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Consumer, Food & Retail Insights

| 2 minutes read

Wildfires rage as the EU pushes on with landmark ESG legislation

A US City is enveloped in an orange haze emanating from Canadian forest fires hundreds of miles to the North. Shows in the Theatre District are interrupted as smoke affects breathing, people are sporting masks. This is not LA or some dystopian dream. It is downtown New York on 7th June 2023.

Cross the Atlantic and discussion rages about overflow discharges into UK coastal waters. In the EU there are two timely pieces of ESG legislation: CSRD and CS3D.

CS3D is out, or rather approved by the Commission. It follows hot on the heels of CSRD and signifies big steps forward in the EU’s Green Agenda. This cannot be ignored, even by UK businesses. It will impact any entities that have business in the EU if that business goes towards those all-important net turnover thresholds.

CSRD is anticipated to touch at least 50,000 EU companies by 2026, meaning they will need to report on their ESG initiatives targets, strategy, and performance against these in their annual accounts. CS3D is expected to touch at least 10,000 EU companies by 2026, exposing them to potential fines and claims for ESG breaches. ‘Double materiality’ – which builds on the materiality concept first deployed in the US by the SEC in the mid-1900s – is a cornerstone of CSRD and CS3D, attributing importance to not only the ESG impact of a company’s activities on itself but also the wider environmental, social, and human impact.

The acronyms CSRD and CS3D could become as frequently used in the EU as ESG and AI, but what do they mean and how do they slot into the ESG landscape?

CSRD – Corporate Sustainability Reporting Directive

This is the EU’s Corporate Sustainability Reporting Directive that entered into force on 5th January 2023. It will apply from 2025 to large EU companies that are not subject to the Non-Financial Reporting Directive and will require entities to report in their annual accounts by reference to a set of 12 reporting standards. It’s currently in draft and was submitted for approval to the EU Commission by the European Financial Reporting Advisory Group toward the end of 2022 (they can be viewed here).

This is well trodden territory and gives a mandatory framework of what and how standards must be set and reported. Of recent import is the legislation that will give real teeth to CSRD…

CSDDD (CS3D) – Corporate Sustainability Due Diligence Directive

Proposed to it by legal directorate and announced by the Justice Commissioner in February 2022, the EU Commission announced it had agreed its position on CS3D on 1st June 2023 to sit alongside mandatory due diligence requirements in sectoral laws such as minerals, batteries and deforestation. It aims to foster sustainable and responsible corporate behaviour with a set of legal requirements on human rights and environmental protection for all sectors. It creates a corporate due diligence duty and a duty of care by company directors, underpinned by fines for non-compliance.  

CS3D is now ready for the trialogue of negotiations between Parliament, Council and Commission of the EU. The adoption target date is c. 2024 with two years for member state implementation. Brexit means it will not extend to the UK but any UK entity that meets the non-EU thresholds below will be caught:

Entity and location

Net turnover (million €)

Employees (on average)

 

Non-EU Company (such as UK/US)


 ≥40 in the EU

 N/A

Non-EU Parent Company (group figures)


 >150 with ≥40 in the EU

 ≥500

EU Company



 >40

 >250


EU Parent Company (group figures)


 >150

 ≥500


CS3D will provide another system of public law supervision and enforcement as well as private enforcement. It introduces best effort obligations that member states must introduce into national law and addresses accountability for environmental damage and human rights abuses in and outside the EU. It also creates a possible platform for ESG class actions against companies and/or their directors – we’ll be writing much more about this in forthcoming blogs, so watch this space!

Canadian wildfire smoke to engulf New York skies again

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consumer goods, consumer goods food and retail, food and beverage, retail and fashion