EU Looks to Expand Corporate ESG Requirements

Pollution
As the European Union continues to bolster regulations related to climate change, member countries are responding by issuing new environmental, social, and governance (ESG) requirements that address human rights and environmental issues alike.

In March, the EU issued a resolution on corporate due diligence and accountability that laid out its plans to strengthen existing ESG requirements. Companies across the EU will be required to identify ESG risks within their operations and improve ESG reporting.

The resolution decried voluntary due diligence standards, saying that they “have not achieved significant progress in preventing human rights and environmental harm and in enabling access to justice … the Union should urgently adopt binding requirements to address and remediate potential or actual adverse impacts on human rights, the environment, and good governance in their value chain.”

This month, the European Commission and the European External Action Service (EEAS) published guidance intended to push companies to address the risk of forced labor in their operations and supply chains. The hope is that the practical advice within the report can help businesses better understand the risks of forced labor and how to prevent it.

The EU also passed new regulations earlier this year that aim to prevent companies from providing misleading environmental information and making false claims about the environmental impact of their products and services, known as greenwashing.

The Sustainable Finance Disclosure Regulation (SFDR) establishes rules to prevent greenwashing by requiring fund managers to evaluate and disclose the ESG features of their financial products. In requiring firms to disclose information on their funds if they promote an environmental or sustainable cause, EU regulators hope that investors and consumers can gain greater clarity on companies’ social and environmental practices.

The SFDR rules “effectively reset the bar as to what can be called sustainable investment,” Simon O’Connor, chair of the Global Sustainable Investment Alliance, told Bloomberg. While the legislation cut down on corporate greenwashing, assets in sustainable investments declined to $12 trillion in Europe over 2020 from $14 trillion in 2018, $2 trillion over the past two years.

Supply Chain Due Diligence
Individual countries are also enacting new ESG regulations, including requirements to look for human rights and environmental abuses in supply chains. Just last month, Germany passed a supply chain act that will require companies over a certain size to enact due diligence procedures intended to prevent human rights and environmental violations within their global supply chain.

Starting in 2023, if companies in Germany find foreign suppliers in violation of the rules, they will be required to take appropriate action, or face massive fines of up to 2 percent of their annual global revenues, according to Reuters. Other EU countries may look to adopt similar regulations. 


 Danny Flynn is assistant editor at Compliance Chief 360°.

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