In the weeks immediately prior to the publication of this book, the European Commission published its Simplification Omnibus package (the Omnibus Package), which proposes significant amendments to several sustainability-related EU laws, including the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD), Taxonomy Regulation and Carbon Border Adjustment Mechanism. In proposing these amendments, the Commission aims to reduce the reporting burden by at least 25% for all companies and at least 35% for small and medium-sized enterprises (SMEs).

The proposed changes to CSRD include:

• For EU companies, increasing the thresholds to only include “large” EU companies (with an annual net turnover over EUR 50 million or balance sheet total over EUR 25 million) which have over 1,000 employees (increased from 250 employees). For non-EU companies, increasing the thresholds to only include non-EU parent companies generating an annual net turnover in the EU of more than EUR 450 million (increased from EUR 150 million), which either have a large EU subsidiary or an EU branch generating over EUR 50 million annual net turnover in the EU. The Commission estimates that this will remove approximately 80% of the companies originally in scope.
• Delaying the application of CSRD for those companies in scope which were due to first report in 2026 and 2027 by two years.
• A commitment to publish a new, simplified set of European Sustainability Reporting Standards (ESRS), which companies in scope of CSRD are required to report under. For companies no longer in scope of CSRD, the Commission will publish voluntary reporting standards. These voluntary standards will also serve to cap the amount of information that a company in scope of CSRD can request from companies in its value chain which are not in scope. Companies in scope of CSRD will also no longer be subject to additional sector-specific reporting standards.
• Removing the eventual requirement for companies to obtain a reasonable assurance opinion on their CSRD reports. The current requirement to obtain a limited assurance opinion will remain, and the Commission has indicated that it will issue further guidance on this.

The proposed changes to CSDDD include:

• Delaying application for the first wave of companies in scope from 2027 to 2028, and delaying the deadline for Member States to transpose CSDDD into national law to 2028.
• Increasing the number of CSDDD provisions which Member States cannot “gold-plate” (i.e. make more onerous than the original text) when they transpose the Directive.
• Limiting a company’s due diligence obligations in its chains of activities to its direct business partners only, with certain exemptions such as when a company deliberately structures its business relationships to remove a supplier with harmful activities from having a direct relationship with the company.
• Removing the obligation for a company to terminate a relationship with a business partner, where the business partner is causing an adverse impact that the company cannot address.
• Limiting the types of stakeholders a company must engage with to no longer include consumers or national human rights, environmental and civil society organisations, amongst others.
• Changing the requirement for companies to re-assess the adequacy and effectiveness of their due diligence measures from once a year to every five years, with the caveat that companies should also re-assess whenever there are reasonable grounds to believe that the measures are no longer adequate or effective.
• Removing the pan-EU civil liability regime, which would have allowed organisations such as charities to bring actions on behalf of victims of adverse impacts. Instead, liability will be based on existing Member State law, giving precedence to existing national rules of recourse, including causality and fault.
• Removing the future review clause, under which a company in the financial sector may have become subject to specific due diligence rules for its downstream chains of activities.

The proposed changes to Taxonomy reporting include:

• Making Taxonomy reporting mandatory only for companies in scope of CSRD with more than EUR 450 million annual net turnover. Companies in scope of CSRD with turnover lower than this would only report under the Taxonomy if they claim their activities are fully or partially Taxonomy-aligned. The Commission will publish additional rules to govern how a company should report partial Taxonomy alignment.
• Introducing a materiality threshold for Taxonomy reporting, meaning companies may omit reporting on the Taxonomy alignment of activities representing less than 10% of their total turnover, capital expenditure or operating expenditure.
• Simplifying the templates that companies should use for Taxonomy reporting.

The majority of these changes are contained in two Directives, which will need to go through the EU’s ordinary legislative process. Although the Directive containing proposed changes to the application dates of CSRD and CSDDD is expected to be adopted by the end of 2025, the Directive containing the substantive changes to both Directives will likely be subject to significant debate, which may delay its adoption or lead to further changes.

This chapter was written prior to the introduction of the Omnibus Package.

