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European Parliament passes CSRD and unveils sustainability measures

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The European Parliament has unveiled a series of measures around sustainability. It has revised its Fit for 55 package, adopted new reporting rules for multinationals, voted to include energy measures in national recovery plans, and approved a new law on cybersecurity.

  • The European Parliament has unveiled a series of measures around sustainability.
  • The topics of focus are emissions reductions, carbon sinks, transparency of corporations, green transition, cybersecurity and fair competition.
  • These policies are expected to shape the sustainability strategies of businesses, financial institutions and local governments.

Fit for 55 to include stricter regulation of greenhouse gas emissions…

The EU parliament has updated the ambitions of its Fit for 55 package. The Parliament and Council of negotiators provisionally agreed to revise the Effort Sharing Regulation (ESR), which covers 60% of the bloc’s emissions and sets binding greenhouse gas (GHG) reduction targets for Member States. 

The new agreement revising the ESR calls for the increase in the mandatory 2030 GHG reduction targets at the EU level to 40% from 30%, based on 1990 levels. For the first time, all Member States are to be included with reduction targets ranging from 10% to 50%.

The deal also provides flexibility to Member States, stemming from a need to balance a just and fair transition for all members while ensuring that the EU Climate Law is not undermined. As such, the agreement restricts the possibilities to transfer, borrow and save emission allocations compared to the Council’s position.

The Commission will publish information on national actions in an easily accessible form to increase the accountability and transparency of Member States.

…and higher carbon sink targets

The Parliament and Council of negotiators also effectively raised the 2030 GHG reduction target to 57%, by increasing the EU carbon sinks target for the land use change and forestry sector. It represents a 15% increase in the GHG removal target for the sector, at 310 million tons of CO2 equivalent by 2030.

The plan includes improving the monitoring, reporting and verification of emissions, including by using more geographical data and remote sensing, to keep track of targets more accurately. EU countries will be obliged to take corrective action if they lag on their goals, while non-compliance will result in 108% of the GHG above their 2026-2029 budget being added to their 2030 target.

The changes to the Fit for 55 package will have to be formally approved before they can be enforced.

Approval of CSRD expands sustainability reporting to 50,000 companies

The Parliament adopted the Corporate Sustainability Reporting Directive (CSRD) in November 2022. There were 525 votes in favour, 60 votes against and 28 abstentions, reflecting the bloc’s ambition to lead on global ESG reporting standards. CSRD has been expanded to cover 50,000 companies, a more than four-fold increase from the current 11,700. It will also require companies to report on their impact on the environment and society.

The adoption of CSRD also sends a strong signal about the EU’s stance against greenwash risks. Rules contained in the CSRD go beyond the requirements of the disclosure of non-financial information (NFRD), which was viewed as inadequate. The first set of standards will go into effect by June 2023.

The new rules apply to all large companies, whether or not they are publicly listed. It also includes listed SMEs and non-EU companies judged to have substantial activity in the region. They need to have a turnover of at least €150 million. 

To ensure data integrity, the disclosures will have to be independently audited and certified, and companies will have to provide digital access. The rules are expected to be implemented between 2024 and 2028 in the following order:

  1. From 1 January 2024, for large public-interest companies with over 500 employees, already subject to the non-financial reporting directive, with reports due in 2025;
  2. From 1 January 2025, for large companies that are not presently subject to the non-financial reporting directive, and employing more than 250 workers and/or €40 million in turnover and/or €20 million in total assets, with reports due in 2026;
  3. From 1 January 2026, for listed SMEs and other undertakings, with reports due in 2027. SMEs can opt out until 2028.

Energy security remains high on the EU Parliament‘s agenda

Members of European Parliament (MEPs) voted to include REPowerEU measures in the Recovery and Resilience Facility. The REPowerEU was designed in response to the energy crisis in Europe caused by the war in Ukraine.  The Recovery and Resilience Facility (RRF) is an instrument to mitigate the economic and social impact of the COVID-19 pandemic. 

The Parliament is looking to combine the two as a means of achieving energy security while enabling the green transition. In May 2022, the European Commission voted to integrate parts of REPowerEU into the Recovery and Resilience Plans (RRPs) of Member States. Specifically, it proposed three measures designed to save energy, diversify supplies, and accelerate the transition to clean energy.

To speed up its transition to clean energy, the Commission called for a higher share of renewables in its energy mix. Increasing energy efficiency across all modes of usage was also seen as a way to save energy. Policymakers proposed to diversify the energy supply by increasing the levels of biomethane and green hydrogen, although it also recommended LNG imports from non-Russian sources.

The Parliament is now planning to negotiate with member nations on their planned spending under the REPowerEU plan. The EU is calling on its members to ensure that at least 35% of their spending impacts more than one country. By combining REPowerEU and RRF plans, the EU also seeks to ensure members would apply the “do no significant harm” principle. 

Cybersecurity resilience and fair competition in the single market

In November 2022, the Parliament also voted to strengthen existing legislation on cybersecurity and to adopt a new tool to ensure fair competition in the EU. Specifically, it gives the Commission the right to investigate subsidies granted by non-EU public authorities to companies operating in the EU. Both measures passed by a majority vote of 98%. 

The new cybersecurity provisions will be incorporated into the existing legislation that was introduced in May 2022. Regulations dealing with subsidies and fair competition will enter into force after they have been officially adopted by the Council, which is expected on the 28 of November. 

The new rules on cybersecurity seek to tighten obligations relating to risk management, risk reporting and information sharing by entities exposed to cyber threats. The new security proposals would cover what the EU sees as essential sectors, including energy, transport, banking, healthcare, digital infrastructure, public administration and space.

The regulation on ensuring fair competition in the EU seeks to address distortive competitive advantages from non-EU public authorities. This could be in the form of no-interest or subsidised loans, preferential tax treatment or state grants. The intention is to level the playing field for companies in EU countries, which are bound by strict state aid rules.

A further measure relates to mergers and acquisitions. Mergers involving entities that have an EU turnover of €500 million, and which have a foreign financial contribution of at least €50 million, will require the Commission’s approval. The same will apply to public tender procurements of over €250 million. 

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