Developments in ESG governance & transition

EC publishes timeline for preparation of CSDDD Guidelines
In October, the European Commission (EC) informally shared timelines for the preparation and publication of guidelines implementing the Corporate Sustainability Due Diligence Directive (CSDDD). Before the end of this year, the EC will conduct a public consultation to assess which guidelines have to be prioritised. Additionally, the EC will initiate a call for evidence, inviting stakeholders to provide input on the content of the guidelines. Following this, the EC will engage with stakeholders to develop specific guidance, followed by a public consultation on the draft guidelines. By 26 January 2027, the EC will publish final Guidelines on the due diligence process, model contract clauses, risk factor assessments, and data and digital tools. By 26 July 2027, the EC plans to publish Guidelines on climate transition plans, resource sharing, stakeholder engagement and sector-specific guidance. Additionally, the EC will initiate a call for evidence, inviting stakeholders to provide input on the content of the guidelines. Following this, the EC will engage with stakeholders to develop specific guidance, followed by a public consultation on the draft guidelines. By 26 January 2027, the EC will publish final Guidelines on the due diligence process, model contract clauses, risk factor assessments, and data and digital tools. By 26 July 2027, the EC plans to publish Guidelines on climate transition plans, resource sharing, stakeholder engagement and sector-specific guidance.

NGFS publishes report ‘Climate change, the macroeconomy and monetary policy’
On 29 October, the Network for Greening the Financial System (NGFS) released a report summarising key messages from three recent NGFS-publications on the macroeconomic impact of climate change. The reports focus on: (1) the impacts of acute physical hazards; (2) the green transition; and (3) climate macroeconomic modelling. They illustrate how physical hazards and transitioning to net zero can affect macroeconomic variables like output and inflation. They also outline how central banks can incorporate climate-related impacts into their modelling toolkits.

UNEP publishes emissions gap report 2024
On 24 October, the United Nations Environment Programme (UNEP) published the UN Emissions Gap Report 2024, which annually reports on the gap between greenhouse gas emission levels consistent with the Paris Agreement and current and projected emission levels under the Nationally Determined Contributions (NDCs) to the Paris Agreement. It notes that the implementation of current NDCs would result in a 2.6-3.1°C temperature rise by 2100, slightly higher than the 2023 report’s prediction of 2.5-2.9°C. Global emissions increased by 1.3% from 2022 to 2023. To stay on track for the 1.5°C target, countries must reduce their emissions by 42% by 2030 and 57% by 2035. The report will guide the next round of NDCs for 2035, due to be submitted before COP29 in Azerbaijan.

European Parliament approves Single European Sky rules reform
On 22 October, the European Parliament (EP) approved the reform of Single European Sky rules. This reform aims to enhance national performance plans for air navigation services and improve EU airspace management. The plans will include binding targets and incentives for more efficient and environmentally friendly flights. An independent review board will assist in decision-making regarding the implementation of these plans. The EC will set EU performance targets on capacity, cost efficiency, climate and environmental factors, subject to review at least every three years. The rules will enter into force 20 days after publication in the Official Journal.

European Council agrees to postpone Deforestation Regulation application date
On 16 October, the Council agreed to the EC proposal to delay the application date of the EU Deforestation Regulation by one year. This would make the regulation applicable from 30 December 2025 for large companies and from 30 June 2026 for micro- and small enterprises. On 2 October, the EC published guidance documents and an international cooperation framework. The EP now needs to approve the proposal in a plenary vote.

IEA publishes World Energy Outlook 2024
On 16 October, the International Energy Agency (IEA) published its World Energy Outlook 2024. This report analyses the global energy system outlook. Geopolitical tensions highlighted existing energy security risks and the role of cleaner energy in reducing them. Clean energy transitions have accelerated, with low-emission sources expected to generate over half of the world’s electricity by 2030. Investment in clean energy projects nearly doubled the amount spent on fossil fuel supply due to its increasing cost-effectiveness. However, clean energy deployment varies across technologies and countries, and two thirds of new energy demand is still met by fossil fuels. Current policies align with a 2.4°C temperature rise by 2100, and climate inaction costs are increasing.

Council adopts updated product liability rules
On 10 October, the Council adopted the updated Directive on EU product liability rules. The improvements address challenges in the digital and circular economy, holding companies or persons repairing or upgrading products outside the original manufacturer’s control liable for their modifications. The rules also tackle difficulties faced by injured persons in gathering evidence, particularly when it comes to new technologies. They encourage the adoption of new technologies and give legal clarity and a level playing field to producers.