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In the last 12 months, the EU has continued to push forward a series of far-reaching ESG regulations as part of its long-term ambition to reach climate neutrality by 2050 within its European Green Deal framework.

This includes the finalisation of the CSDDD in July 2024, which is discussed in more detail below. The CSDDD requires in-scope businesses to conduct due diligence to identify, mitigate and prevent harm to the environment and society derived from business operations for which they are responsible. Businesses must conduct due diligence and work towards these outcomes in respect of both their own operations and other businesses within their chain of activities.

In January 2024, the CSRD began to apply to the first tranche of in-scope businesses (large EU public interest entities), with their first reports due in 2025. The CSRD requires that sustainability-related information be included in annual financial reports, which are publicly available. Governed by the ESRS, these sustainability disclosures are based on a “double materiality” assessment, considering both the financial impact of sustainability-related issues on the business itself, and the impact of the business’s own operations and value chain on the environment and society. See discussion below with more detail on both CSRD and ESRS.

These developments have been accompanied by additional legislative progress, with the European Council adopting a regulation to prohibit products made using forced labour in the EU, as well as a nature restoration law.

However, the EU’s legislative agenda has encountered some opposition. For example, concerns from trading partners and industry representatives have led to the EU proposing a one-year delay to the introduction of the Regulation on Deforestation-Free Supply Chains (EUDR), which will prohibit products entering the EU if they are grown in deforested areas. Similarly, concerns from Member States and industry groups over the extent of obligations the CSDDD imposes on businesses led to changes to the text, resulting in the turnover thresholds for companies to be in scope increasing from EUR 150 million to EUR 450 million.

The EU has not adopted a formal definition of this term. The EU has, however, adopted similar concepts around “sustainability”, as discussed below.

The impetus for ESG regulation in the EU can be traced back to a series of landmark international agreements concluded in 2015, namely the adoption of the United Nations (UN) 2030 Agenda for Sustainable Development and the Sustainable Development Goals, as well as the Paris climate agreement. The latter includes a commitment to align financial flows with a pathway towards low-carbon and climate-resilient development.

The European Commission’s 2018 Action Plan on Financing Sustainable Growth identified 10 key action points to fulfil these sustainability goals in respect of financial services, including:

• establishing a taxonomy for sustainable activities;
• creating standards for “green” financial products;
• incorporating sustainability as part of financial advice;
• developing sustainability benchmarks and improving the integration of sustainability within ratings; and
• strengthening disclosures made by asset managers and financial advisers to their clients.

Moreover, in December 2019, the Commission presented the European Green Deal, a growth strategy aiming to make Europe the first climate-neutral continent by 2050. To this end, the Commission has been developing a comprehensive policy agenda on sustainable finance in the framework of the Green Deal and the new strategy for financing the transition to a sustainable economy.

Corporate Sustainability Reporting Directive (CSRD)

In a bid to extend the scope of, and address shortcomings in, the Non-Financial Reporting Directive (NFRD), in November 2022, the European Parliament formally adopted the CSRD, which establishes a new mandatory framework for non-financial disclosures in the EU. The requirements will apply to all large EU companies that meet certain financial thresholds, listed or otherwise, as well as non-EU companies having at least one subsidiary in scope and a turnover of at least EUR 150 million generated in the EU. The CSRD amends several existing directives such that nearly 50,000 companies will be subject to the new reporting obligations, compared to approximately 11,700 under the current regime. Reporting requirements under the CSRD will apply on a phased basis, as follows:

• from 1 January 2024, for large public interest companies with over 500 employees that are already subject to the NFRD;
• from 1 January 2025, for large companies not currently subject to the NFRD (over 250 employees and/or EUR 50 million in net turnover and/or EUR 25 million on its balance sheet); and
• from 1 January 2026, for listed small and medium-sized enterprises (SMEs). SMEs can opt out until 2028.

