards sustainable projects.

The EU Taxonomy is a significant component of the EU's sustainable finance agenda, providing a common framework for assessing and promoting environmentally sustainable activities and guiding investments towards a greener and more sustainable economy. Technical criterial for the first two objectives has been released with more being rolled out every year.

Eligible Sectors: The EU Taxonomy covers various sectors, such as energy, manufacturing, transportation, and agriculture among others.

Reporting Requirements: Financial market participants, companies, and issuers are required to disclose the proportion of their activities that align with the taxonomy, enhancing transparency.

Transition Period: The taxonomy is being phased in gradually, with a focus on climate change objectives initially, and further sectors and objectives will be included over time.

Purpose: The EU Taxonomy establishes clear criteria for determining the sustainability of economic activities, helping investors, businesses, and policymakers identify sustainable investments and activities.

Environmental Objectives: It focuses on six environmental objectives, including climate change mitigation, adaptation, circular economy, water and marine resources, pollution prevention, and biodiversity.

Technical Screening Criteria: The Taxonomy regulation provides specific criteria for determining the sustainability of activities.

EU Taxonomy

Must make substantial contribution to one of the six taxonomy objectives mentioned earlier such as climate change mitigation, pollution prevention etc.

Companies must ensure that no significant harm is done to the remaining five environmental objectives in the taxonomy. Criteria for DNSH are specified for each activity in relation to the other five objectives.

Minimum Safeguards

Must meet minimum human rights, corruption, tax and fair competition standards.

EU Taxonomy

Substantial Contribution

For each environmental objective there are two types of substantial contributions that are recognised as taxonomy aligned. They must fulfil the technical screening criteria.

Enabling Activity

The primary economic activity is improving the performance of other taxonomy aligned economic activities and does not harm environmental goals. E.g. production of key components for low carbon products.

01

Own Performance

The economic activity itself is being performed in an environmentally sustainable manner that contributes to an environmental goal. E.g. energy efficient manufacturing techniques, low-carbon energy production etc.

EU Taxonomy

Minumum safeguards

Based on the International Bill of Human Rights, the UN Guiding Principles on Business and Human Rights, OECD guidelines for Multinational Enterprises, the eight ILO core conventions and the ILO declaration of Fundamental Rights and Principles of work.

Human Rights

Human Rights impact assessment must be conducted in order to claim your company is taxonomy aligned. Perform Human Rights Due Diligence (HRDD) according to OECD guidelines.

01

Corruption & Taxation 02

Ensure that the company has processes in place for anti-corruption both for clients and internally.

Fair competition

Ensure fair and healthy competition is promoted.

EU Taxonomy

EU Taxonomy

Example: Automobiles

Conventional Tech: Combustion engines

Transition Tech: Electro Mobility ✔

Future Tech: Hydrogen Mobility ✔

60% Turnover not taxonomy aligned

40% Turnover taxonomy aligned ✔

EU 2019/631: Till 2025 max 50g CO2/km and from 2026 onwards 0g CO2/km.

Taxonomy points 2-6 must be examined for DNSH.

Minimum Safeguards

Organisation must comply with relevant UN, ILO and OECD guidelines.

✔ Organisation is 40% taxonomy aligned.

Opportunities

Social Enterprises

The ESRS, SFDR and the EU Taxonomy are all attempts to divert capital towards the social impact. The regulations refer to ESG as a potential risk and as an opportunity. This means the opportunity to make technologies and business models which have a positive social impact. Social enterprises such as The Body Shop are a great examples of how ESG can be an opportunity.

Upcoming ESG rules mean companies must change their strategies to make a profit while creating social good. Social entrepreneurs have been doing this for a while, and companies can draw on this existing talent pool to ease their transition towards regulatory alignment.

Most social enterprises and social innovations dream of creating impact at a large scale. The ultimate goal is to achieve a paradigm shift in the system, also known as systems change. One of the most effective ways to achieve large scale, lasting systems change is through legislation, regulation and policies.

There was once a time in post-industrial revolution London when the factory smoke and smog had rendered the sky of London black. it was only after the great smog of 1952 that the clean air act of 1956 was passed. A few months later, the sky was no longer black or grey but blue again. Proper implementation of ESG legislation has the potential to clear up our polluted skies once again.

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About The Author

Asad Ayub is a World Economic Forum Global Shaper. He has worked on projects for the EU, MasterCard Foundation and Google.org.