The year 2021 was a prolific one for environmental, social and governance (ESG) in the EU. The year 2022 looks just as productive for the EU legislature.
Companies must comply with increasing obligations related to ESG. They must also do their best to meet requirements to have their businesses qualify as sustainable and to be noticed by investors on the EU market.
Many legislative initiatives are also in the EU pipeline to ensure effective protection of human rights and the environment, involving potential further obligations for companies as well as their supply chains.
Here are the main developments you need to monitor in 2022, and the impact of such ESG regulations on antitrust policy and enforcement.
EU Taxonomy Regulation starts applying
At the end of 2021, two European Commission (Commission) delegated acts were published in the EU Official Journal, allowing the EU Taxonomy Regulation to apply from 1 January 2022 (see our previous alert).
The first delegated act sets the technical screening criteria (TSC) to establish whether an economic activity contributes substantially to climate change mitigation and adaptation. Climate change mitigation and adaptation are two of the six objectives established in the EU Taxonomy Regulation, the main EU instrument to channel investors’ money toward sustainable activities and achieve the bloc’s climate goals.
Therefore, since 1 January 2022, companies carrying out one of the activities listed in this delegated act are able to use the TSC to determine and report/disclose whether their activities are eligible and aligned with the EU Taxonomy as regards the objectives of climate change adaptation and mitigation (provided that such activities do not harm any of the other EU Taxonomy objectives).
The second delegated act relates to the companies’ obligations to disclose how and to what extent their activities are associated with environmentally sustainable economic activities (Article 8 of the EU Taxonomy Regulation). The Article 8 delegated act provides for a simplified disclosure regime during a transitory period covering the year 2022. Thus, companies must report only on certain elements (regarding taxonomy eligibility) from 1 January 2022.
Nuclear and gas activities included in the EU Taxonomy for climate change adaptation and mitigation objectives
On 2 February 2022, the Commission presented its Complementary Delegated Act (CDA) on climate change mitigation and adaptation covering certain nuclear and gas activities.
Nuclear and gas related activities must meet the TSC set out in the CDA to be considered as contributing to climate change mitigation and climate change adaptation. Thus, upon the fulfillment of certain conditions, these activities could be included in the EU Taxonomy. The CDA also introduces specific disclosure requirements for businesses active in the gas and nuclear energy sectors to provide full transparency to investors.
However, the CDA remains subject to the approval of the European Parliament (Parliament) and the Council of the European Union (Council). They will have four months from the Commission’s formal adoption to scrutinize the CDA and possibly reject it. The Commission’s bundling of gas and nuclear in one single instrument probably ensures that there will not be enough votes in the Council to meet the reinforced qualified majority (at least 20 EU Member States representing at least 65% of the EU population) to block it. More opposition is expected from the Parliament, which may object by an absolute majority of its members.
Companies with activities relating to nuclear and gas should prepare by checking whether they meet the TSC set out in the CDA as it may become applicable by 1 January 2023, or in their next reporting period. The adoption of the TSC will be decisive for funding such high-cost activities.
Taxonomy delegated acts setting the TSC applicable to the remaining EU Taxonomy objectives
Delegated acts are also required to establish TSC with respect to the four remaining EU Taxonomy objectives (i.e., the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems).
Under the EU Taxonomy Regulation, the Commission was required to adopt the relevant delegated acts by 31 December 2021 for an application from 1 January 2023. While that first deadline was missed, the Commission’s advisor, the Platform on Sustainable Finance (Platform), did publish in 2021 its draft report on preliminary recommendations for these TSC and called for feedback from stakeholders. The Platform is currently reviewing this feedback before submitting its final report to the Commission. Then, the Commission will be able to prepare the relevant delegated acts setting TSC regarding these four remaining objectives.
The Commission’s draft delegated acts should be published around June 2022 and then reviewed by both the Council and the Parliament; it is not clear whether an application as of 1 January 2023 is still contemplated.
Companies should stand ready to check whether their activities will meet the upcoming TSC and should already collect the relevant data.