The CSRD envisages the adoption of ESRS, to be developed by the European Financial Reporting Advisory Group (EFRAG). The Commission adopted a delegated act on the first set of ESRS on 31 July 2023, which set out cross-cutting standards regarding general requirements and disclosures, as well as standards relating to environmental, social and governance topics. EFRAG is currently in the process of developing sector-specific standards in addition to those aimed specifically at listed SMEs. In March 2023, the Commission asked EFRAG to prioritise work related to the implementation of the sector-agnostic ESRSs, which has delayed the development of some of the sector-specific standards. Nevertheless, exposure drafts for the oil and gas and the mining, quarrying and coal mining sectors are expected to be published by the end of 2024. 

Sustainable Finance Disclosure Regulation (SFDR)

The EU’s SFDR entered into force in December 2019 and requires all EU financial market participants and financial advisors (including non-EU firms marketing in the EU) to make ESG disclosures in relation to their financial products, sustainability risks and adverse sustainability impacts. The scope of required disclosure depends on the level of integration of ESG considerations within the financial product. Products promoting environmental or social characteristics (Article 8 products) and products having sustainable investments as their objective (Article 9 products) are subject to pre-contractual and ongoing disclosures on sustainability indicators used to monitor performance. The SFDR’s Level 1 requirements have been applicable since March 2021. The final Level 2 disclosures were published in the Official Journal of the EU in July 2022 and applied from January 2023.

Level 1 entity-level disclosures require fund managers to:

• assess the potential for ESG factors to negatively impact the returns of funds under management; and
• disclose the outcome of that assessment to investors both in funds’ prospectus documents and on the firm’s website.

The entity-level disclosures also require in-scope firms to publish an “adverse impacts statement” on their website. Firms with 500 or more employees are required to publish a statement describing the due diligence policies that are applied by the firm to identify the adverse impacts of investment decisions on sustainability factors. Firms with fewer than 500 employees have the option to either publish a statement or clearly state that adverse impacts are not taken into account (as long as they detail why they are not and, where relevant, whether there is an intention to account for them in the future).

Level 2 product-level disclosures include pre-contractual and periodic disclosure templates for Article 8 and Article 9 products, which should be annexed to prospectuses and annual reports, as well as the template principal adverse sustainability impacts statement. Such disclosures now play a big role in new marketing activities, including by private fund managers.

Taxonomy regulation

The Taxonomy Regulation, as applicable from 1 January 2022, sets out a common set of technical screening criteria to test and measure the extent to which an economic activity qualifies as environmentally sustainable. It applies where financial market participants make products available that promote specific environmental characteristics or products that have sustainable investment as an objective. 

In order to align with the Taxonomy Regulation and qualify as environmentally sustainable, the activity must substantially contribute to at least one of the six environmental objectives and comply with the relevant technical screening criteria, and it must do no significant harm to any other environmental objective and must comply with minimum safeguards. The six environmental objectives are:

• Climate change mitigation.
• Climate change adaptation.
• Sustainable use and protection of water and marine resources.
• Transition to a circular economy.
• Pollution prevention and control.
• Protection and restoration of biodiversity and ecosystems.

Under Article 8 of the Taxonomy Regulation, firms subject to the NFRD, as described below, are required to disclose the proportion of turnover derived from products or services that qualify as environmentally sustainable, as well as the proportion of the capital and operating expenditure relating to assets or processes associated with those activities.

The regulation initially focused on climate change issues, with technical screening criteria and disclosure requirements applicable to the objectives of climate change mitigation and adaptation applying from 1 January 2022. Criteria that relate to the remaining four environmental objectives applied from 1 January 2023.

While the Taxonomy Regulation is concerned with the measurement of the environmental sustainability of certain economic activities, the Commission is also considering the establishment of a social taxonomy. On 28 February 2022, the Commission’s Platform on Sustainable Finance published a final report on the Social Taxonomy, outlining its scope and material for the contribution (including a set of specific social objectives) and do-no-significant-harm tests, but the progress of this project is unknown.