Eumedion publishes focus letter 2025 and green paper on Dutch stakeholder model
On 9 October, Dutch institutional investor association Eumedion published its annual Focus Letter for the 2025 Dutch proxy and reporting season. It calls on Dutch listed companies to align their climate action plan with the CSDDD requirements by 2025, and to issue a high-quality sustainability statement under the CSRD for the first time in 2025. A separate letter requests the six largest audit firms to pay increased attention to the double materiality assessment (DMA) in their assurance work and include the assurance report as part of an integrated auditor’s opinion on both the financial and the sustainability statement. On 17 October, Eumedion also published a green paper on the Dutch stakeholder model and the role of Dutch institutional investors. It includes recommendations for institutional investors to enhance engagement at Dutch listed companies, and on recalibration of the Dutch stakeholder model. Eumedion will present a final position paper in 2025 based on input from interested parties.

EC proposes postponement of Deforestation Regulation application date
On 2 October, the EC proposed to postpone the application date of the EU Deforestation Regulation by one year. If approved by the EP and Council, this would make the regulation applicable from 30 December 2025 for large companies and from 30 June 2026 for micro- and small enterprises. The EC also published guidance documents and an international cooperation framework.

Call for input on CSDDD implementation and guidelines
On 30 September, Greta Koch, a policy advisor to MEP Axel Voss, shared a LinkedIn post requesting input regarding the implementation of and guidelines for the Corporate Sustainability Due Diligence Directive (CSDDD). Companies and other stakeholders are encouraged to share which hurdles they experience relating to the CSDDD and indicate areas where further legal clarification is needed. They can also provide suggestions on the content of the guidelines. Input will be submitted to the responsible contacts in the EC and to member states.

EP briefing: ‘Potential economic impact of European sustainable finance’
On 19 September, the European Parliament published a briefing discussing the relationship between sustainability efforts, a country's economic growth, and the impact on business and financial performance. It reviews (i) the current EU sustainable finance regulation framework; (ii) the remaining questions and challenges and what the EU could do, and (iii) the potential economic impact on countries and businesses.

ISO publishes guidelines for contributing to SDGs
On 12 September, the International Organization for Standardization (ISO) and the United Nations Development Programme (UNDP) published guidelines to help companies manage and enhance their contributions to the UN Sustainable Development Goals (SDGs). The guidelines take a holistic approach to sustainable development, providing tools to enhance business performance while optimising companies’ impacts on people and the planet. They cover topics such as SDGs-aligned target-setting, stakeholder engagement to identify and prioritise actual and expected impacts, collecting relevant data, and understanding and managing trade-offs to increase impact.

EC publishes Draghi report on the future of European competitiveness
On 9 September, the EC presented a report on Europe’s future competitiveness by Mario Draghi. The report will feed into the new EC agenda for the next five years. The report identifies three main areas for action to reignite sustainable growth: (i) closing the innovation gap between the US and China; (ii) adopting a joint plan for decarbonisation and competitiveness; and (iii) increasing security and reducing dependencies. The second part the report examines barriers for growth, such as high energy costs in Europe and the need for more generation and grid capacity to support the spread of digital technology and transport electrification. Draghi states that Europe must make fundamental decisions on balancing decarbonisation with industrial competitiveness, and needs to employ a mixed strategy that combines different policy tools and approaches tailored to different industries.

Climate Resilience Dialogue publishes final report on solutions to narrow the climate protection gap in Europe
On 2 September 2024, the EC presented the final report by the Climate Resilience Dialogue, a temporary group of stakeholders established by the EC. The report follows an interim report of July 2023. It consolidates the main climate-related risks currently affecting people, businesses and assets in Europe, and provides an overview of existing knowledge, lessons, and insights to suggest actions and solutions for narrowing the climate protection gap. The proposed solutions, which can be implemented by different stakeholders (e.g., public authorities, insurance companies and consumers), include (i) promoting risk awareness; (ii) improving risk assessment; (iii) enhancing insurance cover affordability; (iv) reducing mistrust; and (v) intensifying collaborations between stakeholders and supervisory authorities.

EC Joint Research Centre releases tools to assess credibility of climate transition plans
On 29 August, the EC’s Joint Research Centre issued a policy brief introducing tools to assess geographical dependencies pertinent to the credibility of corporate climate transition plans. These tools enable companies to identify and disclose geographic dependencies at the asset-within their climate transition plans. Examples of such geographical dependencies include the local availability of secondary materials or skilled workers. In 2025, the Joint Research Centre will publish a technical report on this matter.

SBTi publishes framework to accelerate buildings sector’s alignment with net-zero targets
On 28 August, the Science Based Targets initiative (SBTi) introduced a science-based decarbonisation framework for companies and financial institutions in the buildings value chain. The framework sets emissions reduction targets aligned with the 1.5°C goal to address climate challenges and achieve a net-zero future. Key actions include: (i) halting fossil fuel use by 2030 at the latest; (ii) reducing in-use operations emissions; (iii) cutting upfront embodied emissions; and (iv) retrofitting inefficient buildings.

