EU ESG Regulatory Policy Review

The ESG (Environmental, Social and Corporate Governance) regulatory policies of the European Union have shown a trend of gradually strengthening and refining in recent years, aiming to promote the performance of enterprises in sustainable development. Here is a summary of the EU's ESG regulatory policies:

1、 Main regulations and directives

1. Corporate Sustainability Reporting Directive (CSRD)
   • effective timeIt will officially come into effect on December 18, 2022 and be implemented in all EU member states on June 18, 2024.
   • scope of applicationCovering companies and large enterprises listed in the European Union (excluding small and micro enterprises), it is expected that more than 50000 enterprises will have to fulfill their reporting obligations, which is four times more than the previous Non Financial Reporting Directive (NFRD).
   • Core RequirementsRequire companies to disclose every detail of their environmental and social performance in detail, and enhance the transparency and credibility of reports through standardized and systematic reporting frameworks. Enterprises are required to comply with the European Sustainability Reporting Standard (ESRS) and conduct third-party audits of the sustainability information and data contained in the report.
2. Corporate Sustainability Due Diligence Directive (CS3D or CSDDD)
   • Approve timeApproved by the European Council on March 15, 2024, it is expected to be implemented as early as the second half of 2026.
   • scope of applicationThis directive focuses on requiring companies to conduct due diligence, identify and take measures from a supply chain perspective to prevent, mitigate, or terminate adverse impacts on the environment and human rights. The scope of influence will be expanded to third country enterprises that meet regulatory requirements in the European Union.
   • implementation phaseImplement in stages, including EU companies with a certain number of employees and revenue standards, as well as non EU companies operating within the EU.

2、 Supporting standards and measures

• European Sustainability Reporting Standards (ESRS)
  • determine the timeThe final draft will be officially confirmed on July 31, 2023.
  • contentComposed of 12 standards, including 2 general standards, 5 environmental standards, 4 social standards, and 1 governance standard, to meet the disclosure requirements of CSRD.
  • requireEnterprises must use "dual importance" (financial importance and impact importance) as the basis for sustainable development information disclosure, and conduct third-party verification and authentication of reports.

3、 Key elements and impacts

• Principle of Double ImportanceFirst proposed by the European Union in CSRD, it includes two core dimensions: impact importance and financial importance. Enterprises are required to consider not only their financial impact but also their potential impact on the environment and society when assessing ESG factors.
• Supply chain controlBoth CSRD and CS3D have put forward requirements for enterprises in the supply chain, promoting them to strengthen ESG management from a supply chain perspective and ensure the sustainability of the entire supply chain.
• Punishment measuresCSRD requires EU member states to establish investigative and compliance entities to implement "effective, proportionate, and dissuasive" penalties. The specific punishment measures shall be determined by each member state in accordance with its own laws.

4、 Suggestions for Chinese enterprises to respond

Faced with the increasingly strict ESG regulatory policies of the European Union, Chinese companies need to actively adjust their strategies to adapt to new regulatory requirements. Specific suggestions include:

1. Strengthen data governance and analysis capabilitiesImprove the ability to collect, organize, and analyze ESG data to ensure the accuracy and completeness of reports.
2. Enhance compliance and risk management capabilitiesEstablish a sound compliance management system and strengthen the identification, assessment, and management of ESG risks.
3. Strengthen internal control and stakeholder communicationOptimize internal control processes, strengthen communication and collaboration with stakeholders such as investors, consumers, and suppliers.
4. Promote strategic and cultural transformationIncorporate sustainable development into corporate strategic planning and promote the development of corporate culture towards a greener and more sustainable direction.

The EU's ESG regulatory policies are constantly being strengthened and improved, and Chinese companies need to closely monitor policy developments and actively respond to them to ensure compliant operations and sustainable development in the EU market.