Corporate Sustainability Due Diligence Directive (CSDDD)

The CSDDD (Directive (EU) 2024/1760) entered into force in July 2024. Member States have until 26 July 2026 to transpose the CSDDD into national law. The CSDDD requires in-scope companies to identify, prevent, end and/or mitigate their activities’ adverse impacts on human rights and the environment. It also requires in-scope companies to establish and maintain a complaints procedure, monitor the effectiveness of due diligence policy and measures, and publicly communicate on due diligence. Victims of harms committed by in-scope companies and their subsidiaries, contractors and suppliers, either at home or abroad, will be able to take legal action relating to any due diligence failures before EU courts. Furthermore, the CSDDD requires Member States to designate independent national supervisory authorities to monitor and enforce the due diligence obligations, including by imposing financial penalties. In-scope companies are required to adopt and put into effect a transition plan for climate change mitigation and to procure that their subsidiaries and business partners in their value chain do so as well. The plan must aim to ensure, through the company’s best efforts, that its business model and strategy are compatible with the transition to a sustainable economy and with limiting global warming to 1.5°C in line with the Paris Agreement. The regime includes a specific liability regime in case of non-compliance.

The following companies are in scope of the CSDDD:

• EU companies that in the last two consecutive years had more than 1,000 employees on average during a balance sheet year and had a net worldwide turnover of over EUR 450 million in the last financial year;
• EU companies that do not meet the employee or turnover test on a standalone basis but are the ultimate parent company of a group that had more than 1,000 employees on average during a balance sheet year and had a net worldwide turnover of over EUR 450 million in the last financial year, calculated on a consolidated basis;
• EU companies that generated more than EUR 22.5 million in revenue from royalty agreements (i.e., franchising or licensing agreements) entered into in the EU and had a net worldwide turnover of more than EUR 80 million in the last financial year, including where the EU company is an ultimate parent company of a group.

Non-EU companies are also in scope of the CSDDD if they meet the turnover thresholds in respect of their turnover generated within the EU (the employee threshold does not apply to non-EU companies).

The obligations in the CSDDD, except for those pertaining to public communication, will apply on a staggered basis, starting in 2027 for the largest in-scope companies (that is, EU companies with more than 5,000 employees and a net worldwide turnover of over EUR 1 billion and non-EU companies with a net turnover of more than EUR 900 million in the EU).

Regulation on Deforestation-Free Products

In June 2023, the EU enacted the EUDR. The EUDR restricts the placing and making available on the EU market, as well as the export from the EU market of, certain raw materials (cattle, cocoa, coffee, palm oil, rubber, soya and wood) as well as certain products made therefrom. Once the EUDR comes into effect, the trade of such raw materials and related products will only be permitted if they:

• are deforestation-free (i.e., the relevant raw materials were produced on land that was not subject to deforestation or forest degradation after the cut-off date of 31 December 2020);
• have been produced in accordance with the relevant legislation of the country of production (including human rights and indigenous peoples’ rights laws); and
• are covered by a due diligence statement which contains information to ensure that the raw materials and products are deforestation-free and are compliant with all relevant applicable laws.

All companies that supply and trade in-scope raw materials and derivatives for distribution, consumption or use on the EU market, throughout the supply chain, fall within the scope of the EUDR and must fulfil strict due diligence obligations in accordance with the EUDR (although there are certain exemptions for micro, small and medium-sized enterprises).

In-scope companies must assure traceability to the exact location where the relevant raw materials were first produced and implement a due diligence system to avoid sourcing of materials and products that are not deforestation-free or have not been produced in accordance with the relevant legislation of the country of production. Where a company does not comply, the competent authorities can not only prohibit distribution, but also force the withdrawal of affected materials and products from the market and the recall of non-compliant goods from end customers, as well as impose fines of up to 4% of the annual turnover.

The EUDR has received a mixed reception from Member States, third countries and international organisations such as the World Trade Organization. In March 2023, agriculture ministers from 20 EU Member States called on the European Commission to delay and soften the implementation of the EUDR on the basis that it imposed an excessive administrative burden on the agricultural sector. Similarly, the U.S. Trade Representative, the U.S. Agriculture Secretary and the U.S. Commerce Secretary urged the European Commission to postpone the implementation of the EUDR, arguing that its stringency and vagueness create significant compliance challenges. There are also growing concerns about the potential economic impact on countries that export raw materials to the EU, such as Brazil and Indonesia. In response to this backlash, the Commission and the Council of the EU proposed a one-year delay to the implementation of the EUDR. However, unless the Parliament agrees to this delay, the EUDR will enter into force at the end of 2024.