ESMA report on trends, risks and vulnerabilities
On 29 August, ESMA released its biannual report on market risks for 2024. In addition to a discussion of key risk drivers and the market in general, the report also specifically discusses transition funds. According to the report, these funds have doubled the attracted cumulative inflows over the last two years compared to funds investing in already green companies. Market data from the regulator reveal that there are currently 136 EU funds referencing ‘transition’ in their names, with cumulative assets valued at EUR 39 billion as of June 2024. Nevertheless, the market for transition funds is still significantly smaller than that for other environment-themed funds which comprise a total of 872 funds with managing assets worth EUR 260 billion.

SBTi publishes report on more effective approach for scope 3 emissions
On 30 July, the Science Based Target initiative (SBTi) published research on considerations for a more effective approach to scope 3 greenhouse gas emissions. This is an early step in the review of the Corporate Net-Zero Standard and the guidance remains unchanged until the process is complete.

Corporate Sustainability Due Diligence Directive enters into force
On 25 July, the Corporate Sustainability Due Diligence Directive (CSDDD) came into force. Member states now have a two-year period to transpose the directive into national law. Our latest update on the CSDDD offers detailed information, including application timelines.

EC publishes FAQs on CSDDD
On 25 July, the European Commission (EC) released an initial set of frequently asked questions (FAQs) on the CSDDD. The FAQs offer a high-level overview on the directive's objectives, its entry into force, its interaction with other European sustainability initiatives as well as its scope, obligations, enforcement, and anticipated impact. Regarding financial institutions, the EC confirms that they fall under the personal scope of the CSDDD and must adopt a climate transition plan, while “financial services provided in the context of relationships with clients” are excluded from the material scope of due diligence obligations.

EC publishes report on monitoring climate-related risks to financial stability
On 1 July, the EC published a report on the risks posed by climate change to financial stability in the EU. The findings indicate that such risks could result in losses for both financial and non-financial companies. As the EU continues its efforts to mitigate these risks, individuals and businesses can expect changes in how financial institutions operate and invest. Such changes may encompass enhanced transparency and disclosure regarding climate-related risks and opportunities, along with new investment products and services designed to foster sustainable growth.

UN Working Group presents report on responsible investing
On 17 June, the UN Working Group on Business and Human Rights presented its report ‘Investors, ESG and Human Rights’ to the UN Human Rights Council. The report examines the use by investors of ESG and sustainability approaches around the world. In particular, the report considers the alignment of these approaches with the United Nations Guiding Principles on Business and Human Rights (UNGPs). Key findings include that ESG and sustainability approaches vary widely across different investors, lack consistent definitions and are not linked to specific global standards. This leads to risks of greenwashing and human rights-washing. The report makes several recommendations to states, investors and other stakeholders.

Council adopts position on revised waste framework directive
On 17 June, the Council adopted its position on the targeted revision of the waste framework directive, focusing on food and textile waste. The proposed directive sets binding targets for the reduction of food waste by 2030 compared to 2020: 10% in processing and manufacturing and 30% per capita in retail, restaurants, food services and households. The Council's opinion endorses these targets and provides for the possibility to set targets for edible food waste by 31 December 2027, when the EC will review the 2030 targets. The Council's opinion states that the EC will consider setting specific targets for waste prevention, collection, preparing for re-use and recycling of the waste textile sector by the end of 2028. This position will form the basis for negotiations with the European Parliament on the final shape of the directive, which are expected to start in the new legislative cycle.

Council gives final approval to right-to-repair directive
On 30 May, the Council adopted a directive promoting the repair of broken or defective goods, also known as the right-to-repair (or R2R) directive. This legislation will make it easier for consumers to seek repair instead of replacement and repair services will become more accessible, transparent and attractive. The adoption of the directive is the last step in the legislative decision-making process. The directive will now be published in the Official Journal of the EU and will enter into force 20 days later. Member states will then have two years to transpose the directive into national laws.

Council gives final approval to CSDDD
On 24 May, the Council formally adopted the Corporate Sustainability Due Diligence Directive (CSDDD). This is the final step in the EU decision-making process. The directive will now be published in the Official Journal of the EU and will enter into force 20 days later. Member states will then have two years to transpose the directive into national law. Our update on the CSDDD provides further information, including application timelines.

Council gives final approval to gas and hydrogen market package
On 21 May, the Council adopted a regulation and a directive establishing common internal market rules for renewable and natural gases and hydrogen and reforming the existing EU gas legislation. The new rules call for integrated and transparent network planning across the EU, based on the 'energy efficiency first' principle and with a forward-looking approach. Gas and hydrogen network operators will prepare a 10-year EU network development plan. The regulation and directive will now be signed and published in the Official Journal of the EU. The regulation will enter into force six months after its publication. Member states have two years to adapt their national legislation to the provisions of the directive.