Disclosure obligations on companies under the SFDR
Increasing disclosure obligations apply to financial market participants and companies in the EU.
The Sustainable Finance Disclosure Regulation (SFDR) provides for disclosure obligations that apply to financial advisors and financial market participants (fund managers’ insurance undertakings, investment firms and credit institutions providing portfolio management services).
Level 1 disclosures have applied since March 2021 (i.e., the disclosure of information about the financial market participants’ policies on the identification and prioritization of principal adverse sustainability impacts).
Level 2 disclosures are more detailed disclosure requirements that were supposed to apply from 1 January 2022. However, the Commission has delayed the application of the Level 2 disclosure obligations because it has not been able to adopt the relevant regulatory technical standards (RTS). The draft RTS was submitted to the Commission by the European Supervisory Authorities in two tranches in February 2021 and October 2021, which, according to the Commission, did not leave enough time for a proper review. The Commission has therefore announced that the application of the Level 2 disclosures is postponed until 1 January 2023.
However, financial market participants should already prepare for such disclosures, including by collecting all the relevant data.
In April 2021, the Commission proposed a Corporate Sustainability Reporting Directive (CSRD) to extend the scope of the EU Non-Financial Reporting Directive (NFRD) already in force.
The proposal extends the scope of the reporting requirements and the categories of companies subject to them. The CSRD would apply to all listed companies (except those listed micro-enterprises) and all large companies (listed or not) meeting two out of three of the following criteria: (i) a balance sheet total of €20 million, (ii) net turnover of €40 million and (iii) 250 employees on average during the financial year. Currently the NFRD only applies to large public-interest entities (i.e., companies with securities listed on the EU markets, banks and insurance companies) with an average number of employees in excess of 500.
The CSRD is being reviewed by the Parliament and the Council. It should be agreed on in 2022; potential application will be from 2024, with companies reporting on the 2023 financial year.
If adopted, the CSRD will mark an important additional change in corporate reporting.
Future Commission’s proposal on supply chain due diligence: environment and human rights
In the near future, companies active in the EU may also have to perform audits of and conduct due diligence over their entire supply chains to address important ESG-related issues. The Commission plans to submit draft legislation in early 2022 on a mandatory supply chain due diligence law.
The Commission has already undertaken preliminary steps by publishing guidance on due diligence for EU businesses to address the risk of forced labor in their operations and supply chains. In this document of July 2021, the Commission notably provides the considerations that are relevant for companies seeking to steer clear of forced labor.
According to the Commission’s guidance, companies should monitor forced labor risk factors that may relate to the country involved, migration situation, informal labor relations, specific restrictions on workers, etc. Actions to address forced labor are also mentioned, such as in-depth risk assessments of suppliers or supply chain segments, the possibility of disengaging from risky contractual relationships, and communication with responsible governments.
On that basis, multinational companies should be ready to prepare, establish and implement adequate protocols to take further steps to fight forced labor, including by controlling their value chains.
It is noteworthy that Germany has already adopted a law requiring companies with more than 3,000 employees to conduct audits of their direct suppliers and to assess the risks arising from indirect suppliers in terms of violation of human rights or environmental law from 1 January 2023. From 1 January 2024, companies with more than 1,000 employees will be included in the scope of that law.
Commission’s proposal on environmental criminal law
In December 2021, the Commission proposed a new directive to strengthen enforcement of environmental criminal law. The proposal has been submitted to the Parliament, which has already asked relevant committees for their opinions. The Commission wishes to see this future directive being implemented with a startup period from 2022 to 2025.
With that proposal, Member States would be forced to take criminal law measures to ensure a more effective protection of the environment. This follows the Commission’s finding that there are limitations and shortcomings with the 2008 Environmental Crime Directive. Interestingly, the Commission indicates that its proposal would contribute to the Zero Pollution Action Plan, the Circular Economy Action Plan and the Biodiversity Strategy for 2030 as well as promote environmental rule of law. This converges with the objectives pursued under the EU Taxonomy Regulation.