Forced Labour Regulation

In November 2024, the Council of the EU adopted a regulation prohibiting placing or making available products made using forced labour on the EU market, as well as exporting such products from the EU market. Where there is a substantiated concern that a company has placed, made available or exported products made with forced labour, the Commission and Member State competent authorities can open an investigation into that company. Companies can be ordered to withdraw or dispose of products found to be made with forced labour.

The Forced Labour Regulation creates a Union Network Against Forced Labour Products, which is intended to serve as a platform for co-operation between Member States and the Commission and streamline enforcement including by facilitating the co-ordination of investigations. Furthermore, under the Forced Labour Regulation, the Commission is required to establish a database that provides information on forced labour risks in specific geographic areas or with respect to specific products. This database will not name specific companies.

At the time of writing, the Forced Labour Regulation had not yet been published in the Official Journal.

The Conflict Minerals Regulation (Regulation (EU) 2017/821) requires EU companies to ensure that they import ores and concentrates containing tin, tantalum, tungsten or gold from responsible and conflict-free sources and comply with certain supply chain due diligence obligations.

In February 2024, the EU amended the Unfair Commercial Practices Directive (UCPD) to address the issue of greenwashing by adding the following practices to the list of practices that are prohibited in all circumstances (i.e., blacklisted):

• Displaying a sustainability label that is not based on a certification scheme or not established by public authorities.
• Making a generic environmental claim — including by using labels such as “environmentally friendly”, “eco-friendly”, “green”, “ecological”, “climate-friendly”, “carbon-friendly”, “energy-efficient” or “biodegradable” — where recognised excellent environmental performance cannot be demonstrated.
• Making claims, based on carbon emissions offsetting, that a product has a neutral, reduced or positive impact on the environment in terms of emissions.
• Making an environmental claim about the entire product or the entire business when it concerns only a certain aspect of the product or a specific activity of the business.

The Directive on preventing and combatting trafficking in human beings and protecting its victims constitutes a legal framework designed to fight all forms of exploitation in the EU by natural and legal persons, including sexual exploitation, begging, slavery, servitude, the exploitation of criminal activities and the removal of organs (Directive 2011/36/EU). The directive requires Member States to ensure that all legal persons are held liable for offences committed for their benefit by any person who has a leading position within the legal person. It provides for sanctions to be raised on a legal person held liable, including exclusion from any entitlement to public benefits or aid and disqualification from the practice of commercial activities.

In September 2022, the European Parliament adopted a directive governing the adequacy of minimum wages for EU workers (COM(2020)682 final), which currently range from EUR 332 per month in Bulgaria to EUR 2,257 per month in Luxembourg (pre-tax). The directive does not set a fixed minimum wage but considers:

• the adequacy of minimum wages;
• the promotion of collective bargaining on wage setting;
• effective access to minimum wage protection.

Member States would be required to monitor the adequacy of minimum wages and report to the Commission on an annual basis. The European Council is expected to formally adopt the directive in October 2022, after which Member States will have two years to implement it in national law.

In force since 18 August 2024, the Regulation on Nature Restoration (Regulation (EU) 2024/1991) requires Member States to restore 20% of the EU’s land and sea areas by 2030, and ultimately all ecosystems in need of restoration by 2050. It prioritises ecosystems with the most potential to capture and store carbon and to prevent and reduce the impact of natural disasters. Member States will be required to submit draft National Restoration Plans to the Commission by 1 September 2026. The European Environmental Agency will regularly publish technical reports on Member States’ progress towards the targets and the Commission will report to the European Parliament and to the Council on the implementation of the law.

