WR ESG Alert: EU agreement on the Corporate Sustainability Due Diligence Directive and updates to and expansion of a range of environmental obligations
In this month's ESG alert, we highlight that political agreement has been reached at EU level with respect to the Corporate Sustainability Due Diligence Directive, the Ecodesign for Sustainable Products Regulation as well as new rules to strengthen the Energy Performance of Buildings Directive. We also describe an expanded scope for sustainability disclosure obligations following a report by the European Supervisory Authorities and revisions to the Norwegian Greenhouse Gas Emissions Trading Act.
On 7 December 2023, a provisional agreement was reached between the European Parliament and the Council to reduce the emissions and energy use of buildings. The strengthened Energy Performance of Buildings Directive (EPBD) will support the EU's efforts to decarbonise buildings, which are responsible for approximately 40% of the energy consumption in the EU. The revised directive will make zero-emissions buildings the standard for new buildings. Member States will also have to ensure that new buildings are solar-ready, meaning that they must be fit to host rooftop photovoltaic or solar thermal installations. In addition, the revised EPBD contains measures to improve both the strategic planning of renovations and the tools to ensure such renovations will happen.
Under the agreed provisions, each country will adopt its own national trajectory to reduce the average primary energy use of residential buildings by 16% by 2030 and 20-22% by 2035. Countries are free to choose which buildings to target and which measures to take. National measures will have to ensure that at least 55% of the decrease of the average primary energy use is achieved through the renovation of the worst-performing buildings.
Member States will have to set up national building renovation passport schemes to guide building owners in their staged renovations towards zero-emission buildings. Member States must also establish one-stop-shops for owners of homes, SMEs, and all actors in the renovation value chain, to receive dedicated and independent support and guidance.
Member States will have the possibility to exempt certain categories of residential and non-residential buildings from the obligations, including historical buildings and holiday homes.
The provisional agreement will require formal adoption by the European Parliament and the Council.
On 4 December 2023, the European Supervisory Authorities (ESAs) released a Final Report suggesting changes to the regulatory technical standards (RTS) for the EU Sustainable Finance Disclosure Regulation (SFDR). This came after a 2022 request from the European Commission for the ESAs to review the SFDR RTS. The objective of the consultation was to identify and understand any shortcomings in the regulation, especially in relation to legal uncertainty, the regulation's useability and ability to tackle greenwashing. In April 2023, the ESAs sought input on their proposed adjustments, focusing on principal adverse impact (PAI) disclosures, the SFDR 'do no significant harm' (DNSH) test, and disclosures at the product level.
The proposed RTS cover the topics outlined in the European Commission's instructions to expand the social indicators for PAIs, refine existing PAI indicators and introduce disclosures for GHG emissions reduction targets.
However, the ESAs have also expanded their scope beyond the Commission's explicit request, considering additional changes based on input shared through Q&As and feedback from the NCAs. These proposed changes involve:
- Improving disclosure about how sustainable investments align with the DNSH principle. This includes disclosing the criteria used in the DNSH assessment for sustainable investments and explaining how the proportion of sustainable investments in a financial product is calculated, either based on economic activity - similar to Taxonomy-aligned calculations - or investment.
- Simplifying the templates in Annexes II to V of the SFDR Delegated Regulation, including introducing a new dashboard for a straightforward summary of crucial information.
- Making technical adjustments, such as standardising the calculation of sustainable investments and requiring disclosures to be in machine-readable format.
- Revising provisions for products with various investment options, like multi-option products.
In essence, these proposals will significantly impact financial market participants, who will need to update their SFDR disclosures on products and websites due to changes in templates and data points. Additionally, they will have to reassess their entity-level PAI and DNSH methodology and disclosures because of the various changes to PAI indicators.
Within the next three months, the European Commission will decide whether to approve the proposed RTS changes. However, the timeline for when these changes will take effect, if endorsed and adopted by the EU authorities, remains unclear.
On 5 December 2023, a political agreement was reached between the European Parliament and the Council on the Ecodesign for Sustainable Products Regulation. The regulation aims to induce more sustainable, repairable and circular products with fewer components of concern and more recycled content. The new legislation will build on and strengthen the existing Ecodesign Directive.
The background to the regulation is the concern that products use extensive amounts of materials, energy and other resources and cause significant environmental impacts throughout their lifecycle, from the extraction of raw materials, to manufacture, transport, use and end of life. The objective of the new regulation is thus to make sustainable products the norm on the EU market and reduce their overall environmental and climate impacts.
The new ecodesign requirements will go beyond energy efficiency and aim to boost circularity, including with respect to:
- product durability, reusability, upgradability, and repairability;
- presence of chemical substances that inhibit reuse and recycling of materials;
- energy and resource efficiency;
- recycled content;
- carbon and environmental footprints; and
- available product information, in particular a digital product passport.
The regulation will enable the setting of performance and information requirements for key products placed on the EU market. The Commission will adopt and regularly update a list of products identified on the basis of the EU’s climate, environment and energy efficiency objectives. The regulation has been deemed EEA relevant.
The Norwegian Parliament has recently passed amendments to the Norwegian Greenhouse Gas Emissions Trading Act (Nw. klimakvoteloven) to reflect changes in the EU’s Emissions Trading System (EU ETS). Among other things, this involves broadening the scope of the law to encompass maritime transport. Also, more technical changes have been made to better align the Norwegian law with the EU ETS Directive, which has introduced a system that can also include emission free activities. In addition, there are new provisions in place regarding supervision and enforcement.
On 14 December 2023, an informal agreement was reached between the European Parliament and the European Council on the Corporate Sustainability Due Diligence Directive (CS3D), building on the proposal from the Commission of 23 February 2022. The CS3D obliges companies to integrate human rights and environmental considerations into their operations.
As proposed, the CS3D will apply to EU companies of a considerable size and economic heft. The compromise agreement reportedly excludes financial actors' investment and lending activities from the scope of the directive, although a review clause has reportedly been incorporated to assess the potential inclusion of the financial downstream sector in future.
The CS3D contains two key obligations for in-scope companies. First, all companies covered by the directive will have to integrate a due diligence regime into their policies and risk management systems. The due diligence regime must cover negative impacts on human rights and the environment arising from the companies' own activities and the activities of their business partners, as well as downstream activities such as distribution or recycling. Second, companies will be required to adopt a plan to ensure that their business models align with the goal of restricting global warming to 1.5°C.
Non-compliance with the due diligence obligations of the directive can be met with civil liability or with penalties such as public exposure and/or fines amounting to a maximum of 5 per cent of a company's global net turnover. Moreover, compliance with due diligence obligations could be considered as a component in criteria used for awarding public and concession contracts.
The CS3D is expected to be adopted by the EU during the course of 2024. It has been marked as EEA relevant, although alignment with the Norwegian Transparency Act will likely be required before the directive is implemented into Norwegian law.
Wikborg Rein's monthly ESG alerts will cover key developments on topics of relevance under the ESG umbrella. The WR ESG alerts intend to offer a focused perspective on environmental and social issues, emphasising material developments and their implications. However, this may not encompass all aspects of the broader ESG spectrum and will generally not cover governance-related updates.
The WR ESG alerts primarily cover regulatory developments within Norway and the EU. We endeavour to keep you informed about the evolving landscape of ESG regulations, although it is essential to verify and cross-reference information, considering the dynamic nature of regulatory environments. Please note that the information shared in the WR ESG alerts is for informational purposes only and should not be construed as legal advice.