What is Europe doing with ESG?
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The Brief
To learn more, join us as we take a deeper dive into this conversation at our ‘What Is Europe Doing on ESG? What Does It Mean for the U.S.?’ event
The European Union has been actively working on setting standards for topics related to environmental, social, and governance (ESG) factors. The EU’s recent focus has primarily been on environmental issues, but they have also touched on elements of social and governance. The decisions made in Europe can have impacts that go beyond their borders, therefore understanding how the EU is approaching ESG is important. BPC has created the graphic and guide below to help familiarize people with several key concepts from Europe’s approach to ESG.
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Guide to Terms and Actions
- Non-Financial Reporting Directive (NFRD): NFRD refers to a 2014 EU directive on non-financial reporting that applies to a subset of companies based on “the average number of employees, balance sheet total and net turnover.” The directive requires covered businesses to report on certain environmental and social factors. The NFRD introduced the principle of double materiality, whereby a company discloses material financial information and information about the effects a company or entity has on society and the environment. The NFRD is set to be replaced by the CSRD.
- Commission action plan on financing sustainable growth: The action plan was adopted by the European commission in March 2018 and is a strategy to connect finance with sustainability. The action plan includes key components like setting up the EU taxonomy and creating an EU green bond standard.
- The European Green Deal: The European Green Deal was presented in December 2019 and is a plan by the European Commission to tackle climate change and other environmental issues. The stated goals include “no net emissions of greenhouse gases by 2050,” “economic growth decoupled from resource use,” and “no person and no place left behind.” The European Green Deal sets a target of reducing emissions by 55% by 2030.
- EU taxonomy: The EU taxonomy is a classification system to categorize investment activity based on their sustainability and help the EU reach the goals set in the European Green Deal. The taxonomy regulation was published in June 2020 and went into force in July 2020. The taxonomy lists six environmental objectives: “climate change mitigation; climate change adaptation; 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.”
- EU Sustainability Reporting Standards: European Financial Reporting Advisory Group (EFRAG) is tasked by the European Commission to study developing EU sustainability reporting standards. EFRAG currently put out two reports in March 2021. The first report is a roadmap for developing EU sustainability reporting standards. The second report provides proposed reforms to EFRAG’s governance structure with the goal of ensuring standards are developed based on an inclusive and rigorous process.
- Sustainable Finance Disclosure Regulation (SFDR): SFDR is a regulation that became effective in March 2021. The regulation sets disclosure requirements on financial services firms pertaining to sustainability factors.
- Corporate Sustainability Reporting Directive (CSRD): The CRSD is a proposal adopted by the European Commission in April 2021 and will amend the reporting requirements under NFRD. CSRD introduces new changes that include extending the scope of the companies covered, requiring auditing of reported information, introducing further details for reporting requirements, and requirements for making information machine readable.
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