EU’s electricity market reform: Council adopts updated rules
On 21 May, the EU Council adopted the electricity market regulation, amending the current electricity regulation and the regulation on the Agency for the Cooperation of Energy Regulators (ACER). The changes aim to ensure more stable energy prices, less dependence on fossil fuel prices and better protection against future crises on the way to a decarbonised EU. The regulation will be signed and published in the Official Journal of the EU. It will be directly applicable in all Member States twenty days after publication.

ECB publishes working paper on the globalisation of climate change
On 17 May, the European Central Bank (ECB) published a working paper examining how climate-related physical risks are amplified through economic interdependencies, known as input-output linkages. The analysis provides an interesting country-level breakdown within the European Economic Area, identifying two main groups at risk of substantial aggregate losses: (i) countries with high direct exposure to physical risks associated with climate change; and (ii) those with significant trade links to parts of the world expected to suffer severe direct damages. The wholesale and retail trade, real estate services, and construction sectors are projected to experience the largest aggregate losses. In addition, substantial repercussions are foreseen for the financial and insurance sectors, raising concerns about potential financial stability spillovers from tangible economic setbacks. A key determinant of these outcomes is the ability of individual country sectors to adjust their input sourcing strategies. The findings suggest that sectors with greater flexibility in reallocating inputs may be able to mitigate some of these potential losses, while those with less adaptability may experience more adverse impacts.

EP adopts CSDDD
On 24 April, the European Parliament (EP) adopted the Corporate Sustainability Due Diligence Directive (CSDDD) in a plenary vote. The proposal now has to be formally approved by EC bodies on 15 and 23 May. The CSDDD will then be published in the Official Journal of the European Union. Member states will then have two years to transpose the directive into national law. Please see our update on the CSDDD for more information, including application timelines.

EP adopts regulation on packaging and packaging waste
On 24 April, the EP adopted the regulation on packaging and packaging waste. The regulation concerns the full lifecycle of packaging. It sets requirements to ensure that packaging is safe and sustainable, by requiring that all packaging is recyclable and that the presence of substances of concern is minimised. It also sets binding re-use targets for 2030, restricts certain types of single-use packaging and requires economic operators to minimise the packaging used. Furthermore, it contains harmonised labelling requirements to improve consumer information. The regulation will apply approximately 18 months after its publication in the Official Journal.

EP adopts right to repair directive
On 23 April, the EP adopted the directive on the right to repair of goods for consumers, also known as the Right to Repair Directive (R2RD). It will apply to products already in scope of EU repair requirements and aims to improve the reparability of these goods, including after the warranty period. The directive (i) obliges manufacturers to repair in-scope goods; (ii) introduces a European consumer information form on repair services; and (iii) establishes an EU online repair information platform. After repair, the manufacturer’s liability is extended for at least 12 months. Member States will have to apply the Directive approximately 24 months after its publication in the Official Journal.

EP adopts ecodesign regulation

On 23 April, the EP adopted the proposed Ecodesign for Sustainable Products Regulation (ESPR). While the existing Ecodesign Regulation only applies to energy-related products, the new regulation will cover almost all product categories. It establishes a framework for setting requirements for product groups to make them energy and resource efficient, as well as more durable, reliable and circular. On the basis of this framework, the EC will adopt delegated acts setting requirements for specific product groups. The regulation also introduces a ban on the destruction of unsold clothing and footwear, which could later be extended to other product groups. It also provides for mandatory green procurement requirements. Lastly, the regulation introduces a ‘digital product passport’ containing information on the product’s environmental sustainability. The ESPR will apply 20 days after its publication in the Official Journal.

EP adopts regulation on forced labour
On 23 April, the EP adopted the proposed regulation on forced labour. The regulation will ban the placing on the EU market, making available on the EU market and export to third countries of products made with forced labour. It will apply to all products made with forced labour inside or outside the EU, and across all sectors. Competent national authorities will have to investigate reasonable indications that products have been made with forced labour. Most of the regulation will apply 36 months after its publication in the Official Journal.

EP adopts directive and regulation on hydrogen and low-carbon gas markets
On 11 April, the EP adopted a regulation and a directive on hydrogen and low carbon gas markets. The package provides much-needed clarity for investors and market players on the transition to hydrogen and low-carbon networks. The regulation sets out harmonised market access requirements and mechanisms for fair pricing and stable energy supply. The directive focuses on market organisation, consumer rights and energy poverty. The proposals include a definition of low carbon hydrogen and its derivatives. The EC will develop a methodology to assess the carbon footprint of blue hydrogen, hydrogen leakage and actual carbon capture rates. Once published in the Official Journal, the directive will have to be transposed into national law within two years. The regulation will apply six months after its publication.