EU antitrust law and policy is also becoming increasingly intertwined with considerations relating to ESG. In November 2021, the Commission published a communication in which it acknowledged that EU competition policy can contribute to the green transition by enabling companies to co-operate in the joint pursuit of genuinely green initiatives (COM(2021)713). In making a competition assessment, consumer preferences for sustainable products, services and technologies should be taken into account whenever appropriate. By way of example, the Commission noted that restrictive agreements under Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) might be exempted should the sustainability-linked benefits they bring to consumers outweigh their harm. The Commission adopted revised rules on horizontal co-operation agreements between companies in June 2023 (COM(2023)3445), which clarify that EU antitrust rules do not prevent agreements between competitors that pursue a sustainability objective and introduce a soft safe harbour for sustainability standards.

In addition, Commission guidelines on state aid for climate, environmental protection and energy, applicable from January 2022, have aligned state aid rules with the objectives and targets of the Green Deal.

Enforcement of the EU’s ESG frameworks, as provided for through Regulations and Directives, is left to the national governments of Member States (Article 299 TFEU). Please see country-specific chapters.

Soft non-binding laws

The EU supports various UN instruments that impact businesses, including the UN Guiding Principles on Business and Human Rights, the UN’s 2030 Agenda for Sustainable Development and the Sustainable Development Goals.

Stakeholders

For many stakeholders, greenwashing has become a particular concern. The European Securities and Markets Authority (ESMA) has made tackling the issue a priority in its 2022–2024 Sustainable Finance Roadmap, which includes actions to assess greenwashing market practices, conduct case discussions on greenwashing amongst national competent authorities (NCAs) and work to develop a common understanding of NCAs’ supervisory role.

National Contact Points (NCPs)

Please see country-specific chapters.

Reporting and corporate disclosure make up the focus of much of the legislation outlined in Question 3. However, some EU Directives such as CSDDD impose certain obligations on companies that are process oriented and go beyond requiring reporting. For example, CSDDD provides a framework for the assessment of actual and potential adverse impacts of an undertaking’s activities on human rights and the environment. See also the regulations and directives outlined at Question 4 above.

Reporting

Taken together, the full gamut of ESG regulations requires companies to disclose across a broad range of formats. Fund managers falling subject to the SFDR must make certain entity-level disclosures in fund prospectus documentation and on their websites. Product-level disclosures are required again in fund prospectuses and in annual reports.

Non-financial reporting required of firms falling within the scope of the NFRD and CSRD should be contained in annual management reports, while the CSDDD requires companies to publish an annual statement about their due diligence on their websites.

Reporting requirements in the EU also reflect the notion of double materiality, first coined in the CSRD, which requires a company to disclose ESG information necessary to understand the impact of its activities. While climate-related information should be reported where necessary to understand the inward development, performance and position of the company, it must also be reported where necessary to understand the external impact of the company’s activities on broader society and on the environment. In this way, the materiality perspective of the CSRD covers both financial materiality and social and environmental materiality, unlike other sustainability reporting frameworks, such as the Taskforce on Climate-related Financial Disclosures, whose perspective is restricted to that of financial materiality only.

Private equity/hedge funds/asset managers

Fund managers are heavily impacted by the requirements imposed under the SFDR and, as outlined above, with the SFDR requiring not only EU financial market participants and financial advisers to comply with broad sustainability-related disclosures, but also all non-EU firms marketing in the bloc. In ensuring compliance, fund managers must update marketing materials, including public websites, and source reliable and credible ESG data to form the basis of those disclosures.

Banks

European banks are coming under increasingly strict rules in relation to ESG reporting. In November 2022, the European Banking Authority’s implementing technical standards on Pillar 3 disclosures in relation to ESG risks were published in the Official Journal. Under these rules, banks headquartered in the EU are required to report on their exposure to carbon-related assets and assets subject to climate change-related risks, such as floods and fires. They must also disclose the extent to which their financing activities are aligned with the EU Taxonomy, expressed through both the Green Asset Ratio and the Banking Book Taxonomy Alignment Ratio.

European insurers are now also subject to stricter ESG-related requirements. Changes to Solvency II (Directive 2009/138/EC) effective from August 2022, for example, have seen the prudent person principle amended to include mandatory consideration by European (re)insurers of sustainability risks, as well as the sustainability preferences of their customers, in the investment process.

