The international dimension of the new EU regulatory framework
Lawyer Francesco Maria di Majo - Bridgelaw partner
In the article of lawyer Francesco Maria di Majo, published in the Journal of International Trade Law, the recent EU acts (regulations, directives and delegated or implementing regulations), aimed at strengthening the sustainability of companies and avoiding greenwashing, are systematically and comprehensively examined...
through the adoption of common standards for sustainability reporting and common criteria for assessing whether economic activities contribute to one or more of the six environmental objectives that have been identified under the environmental ‘Taxonomy’ regime (namely climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection of biodiversity and eco-system health).
The main EU acts examined in this article are the EU Directive (EU) 2022/2464 on Corporate Sustainability Reporting (CSRD) with regard to environmental, governance, social and human rights (ESG) factors; the EU Regulation 2020/852 on Taxonomy and its Delegated Regulations (2021-2023), to which CSRD refers for environmental assessment. All of these acts stem from the EU's 2015 Paris Agreement commitments and aim to channel private investment into sustainable activities.
In this article, through an integrated reading between the CSRD and the Taxonomy Regulation (acts that are, although not explicitly, related to each other), some reading tools are provided to companies regarding the international dimension of the provisions of these European regulations. Underlying the CSRD and the European reporting criteria set out in Delegated Regulation (EU) 2023/2772 (European Sustainability Reporting Standards) is the obligation for large companies (to which the CSRD applies), when reporting on sustainability, to address the impact of ESG factors not only with respect to their own activities but also with respect to their subsidiaries and business partners along the entirevalue chain,upstream and downstream, which may extend outside the European Union. This chain includes the sourcing, manufacturing, transport, storage and supply of raw materials but also the delivery and consumption of products.
Large EU companies (with more than 250 employees and a net turnover of EUR 50 million or a balance sheet of more than EUR 25 million) will be obliged to present, as of the next annual report 2025, the aforementioned impact analysis as part of the ‘management report’ (drawn up by the directors pursuant to Art. 2428 of the Italian Civil Code), which is an integral part of the financial statements or consolidated financial statements of the group (thus also including the activities of foreign subsidiaries). The CSRD also strengthens the sanctions regime against auditors with respect to irregularities committed by them in certifying the conformity of the aforementioned financial statements or sustainability report.
Mr. di Majo's article highlights the repercussions that the CSRD may have, again in conjunction with the Taxonomy rules, in terms of strengthening the protection of the interests of those who have purchased products and/or services (including financial services) from a company that has submitted a ‘sustainability report’ containing inaccurate or untrue data on the environmental objectives (including in terms of CO2 reduction) achieved. If the company's products and/or services are then presented as ‘eco-friendly’ without actually being so, thus giving rise to ‘greenwashing’ practices, there is already a risk for the company to be sanctioned by the antitrust authorities or even to be condemned to pay damages in civil lawsuits brought by consumers or their associations.
The preparation of the sustainability report on the basis of the common standards indicated by the ESRS, will therefore increase the risk for companies of being exposed to actions (by individuals or by antitrust), for having provided (even unintentionally) incorrect information on the impact with respect to ESG factors of the entire value chain, which includes the activities of the company's own subsidiaries and business partners that may be located in third countries.
In this regard, the article indicates some tools and methodologies that can be used by companies to avoid incurring such risks. Among these, the certainly safest tool is the recourse to reliable environmental certifications (carried out also with respect to the activities and investments made by subsidiaries abroad) that are based on verifiable data and that are technically and scientifically sound (or by having recourse to ‘guarantees of origin’ of the renewable energy produced).
Mr. di Majo's article also examines the Directive on the Corporate Sustainability Due Diligence Directive (CSDD), which has meanwhile been adopted by the EU on 24 May 2024.
The monitoring of the value chain with respect to ESG factors that large companies are already now required to observe by virtue of the CSRD - from which they may be held liable, but only if there has been misrepresentation or in the case of non-compliance with ESRS criteria in the drafting of the sustainability report - will assume, with the application of the CSDD , a more substantial connotation that goes beyond the mere disclosure obligations of the CSRD.
The CSDD introduces, in fact, starting in 2029 and for companies with more than 1,000 employees and a worldwide net turnover of more than 450 million euros, an obligation for these companies to take appropriate measures to prevent, mitigate, cease or minimise the negative impacts arising from their activities as well as those of their subsidiaries and business partners on human rights and the environment, along the entire value chain.
To this end, companies will have to integrate environmental and human rights due diligence into their corporate policies or risk management systems. Furthermore, companies will be obliged (in CSRD it is still an option) to adopt and implement a transition plan for climate change mitigation.
The verification of these obligations will be devolved to an independent authority that may also impose sanctions on the company.
The CSDD also provides for a regime of private enforcement, i.e. the civil liability of companies and the related right to compensation from natural or legal persons who suffer damage to their legal interests ‘protected by national law’, Art. 29(1)(b) of the CSDD (this concerns in particular damage to a person's health or property). The right to compensation may arise only if the conditions for non-contractual liability under national law are met and if the damage has resulted from the violation by the company of an obligation, prohibition or right specified in one of the international conventions listed in the annex to the CSDD, which is also intended to protect the interests of the natural or legal person injured.
The practical application of such a private enforcementregime appears as of now to be very limited, at least with respect to the protection of the environment, insofar as it is difficult to identify, in the aforementioned international Conventions, rights and obligations that are ‘intended to protect’ the natural or legal person harmed. This scenario may perhaps change when the Member States, when transposing the CSDD, recognise the legitimacy of NGOs acting on behalf of persons who consider themselves - potentially - harmed by diffuse pollution, without requiring concrete proof of damage suffered by them to their health or property (e.g. from the unauthorised discharge of hydrocarbons into the sea contemplated by Marpol Convention 73/78, cited in the Annex to the CSDD).