In its draft proposal, the Commission also proposes to define new environmental crimes such as waste management–related crimes as well as illegal timber trade, illegal ship recycling and illegal abstraction of water. The draft is quite ambitious, as it also requires Member States to set minimum penalties (e.g., a maximum term of imprisonment of at least 10 years if an offense causes or is likely to cause death or serious injury to any person) and limitation periods for these crimes. Member States must also provide sufficient training as well as financial and technical resources to fight environmental crimes. Cooperation and coordination between authorities are prescribed to ensure effective cross-border investigations and prosecutions.
Commission’s proposal for a EU Green Bond Standard
In July 2021, the Commission proposed a regulation on the EU Green Bond Standard (EU GBS) to encourage market participants to issue and invest in green bonds. According to the Commission, the EU GBS can be defined as a voluntary standard to help scale up and raise the environmental ambitions of the green bond market. The Commission’s goal is to set a “gold standard” for how companies and public authorities can use green bonds. By doing so, they will be able to raise funds on the capital markets to finance some of their large investment projects contributing to sustainability.
The proposed framework sets four key requirements: taxonomy alignment, transparency through detailed reporting requirements, external compliance review, and supervision of external reviewers by the European Securities Market Authority.
The proposal is currently being reviewed by the Parliament, which already published a draft report in December 2021 proposing some amendments to the Commission’s text—for instance, the loss of the EU GBS label when failing to meet annual targets relating to the requirements for taxonomy-alignment plans. In 2022, the legislative process will continue at the Parliament. The draft proposal will then be reviewed by the Council following the co-decision legislative procedure.
ESG impact on competition law policy and enforcement in 2022
Agreement between companies
ESG also impacts antitrust.
At the end of last year, the Commission published a communication titled “A Competition Policy Fit for New Challenges.” In its communication, the Commission acknowledges that companies should be allowed to cooperate to pursue genuinely green initiatives jointly. Thus, agreements restricting competition could be exempted if they brought benefits for customers that outweigh the harm caused—for instance, replacing non-sustainable products with sustainable ones and thus improving their longevity and increasing the value that consumers attribute to that product. Many issues remain, however—notably, the vexing questions of whether, how fast and under what conditions EU antitrust enforcers will be prepared to approve collective agreements that benefit the environment as a whole and that do not generate specific improvements for the customer class impacted by the agreement.
We will see in 2022 how the Commission and the national competition authorities in the EU Member States will take this into account and to what extent some agreement infringing Article 101 Treaty on the Functioning of the EU might be exempted. This is a matter to watch closely, given the cost of getting it wrong, as evidenced by the Commission’s investigation of the German car industry agreements relating to the introduction of AdBlue (Case AT.40178 – Car emissions, see both the Commission's decision fining car manufacturers €875 million for restricting competition in emission cleaning for new diesel passenger cars and the letter explaining why certain areas of cooperation were not further investigated issued on 8 July 2021).
The European Green Deal objectives require both private and public funding. Thus, the Commission is in the process of reviewing state aid rules to further support these objectives.
Many actions are being considered by the Commission, such as amendments to the General Block Exemption Regulation by the first half of 2022 to take into account the European Green Deal and digital transformation. This regulation provides for an automatic approval of public aid measures that meet its conditions.
The Commission also endorsed new Guidelines on State Aid for Climate, Environmental Protection and Energy, which should be adopted in early 2022.
These updated guidelines will allow EU Member States to both support new environmental projects and enable support for clean mobility, energy efficiency in buildings, circularity and biodiversity. They will also increase the flexibility of existing rules by eliminating the notification requirement for large green projects within aid schemes already approved by the Commission.
As this alert shows, ESG will continue to be a hot topic in 2022. A large number of companies that are active in the EU across multiple industries will see their operations affected by ESG-related legislative initiatives and regulatory developments. Businesses must keep abreast of these developments and be ready to undertake all actions required for ESG compliance.