Small- and medium-sized enterprises (SMEs)

In broadening the scope of the NFRD, the CSRD extends reporting requirements to all listed EU companies, including SMEs, with an opt-out available during a transition period running until 2028. Under the tiered application timeline, SMEs will be required to report from January 2026 under a proportionate set of ESRS.

While SMEs are not subject to the CSDDD, they may form part of an in-scope company’s chain of activities. The CSDDD includes protections for SMEs by requiring companies to provide targeted and proportionate support for their SME business partners.

Fashion

Of particular relevance to the fashion industry is the Commission’s Circular Economy Action Plan. As part of that plan, the Commission in March 2022 adopted a package of measures including an EU strategy for sustainable and circular textiles, aimed at ensuring that by 2030 textile products within the EU market are long-lived and recyclable, free from hazardous substances and produced with respect to social rights and the environment. Measures forming part of the strategy include:

• the introduction of mandatory eco-design requirements through the Ecodesign for Sustainable Products Regulation (Regulation (EU) 2024/1781);
• measures to prevent the destruction of unsold or returned goods;
• measures aimed at tackling microplastics pollution; and
• revisions of EU rules on packaging and packaging waste.

Automobile industry

In April 2023, the EU enacted a regulation (Regulation (EU) 2023/851) that introduced a target for all new cars and vans to be zero emissions from 2035, as well as interim targets to reduce emissions by 55% for new cars and by 50% for new vans from 2030 to 2034, as compared to 2021 levels.

The Commission proposed a Greening of Freight Transport Package in 2023, which aims to significantly increase energy efficiency in the sector. Similarly, the Commission launched a consultation on its Greening Corporate Fleets initiative, which closed in July 2024; the EU is expected to adopt its proposal in Q2 2025. The EU Save Energy Communication also includes many recommendations to cities, regions and national authorities that can effectively contribute to the substitution of fossil fuels in the transport sector.

Energy industry

The EU External Energy Strategy, adopted in May 2022, aims to facilitate energy diversification and build long-term partnerships with suppliers, including co-operation on hydrogen or other green technologies. The Commission proposes to increase the 2030 target for renewables from 40% to 45% under the Fit for 55 package. This increased target sets the framework for other initiatives.

For example, the EU introduced a dedicated EU Solar Energy Strategy to deliver over 320GW of solar photovoltaic capacity by 2025 and almost 600GW by 2030. To achieve this, the Solar Rooftop Initiative was introduced, which includes a phased-in legal obligation to install solar panels on new public and commercial buildings and new residential buildings.

The EU has also set a target of 10 million tons of domestic renewable hydrogen production and 10 million tons of imports by 2030 to replace natural gas, coal and oil in hard-to-decarbonise industries and transport sectors. The Commission published two Delegated Acts (2023/1185 and 2023/1184) on the definition and production of renewable hydrogen to ensure that production leads to net decarbonisation.

To encourage investment in renewables, the Commission published a Commission Recommendation (2024/1343) to tackle slow and complex permitting for major renewable projects and the EU amended the Renewable Energy Directive (Directive 2023/2413) to introduce a presumption that renewable energy plants and their related infrastructure have an overriding public interest.

Other than the CSDDD (see above, Question 3), there is no single EU governance law. Please see country-specific chapters for national legislative developments in governance standards.

ESG rating agencies

As sustainable investment has continued to become more integrated into the financial ecosystem, investors have increasingly come to rely on ESG rating agencies to provide data points that allow for a comparison of companies’ ESG credentials.

Clear evidence of the importance of ESG ratings in the European market can be seen in the various initiatives made by both the Commission and other EU authorities to address the regulation of ESG ratings and their providers. As part of the Commission’s 2021 consultation on its renewed sustainable finance strategy, stakeholders were canvassed for their views on the quality and relevance of ESG ratings to their investment decisions, the degree of concentration in the market and the need for regulation and action at the EU level. In alluding to the importance of ratings and their providers, they highlighted that improved comparability and an increased reliability on ESG ratings would enhance the efficiency of the market for sustainable finance and facilitate progress under the Green Deal.

