How the new european union sustainability initiatives Will impact U.S. Companies

August 17, 2023 | What's Hot | 5 min read

Chances are, you’re already familiar with the slogan “Think globally, act locally.” For decades, climate change activists have encouraged us to focus on small-scale everyday decisions that can add up to a large-scale healthier planet.

Today, however, organizations need to “act globally” as well.

The Corporate Social Responsibility (CSR) landscape continues to evolve across the globe. But, even as regulations and reporting requirements shift, organizations are increasingly expected to implement environmentally and socially conscious initiatives. With the EU’s newest environmental and social requirements, massive changes are underway that will not only affect EU countries, but many others, including the United States.

In light of Skillsoft’s second-annual CSR Survey — meant to help benchmark organizations’ global progress in CSR initiatives — we examine how European governments are addressing and establishing new regulations for corporate social responsibility.

What is the EU CSRD?

In November 2022, the European Council and the European Parliament approved new sustainability reporting requirements for the European Union. The European Union’s Corporate Sustainability Reporting Directive (CSRD) prescribes new requirements for organizations to report sustainability disclosures across several topics pertaining to environmental and social issues, as well as to improve non-financial reporting.

The ultimate goal of the CSRD is to contribute to Europe’s 2050 climate-neutrality target and European Green Deal objectives, which include providing a “globally competitive and resilient industry, renovated energy efficient buildings, cleaner energy, and cutting-edge clean technological innovation.”

New reporting conditions will:

  • Require organizations to ensure that investors and stakeholders have access to the information they need to assess the impact of companies on people and the environment.
  • Assess financial risks and resulting opportunities to support climate change awareness and other sustainability issues.
  • Require companies to detail how their business strategy will mitigate risks and realize opportunities associated with environmental and social matters — and how environmental and social issues will impact business, beyond financial impact alone.

So, why was CSRD introduced? CSRD aims to address several shortcomings from past environmental and social initiatives, such as vagueness of reporting requirements, lack of comparability, non-compliance, and greenwashing. On a larger scale, it aims to facilitate an EU financial system that is increasingly sustainability-driven by allowing investors to make more informed decisions based on easily accessible and standardized sustainability data.

With the implementation of these progressive sustainability and climate policies, CSRD is working within the framework of existing policies and directives to ignite long-acting change on a huge scale. It impacts organizations in the United States doing business with the EU, and it also serves as an indication of potential sustainability regulations that may be enacted in other parts of the world in the future.

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It’s (Not) All about the money

In addition to the EU’s new sustainability reporting requirements, European nations have also seen a shift in financial policy pertaining to both CSR and environmental, social, and governance (ESG) initiatives.

A few months after the approval of CSRD, on June 13, 2023, the European Commission published a new sustainable finance package. The package aims to strengthen the existing EU sustainable finance framework in three key areas:

EU Taxonomy. Proposed additions to the EU Taxonomy should enable investments in more industries and economic activities recognized as contributing to the EU’s environmental initiatives and CSRD standards. These include:

  • 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

ESG Ratings. ESG ratings providers perform an increasingly important role in the value of sustainable finance. So, the Commission proposes to expand the existing set of economic activities that contribute towards the objectives of climate change mitigation and adaptation to increase the reliability and transparency of ESG ratings activities in the EU. The proposal covers:

  • Using methodologies that are “rigorous, systematic, objective, and subject to validation.”
  • Publicly disclosing information on data sources, methodologies, and assumptions used in their activities and products.
  • Preventing and mitigating conflicts of interest.
  • Being authorized and supervised by the European Securities and Markets Authority (ESMA).

Transition Finance. The third part of the package includes recommendations on transition finance to guide investors, firms, and financial intermediaries on using the EU sustainable finance framework to regulate risks. According to the Commission, transition finance is defined as: “The financing of climate — and environmental performance improvements to transition towards a sustainable economy, at a pace that is compatible with the climate and environmental objectives of the EU.”

The EU is using transition finance to try to ease discrepancies between high demands for ESG products and the limited supply of investment opportunities considered “sustainable” and “taxonomy-aligned.”

With all this focus on European initiatives, you might ask: What has the U.S. done to establish itself as a leader in corporate social responsibility and environmental, social, and governance issues? The answer is a lot, but there’s still so much more to be done on both ends, and taking examples from the new EU guidelines is a great place to start.

What do these new initiatives mean for the United States?

Many American companies have operations in Europe. Therefore, the EU’s new sustainability reporting requirements will fundamentally change the disclosure landscape for all global companies with significant operations in the EU, including American ones.

In fact, the adoption of CSRD will impact more than 50,000 companies. By 2028, U.S. companies with over €150M of operations in the EU and at least one large subsidiary or branch must comply by the CSRD guidelines.

While it may take a while for these new regulations and guidelines to directly impact American-based companies, the EU’s highly ambitious efforts can still serve as a model for U.S. organizations.

But, that’s not to say that the United States isn’t implementing any initiatives of its own. Skillsoft’s most recent annual CSR report highlights areas where American companies are already striving to make a difference. See how individual roles impact professionals’ CSR perspectives.

With an emphasis on the future and a dedication to lasting environmental and social change, EU regulations are a promising starting point for the future of CSR, but it doesn’t end there. It’s high time we all work together — locally and globally — to affect meaningful and lasting change.

If you’re passionate about corporate social responsibility and how it’s being implemented in your organization and beyond, share your thoughts with us by filling out Skillsoft’s 2023 CSR Survey and start working towards making a difference today.