Council endorses modified version of CSDDD proposal
On 15 March, the European Council (EC) endorsed a modified version of proposed Corporate Sustainability Due Diligence Directive (CSDDD). The main elements of the final compromise text are explained in our latest CSDDD update. The current wording of the CSDDD already refers to the application of the OECD Guidelines for Multinational Enterprises, which emphasise the specificities of financial services and expect financial institutions to assess adverse impacts and use their influence on companies. The end of the European procedure for the CSDDD is now in sight. If the European Parliament (EP) adopts the proposal as planned on 24 April, the directive will be published in the Official Journal of the European Union. After the vote, member states have two years to transpose the directive into national law, so that the CSDDD will be in force by 2026.

Provisional agreement on ban on products made with forced labour
On 13 March, the Council and the EP reached a provisional agreement on a regulation on forced labour. The proposal bans the placing on the EU market, making available on the EU market and export to third countries of products made with forced labour. The regulation will apply to all products made with forced labour inside or outside the EU, and across all sectors. Competent national authorities must investigate reasonable indications that products have been made with forced labour. The agreement clarifies the roles of the different supervisory authorities. It also clarifies that if only a part of a product is non-compliant, an order to dispose of the product will only apply to that part and not to the whole product. The proposal now has to be formally approved by the Council and the EP.

EC communication on climate risks
On 12 March, the EC published a communication on managing climate risks in Europe. It sets out how the EU and its Member States can better anticipate, understand, and address growing climate risks. It shows how they can prepare and implement policies that will save lives, reduce costs, and protect prosperity across the EU. The communication also responds to the first ever European Climate Risk Assessment (EUCRA), a scientific report by the European Environment Agency. The communication and report are a call to action for all levels of government, as well as the private sector and civil society. They set out how all major sectors and policy areas are exposed to climate-related risks, how severe and urgent the risks are, and how important it is to have clarity on who is responsible for addressing the risks.

Provisional agreement on regulation on packaging and packaging waste
On 4 March, the Council and the EP reached a provisional political agreement on a regulation regarding packaging and packaging waste. The proposal takes into account the full life-cycle of packaging and sets requirements to ensure that packaging is safe and sustainable, by requiring that all packaging is recyclable and that the presence of substances of concern is minimised. It also sets out harmonised labelling requirements to improve consumer information. The proposal aims to significantly reduce the generation of packaging waste by setting binding reuse targets for 2030, restricting certain types of single-use packaging and requiring economic operators to minimise the packaging used.

Dutch ministry announces new round of SDE++ subsidies
On 1 March, the Dutch Ministry for Economic Affairs and Climate (EZK) announced that the SDE++ subsidy programme will re-open as of 10 September 2024, with an initial budget of EUR 11.5 billion. SDE++ is the main Dutch subsidy programme for large-scale sustainable (energy) projects. It reimburses the difference between the cost price of the technology and the revenue (the ‘non-profitable top’). Subsidies will be available for the following categories, among others: sun, wind, geothermy and aquathermy, electric boilers, hydrogen, carbon capture and storage, process-integrated heat pumps and thermal storage for high-temperature heat.

No support yet for endorsement of CSDDD proposal
On 28 February, the Presidency of the European Council stated that no support was found at a meeting earlier that day for endorsement of the proposal for a Corporate Sustainability Due Diligence Directive (CSDDD). The statement follows an already postponed vote in a preparative body of the Council. The Presidency said it intends to address the concerns. With European elections in June, the proposal must be endorsed and sent to the European Parliament before the final deadline of 15 March. See also our Highlight above.

Parliament adopts revised directive to protect the environment through criminal law (the Environmental Crime Directive)
On 27 February, the European Parliament (EP) formally adopted a revision of the Environmental Crime Directive. The revision clarifies several definitions of environmental crimes, including on illegal timber trade, deforestation-linked products and water abstraction. The Directive also sets a minimum on several maximum sanctions for natural and legal persons, such as imprisonment of up to at least ten years for natural persons and fines of up to at least 5% of the total worldwide turnover for legal persons. The Directive adds ‘ecocide’ as an aggravating circumstance for environmental crimes, without using the word explicitly. Authorisation of conduct by a public authority of a member state, for instance by means of an administrative permit, excludes criminal liability, provided that the authorisation was not issued fraudulently or through corruption, extortion, or coercion, and provided that the authorisation is not in manifest breach of relevant substantive legal requirements. After publication in the Official Journal, the directive will have to be transposed into national law within two years.

