Impact of the new EU Sustainability Directives for European & Global Businesses

In 2019, the European Commission proposed the European Green Deal, a set of initiatives that place the European Union at the helm of the European and global ecological transition. Many policies initiated by the Deal address companies, mandating them to operate with greater environmental responsibility. This year introduces two directives with significant impact for the business world: the Corporate Sustainability Reporting Directive (CSRD) and the Green Claims Directive (GCD).

CSRD – Corporate Sustainability Reporting Directive

The European Commission’s justification for adopting the CSRD was the legal framework not meeting the information needs of a company’s stakeholders. Some companies were not reporting sustainability information at all, while others, choosing to provide some information, did not report all aspects relevant to readers – be they customers or investors. 

Therefore, the main obligation introduced by CSRD is for the approximately 50,000 companies to which it applies to identify and report the sustainability aspects significant for the organization and its stakeholders. In this process, companies must determine both their influence on the environment and people and the influences (risks, opportunities) that various sustainability aspects have on their activities.

For instance, traditionally, companies report only the impact of energy consumption on their financial performance. According to CSRD, companies will now also have to determine the impact of this energy consumption on the environment and communities. 

The Directive will be applicable from:

– 1st January 2024 for companies already subject to the Non-Financial Reporting Directive (NFRD), with the first reports issued in 2025;

– 1st January 2025 for large companies not currently subject to NFRD, with the first reports issued in 2026;

– 1st January 2026 for SMEs, with the first reports issued in 2027. However, SMEs can choose to report from 2028;

– 1st January 2027 for non-European companies whose European revenues exceed €150 million, with the first reports issued in 2028.

GCD – Green Claims Directive

A 2020 study by the European Commission showed that 53.3% of companies’ environmental claims were found to be vague, misleading, or unfounded. To counteract this and ensure fair competition and proper consumer information, the European Commission proposed the GCD. 

This directive stipulates those explicit claims describing a product, service, or the organization itself as having a positive environmental impact must be thoroughly justified, communicated, and verified. The Directive applies to the majority of companies in the European Union, from SMEs to large public companies, across all industries. Microenterprises are the only companies to which the Directive does not apply, but they can align with the new requirements on their initiative.

The proposal is currently in the legislative process and is expected to be adopted by the European Parliament and the Council of the European Union by 2024. From this point, member states have 18 months to implement the directive’s requirements into their national legislation.

Impact of CSRD and GCD on Companies

Companies currently face a major obstacle in collecting and verifying data, both regarding their ESG performance and in supporting the environmental claims they make. To comply with CSRD and GCD requirements, companies will need to allocate significant resources for staff training, implementation of new processes, and possibly changing partners and subcontractors within the supply chain. 

In the remaining time until the transposition of these directives into national legislations, companies have time to develop management frameworks for substantiating environmental claims and management systems for measuring and faithfully reporting ESG factors.

Companies choosing to proactively approach these new regulations will have a competitive advantage in the market. For example, implementing a well-established system for verifying environmental claims can reveal additional data about products and company activities. Similarly, ESG reports not only improve organizational transparency in the face of customers and potential investors but also support decision-makers within the company in planning and implementing business objectives.

In conclusion, ignoring the obligations imposed by CSRD and GCD can lead to significant financial sanctions (4% of turnover in the case of GCD) and consequently can erode the trust of customers and stakeholders, having a negative impact on business activity.

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Ciprian Stănescu is running the Social Innovation Solutions ecosystem, a group of organizations with a mission to empower individuals and organizations to understand future transformations and to develop sustainable tech, policy, and entrepreneurial solutions. SIS runs various educational programs in CEE, and global conversation platforms on climate & sustainability. He worked 12 years for organizations like Ashoka and the Aspen Institute, is a Global Shaper Alumni of the World Economic Forum, and a Board Member of Rethink Romania. He teaches foresight and sustainability at The Entrepreneurship Academy in Bucharest and has recently completed programs in sustainable finance and circularity at Harvard Business School and Cambridge Judge Business School.

Article by Ciprian Stănescu, President, Social Innovation Solutions