The Commission went on to undertake a targeted consultation on ESG ratings and sustainability factors in credit ratings that will directly feed into an impact assessment evaluating the impacts, costs and options of a possible EU intervention in the ratings space. In parallel, a complementary call to evidence was issued by ESMA in February 2022, aimed at mapping the ecosystem of rating providers operating within the EU and assessing the possible costs of supervision.

In November 2024, this work culminated in the Council of the EU adopting the Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities, which introduces rules around conflicts of interests and includes a requirement for EU ESG rating providers to be authorised and supervised by the ESMA. At the time of writing, the regulation had not yet been published in the Official Journal.

ESG benchmarks

In relation to benchmarks, the EU has adopted the Low Carbon Benchmark Regulation, which introduced EU climate transition benchmarks and EU Paris-aligned benchmarks and seeks to ensure that low-carbon benchmarks comply with a standard methodology to provide a degree of uniformity and prevent greenwashing (Regulation (EU) 2019/2089). In July 2020, the EU Commission adopted rules setting out minimum technical requirements for the EU climate transition benchmark label. These include requirements that the sectors to which the benchmark is allocated reduce their carbon emissions year-on-year and exclude assets that significantly harm ESG objectives.

While there is currently no EU benchmark encompassing all three ESG pillars, the Commission has announced the commission of a study to inform the possible features of a new EU ESG benchmark label.

For details of the role of companies and government-owned organisations within the EU, please see country-specific chapters.

Access to reliable data, enhanced by a general lack of standardisation and methodological transparency, has proved difficult for many. Requirements under the EU’s ESG regulations to aggregate data, in particular non-financial data, across complex supply chains and varied portfolio companies have proven particularly challenging.

Varying timelines for the implementation of relevant regulations have also proved burdensome, with the EU’s legislative mechanics at times seeming reluctant to move. Level 2 disclosures under the SFDR, for example, were pushed back twice, eventually occurring in January 2023. Similarly, successive delays in the publication of the draft CSDDD were met with a joint statement from over 100 companies, investors, business associations and initiatives criticising the delay.

EU sustainability legislation has also faced backlash from the Trump Administration. For example, in March 2025, a bill was introduced in the U.S. Senate (the “PROTECT USA” Act), which seeks to prohibit companies “integral to the national interests” of the U.S. (including federal contractors and certain manufacturing and extractive companies) from complying with foreign sustainability due diligence regulations, including the CSDDD. Large companies exposed to both the EU and the U.S. are likely to face challenges balancing compliance with EU sustainability legislation with the anti-ESG push from the current U.S. administration.

In holding responsibility for proposing legislation to the European Parliament and Council, the Commission is the primary source of information relating to ESG regulation in the EU. 

Yes. An outline of the EU’s Taxonomy Regulation is provided at Question 3, above.

Current signs point to the EU pressing ahead with its ambitious legislative agenda, albeit in the face of opposition from certain stakeholders. The CSRD and CSDDD include staggered thresholds, meaning a greater number of companies will come into scope year-on-year, whilst the date of application of the EUDR remains uncertain. The European Council indicated in its November 2024 Budapest Declaration that it will launch a “simplification revolution”, which will reduce reporting requirements by at least 25% in the first half of 2025, to increase the competitiveness of EU businesses. Finally, the Commission is also revising SFDR, the disclose regime applicable to financial market participants, and is considering the introduction of an actual label regime.

Nevertheless, increasing polarisation on ESG issues within the EU Parliament may present challenges for the EU in achieving this agenda. Although an alliance of broadly centrist parties retained a majority in the European parliamentary elections in June 2024, with President von der Leyen set to embark on her second Presidency of the Commission from late 2024 to 2029, a rightward shift in the membership of the European Parliament has already led to increased opposition to ESG more broadly. This includes opposition and potential delays to the EUDR mentioned above, together with opposition within the European Parliament to incoming rules designed to achieve the ban on sale of new petrol and diesel cars from 2035.