Commission approves third IPCEI to support hydrogen infrastructure
On 15 February, the European Commission approved a third Important Project of Common European Interest (IPCEI) supporting hydrogen infrastructure. Under ‘IPCEI Hy2Infra’, seven member states, including the Netherlands, will provide up to EUR 6.9 billion of public funding for 33 selected hydrogen projects. This is expected to generate an additional EUR 5.4 billion of private investments. The selected projects aim to develop infrastructure beyond what the market currently offers. The projects include the development of large-scale electrolysers for renewable hydrogen production, hydrogen distribution pipelines, hydrogen storage facilities and port infrastructure improvements.

Council and Parliament agree on EU certification framework for carbon removal
On 20 February, the EP and Council reached a provisional agreement on a Regulation establishing the first EU certification framework for permanent carbon removal, carbon farming and carbon storage in products. Based on a set of criteria, the Commission will develop tailored certification methodologies for different types of carbon removal activities. Based on these criteria, national certification bodies will be able to provide voluntary certification for carbon removal projects. It is envisaged that the proposed Green Claims Directive will require certification under this framework for corporate claims relating to carbon offsets. The provisional agreement now needs to be formally adopted by both institutions, and will apply immediately upon its entry into force.

Provisional agreement on Net-Zero Industry Act
On 16 February, the EP and the Council reached a provisional agreement on a framework of measures to strengthen Europe's manufacturing ecosystem for net-zero technology products, better known as the Net-Zero Industry Act (NZIA). The NZIA aims to facilitate investments in green technologies by simplifying authorisation procedures, such as permit procedures for strategic projects. It also proposes to facilitate market access for strategic technology products, to improve the skills of the European workforce in these sectors (notably through the establishment of net-zero industry academies) and to create a platform to coordinate EU action in this field. The provisional agreement introduces a number of improvements to the main objectives of the NZIA proposed by the Commission, such as streamlined rules for construction permit procedures, the creation of net-zero industrial valleys and more clarity on criteria for public procurement and auctions. The provisional agreement now needs to be formally adopted by both institutions. The NZIA will largely apply directly upon its entry into force.

Commission presents recommendation on 2040 emissions reduction target
On 6 February, the Commission published a detailed impact assessment report on possible pathways to achieve the agreed goal of making the EU climate neutral by 2050. Based on its impact assessment, the Commission recommends a 90% net reduction in greenhouse gas emissions by 2040 compared to 1990 levels. This recommendation is the start of a political debate and an open dialogue with all stakeholders. The political and legislative decision on the 2040 target will be made by the next EC, following this year’s EU elections. The Commission states that reaching the 90% target will require a number of enabling policy conditions, including (i) full implementation of the agreed 2030 framework; (ii) ensuring the competitiveness of the European industry; (iii) a greater focus on a just transition; (iv) a level playing field with international partners; and (v) a strategic dialogue on the post-2030 framework, including with industry and the agricultural sector. See also the accompanying Q&A's on the EU Industrial Carbon Management Strategy and the Communication on Europe's 2040 climate target and path to climate neutrality by 2050.

Commission adopts communications on 2040 emission reduction targets and carbon management
On 6 February, the Commission adopted two communications. The first communication is on implementing the 2030 energy and climate framework as the stepping stone to reaching the 2040 climate target and climate neutrality in 2050, in line with the European Climate Law. The second communication is on industrial carbon management, setting out how CO2 capture, utilisation and storage could contribute to achieving the EU's climate change objectives. The Commission announced that it will start working on the necessary regulatory framework for transportation and storage of CO2.

Provisional agreement on right-to-repair Directive
On 2 February, the Council and Parliament reached a provisional agreement on a proposed Directive on the repair of goods, also known as the right-to-repair (R2R) Directive. The Directive will apply to products already in scope of EU repair requirements and aims to improve the reparability of these goods, including after the warranty period. The directive (i) obliges manufacturers to repair in-scope goods; (ii) introduces a European consumer information form on repair services; and (iii) establishes an EU online repair information platform. After repair, the manufacturer’s liability is extended for at least 12 months. The provisional agreement maintains the consumer’s right to choose between repair and replacement. The provisional agreement must now be formally adopted by both institutions and will apply 24 months after its entry into force.

Two new EU Regulations to phase down harmful F-gases and ozone-depleting substances
On 29 January, the Council announced the adoption of two Regulations to phase down fluorinated gases (F-gases) and other substances that cause global warming and deplete the ozone layer. Under the new rules, the consumption of hydrofluorocarbons (HFCs) will be completely phased out by 2050. On the other hand, the production of HFCs, in terms of production rights allocated by the Commission to produce HFCs, will be phased down to a minimum (15%) as of 2036. Both production and consumption will be phased down on the basis of a tight schedule with a degressive quota allocation (Annexes V and VII). It also sets dates for the complete phase-out of the use of F-gases in air conditioning, heat pumps and switchgears.

