Recent regulatory developments in the field of sustainable finance in Europe demonstrate a strengthening of requirements for companies and financial institutions.
Here are the main news items:
1. Corporate Social Responsibility Directive (CSDDD)
The Corporate Sustainability Due Diligence Directive (CSDDD), adopted in May 2024, requires large EU companies (those with more than 1,000 employees and sales of over €450 million) to conduct due diligence on their value chains to identify and mitigate environmental and human impacts. This directive introduces transparency and accountability obligations in supply chains, with gradual compliance deadlines depending on company size. However, it largely excludes SMEs and certain key sectors such as finance, which has led to criticism(Plan A)(HRW).
More specifically, the Corporate Sustainability Due Diligence Directive (CSDDD) imposes requirements on large companies regarding responsibility for the environmental and social impacts of their value chains, including:
- map their supply chains,
- carry out risk assessments to identify negative and negative
- implement measures to avoid them.
The directive applies to European companies and those operating in the EU, including certain subsidiaries of non-European multinationals.
The scope of this directive was reduced during the negotiations, limiting its impact to the largest companies (around 5,400 according to some estimates)(Plan A)(HRW).
Companies must also draw up climate transition plans, but there are no specific penalties if they fail to meet emission reduction targets.
2. Revision of the SFDR (Sustainable Finance Disclosure Regulation)
The SFDR, which regulates sustainability disclosures in financial products, is up for review in 2024. European supervisory authorities (EBA, ESMA, EIOPA) have proposed improvements to clarify financial product categories and reduce the risk of greenwashing.
This revision aims to make disclosures more transparent and accessible to consumers, and to introduce a sustainability indicator for assessing financial products. These measures are designed to simplify fund classification and boost confidence in “sustainable” products(EIOPA)(Linklaters).
The revision of the SFDR aims to simplify and clarify the information provided by fund managers and financial institutions on their so-called “sustainable” products. Due to criticism of the ambiguous use of investment categories (notably Article 8 and 9 funds), European regulators have proposed the creation of two clear categories: “sustainable” and “transition”. These changes are designed to reduce the risk of greenwashing by simplifying disclosure requirements and making information more transparent for consumers(EIOPA).
Proposals for a sustainability indicator on financial products have also been put forward, enabling investors to better assess funds and insurance products from an ESG (Environment, Social and Governance) perspective(Linklaters).
3. Carbon Border Adjustment Mechanism (CBAM)
The CBAM, which comes into force in 2023, introduces a carbon tax on imports of certain carbon-intensive products (such as steel, cement and aluminum) to prevent carbon leakage to countries with less stringent emissions standards. This measure is part of the EU’s “Fit for 55” strategy, which aims to reduce emissions by 55% by 2030. CBAM is currently in the transition phase, with full implementation scheduled for 2026(Plan A).
More specifically, the CBAM (Carbon Border Adjustment Mechanism) is an innovative mechanism designed to align carbon prices between imported products and those manufactured in the EU, in order to prevent carbon leakage (i.e. the relocation of production to countries with less stringent emissions standards). Coming into force in 2023, it requires importers of certain carbon-intensive products (such as steel, cement, aluminum, etc.) to pay for certificates based on the carbon footprint of their products.
The transition phase runs from 2023 to 2025, with full implementation scheduled for 2026, when companies will have to purchase certificates for each tonne of CO2 emitted by their imports(Plan A)(Linklaters). The CBAM is part of the broader European Green Deal strategy to achieve carbon neutrality by 2050.
4. European Green Bond Standard
In 2024, the EU adopted the Green Bond Regulation, which sets clear standards for bond issues that respect the EU’s environmental objectives. The regulation aims to ensure that bonds claiming to be “green” meet strict criteria, reducing the risk of greenwashing and making it easier to raise funds for genuinely sustainable projects(Europa.eu).
Indeed, the EU Green Bond Standard (GBS) aims to establish a single, robust standard for the issuance of green bonds in the EU, enabling investors to distinguish bonds that are genuinely aligned with European sustainability goals. The regulation requires that the projects financed by these bonds comply with the European Green Taxonomy, guaranteeing greater transparency and traceability.
This regulation should improve investor confidence by limiting greenwashing practices in the green bond market, which has exploded in recent years with growing demand for investments aligned with the EU’s climate objectives(Europa.eu)(Plan A).
These measures strengthen European regulation to support more credible and transparent sustainable finance, avoiding greenwashing abuses while promoting the ecological transition of companies.