Platform on Sustainable Finance launches 'Compendium of Market Practices’ report
On 29 January, the EU Platform on Sustainable Finance published a report providing insights into how the EU Taxonomy and sustainable finance framework support financial and non-financial actors in their net zero transition. The report focuses on seven stakeholder groups: corporates, credit institutions, investors, insurers, auditors and consultants, small and medium-sized enterprises and the public sector. The report spans three areas: (i) the EU sustainable finance framework for business strategy and transition planning; (ii) finance and transactions, including observations on the adoption of EU tools and frameworks by market participants; and (iii) reporting, monitoring, and assurance. The report’s annex provides case studies for each stakeholder group.

Council adopts negotiation mandate on EU regulation on forced labour
On 26 January, the European Council adopted its negotiation mandate on the proposed EU regulation on forced labour. The proposal prohibits the placing, making available on the EU market and export to third countries of products made with forced labour. Competent national authorities should investigate reasonable indications that products were made with forced labour. In cases of forced labour, the authorities shall withdraw or ban the placement and export of these products. Companies may be required to dispose of the products. The Council mandate proposes, inter alia, that the EC should take over (pre-)investigations into forced labour if the potential violation is of Union interest. The EP, the EC and the Council will now initiate inter-institutional negotiations on the proposal.

Final text of the CSDDD proposal available
On 24 January, the European Parliament, Committee and Council concluded technical negotiations on the proposal for the Corporate Sustainability Due Diligence Directive (CSDDD), resulting in a final text. This text will be voted on by the Council and JURI committee in February. A final vote on the text is expected in April 2024. Read more in our latest update on the CSDDD proposal.

ECB publishes report on risks from misalignment of banks’ financing with EU climate objectives
On 23 January, the European Central Bank (ECB) published a report on the climate transition risks for banks’ credit portfolios. The report shows that the euro area banking sector is significantly misaligned with EU climate objectives and may therefore be exposed to increased transition risks. In addition, around 70% of banks are exposed to elevated reputational and litigation risks. Banks can use the approach described in the report to further develop their alignment assessment capabilities in order to identify the transition risks they face and to comply with the forthcoming disclosure requirements under the EBA’s Implementing Technical Standards on Pillar 3. In a recent blog, ECB Executive Board Member Frank Elderson argues that banks should identify, measure and, above all, manage transition risks in the same way as any other material risk.

NGFS publishes guidance on the purpose and use of the NGFS scenarios
On 23 January, the Network for Greening the Financial System (NGFS) published a technical document on the purpose and use of the NGFS scenarios. Since their initial release, the NGFS scenarios have played an important role in helping central banks, supervisory authorities and other financial institutions explore the implications of different potential futures related to climate change and transition. The document sets out the purposes and practical applications of the NGFS scenarios, recognising the need for scenario users to clarify what they are trying to achieve and to consider how the scenarios enable them to meet their objectives and specific needs, and concludes with frequently asked questions. The online version will be updated regularly.

EBA launches a consultation on guidelines on ESG risk management
On 18 January, the European Banking Authority (EBA) launched a public consultation on draft guidelines setting out requirements for institutions to identify, measure, manage, and monitor ESG risks, including through plans aimed to address risks arising from the transition towards a climate-neutral EU economy. These guidelines set out principles for the development and content of institutions’ plans under the Capital Requirement Directive (CRD6) to monitor and adequately address the financial risks stemming from ESG factors, including those arising from the transition process towards the EU's 2050 climate neutrality goal. The consultation is open until 18 April 2024.

Dutch Ministry of Finance launches consultation on climate measures in the financial sector
On 21 December, the Dutch Ministry of Finance launched an internet consultation on additional measures to strengthen the financial sector’s contribution to the climate transition. The consultation concerns both legislative and non-legislative measures. As described in the consultation document, it specifically seeks input on three legislative options: (i) the inclusion of a duty of efforts to align loans and investments with the targets of the Paris Agreement in the Dutch financial supervision regime; (ii) an obligation to prepare and implement a specific climate plan; and (iii) additional legal obligations on engagement. Participants are requested to specifically consider European legislative initiatives in their answers. Decision making on the results of the consultation will be left to the next cabinet. The consultation closes on 15 February 2024.

ESMA presents methodology for climate risk stress testing and analysis of the financial impact of greenwashing controversies
On 19 December, the European Securities and Markets Authority (ESMA) published two articles: (i) a risk analysis on Dynamic modelling of climate-related shocks in the fund sector and (ii) a risk analysis on the Financial impact of greenwashing controversies. The first article presents a methodological approach to modelling climate-related shocks in the fund sector, which includes dynamic impacts, such as investor inflows and outflows and portfolio rebalancing by managers. The analysis focuses on the overall direction of these effects, and shows that investor outflows can amplify fund value losses following an initial shock. The second article explores the impact of greenwashing controversies on companies’ financial performance, and shows how data on past greenwashing controversies can be useful for monitoring greenwashing-related risks. It also outlines the challenges of using such data.

ECB and ESRB report ‘Towards macroprudential frameworks for managing climate risks to the EU financial system’
On 18 December, the European Central Bank (ECB) and the European Systemic Risk Board (ESRB) published a joint report setting out three detailed macroprudential frameworks for managing risks to the EU financial system. The first framework covers financial stability risk surveillance. It takes stock of advances in climate risk impact measuring and modelling, and proposes a list of indicators for regular financial stability risk monitoring. The second framework concerns macroprudential policy options. It outlines the features of a robust strategy as well as an initial operational design based on existing instruments, which can be scaled up as further information and more tailored policy options emerge. The third framework takes a first look at prospective financial stability impacts stemming from nature degradation, which could exacerbate the financial stability impacts of climate change.

EBA publishes opinion and report on green loans and mortgages
On 15 December, the European Banking Authority (EBA) published an opinion and report on green loans and mortgages, in response to a call for advice from the European Commission. The EBA highlights that green lending currently represents a limited share of the banking sector’s overall lending. In order to facilitate a more active participation of banks in the green loans market, the EBA proposes, amongst others, the introduction of a voluntary EU label for green loans based on a common EU definition. The EBA also proposes to integrate the concept of green mortgage and its key sustainability features in the Mortgage Credit Directive.

Provisional agreement on the CSDDD
On 14 December, the Council and European Parliament reached a provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD). The CSDDD will require large companies (including certain non-EU companies) and mid-size companies active in ‘high-risk’ sectors to conduct due diligence on human rights and environmental impacts in their own operations and their subsidiaries’ operations, as well as the operations of ‘business partners’ in their ‘chains of activities’. Notable changes to the Commission proposal include that the mandatory climate plan must align with the European climate neutrality targets, including fossil fuel-related exposures. Among others, the plan should contain time-bound reduction targets in five-year steps from 2030 to 2050 for the company’s scope 1, 2 and 3 emissions.

Following debate on this topic, financial service providers will only have to conduct due diligence on their own and upstream operations (subject to a review clause for future inclusion of downstream operations), while also being in scope of the climate plan obligation.

The disclosure requirements of the CSDDD will be aligned with the CSRD. Disclosures will need to be accessible through the European Single Access Point (ESAP). National supervisory authorities will be able to impose a minimum maximum penalty payment of 5% of the company’s net worldwide turnover if CSDDD provisions are violated. The provisional agreement also specifies the civil liability rules, for instance setting a minimum limitation period of five years and adding that companies can be held liable if they ‘intentionally or negligently’ failed to prevent, mitigate or end an adverse impact as listed in Annex I. The provisions on directors’ duty of care were deleted. A vote on the final text is expected in March 2024. See here for further insights.

EBA publishes roadmap on the implementation of the EU banking package
On 14 December, the EBA published its roadmap on the implementation timeline of the EBA mandates under the EU banking package that implements the final Basel III reforms in the EU. The banking package encompasses several innovations in the prudential framework for credit institutions. The first phase of the roadmap will also see the first mandates under the Capital Requirements Directive (CRD) in the area of ESG, which is reaffirmed as a clear EU priority.

NGFS publishes recommendations for assessing nature-related economic and financial risks
On 13 December, the Network for Greening the Financial System (NGFS) published guidance that addresses the growing consensus that nature degradation poses risks to individual financial institutions and the financial system in general. The guidance (i) suggests approaches for developing narratives that could serve as starting points for assessing nature-related financial risks; (ii) reviews a range of modelling approaches for nature-economy models and biophysical models; (iii) examines alternative modelling approaches; and (iv) concludes with a list of options for central banks and supervisors to develop quantified nature-related scenarios to guide them in responding dynamically to emerging nature-related risks.

EIOPA launches consultation on the prudential treatment of sustainability risks
On 13 December, the European Insurance and Occupational Pensions Authority (EIOPA) launched a consultation on the prudential treatment of sustainability risks by insurers. This consultation paper follows a 2022 discussion paper which outlined the scope, methodologies and data sources for the analysis on prudential treatment of sustainability risks. The consultation focuses on three conceptual areas: (i) the potential link between prudential market risks in terms of equity, spread and property risk and transition risks; (ii) the potential link between non-life underwriting risks and climate-related risk prevention measures; and (iii) the potential link between social risks and prudential risks, including market and underwriting risks. The consultation closes on 22 March 2024.

See our overview of Governance & transition updates in 2023 here