Regulations for 2024: everything you need to know so far

The Corporate Sustainability Reporting Directive, (CSRD) which expands upon an earlier EU directive, goes into effect next year, with the largest companies required to file their first reports in 2025. The new rules will ultimately apply to almost all European-listed companies and up to 50,000 companies worldwide. The job of data collection and disclosures for companies is substantial and those that have not yet begun testing their ESG reporting processes will have their hands full next year.
 

Misleading claims & greenwashing

What does it mean to be “eco-friendly” or “carbon-neutral” or “sustainable”? It depends on who you ask. A study by the European Commission in 2020 found that 53% of green claims about products or services in the EU were either vague, misleading, or unfounded. Nearly half of those claims had no evidence at all to back them up. Greenwashing is essentially false advertising, and it pays. More consumers are looking to purchase products that are eco-friendly and have fewer negative impacts on the environment.

Greenwashing undermines the entire movement towards sustainability. It not only erodes consumer trust in environmental messaging and disclosures, but it also puts companies that make legitimate efforts to improve their environmental performance at a cost disadvantage to unscrupulous peers.

A lack of common standards is part of the problem. There are currently more than 200 different environmental labels and dozens of other energy-related labels used on products and services in the EU. The result is a confusing barrage of standards and claims that consumers have no means of assessing.

The costs of greenwashing

The growing consumer awareness of greenwashing is making it riskier for companies to make false environmental claims. It may also get a lot more costly. Both the EU and the UK have proposed new laws to combat greenwashing. The UK’s Green Claims Code is a voluntary code of conduct, but the country’s Competition and Markets Authority has already launched investigations of green claims by several fashion brands and has indicated that it also intends to look at other sectors of the economy.

 

The EU’s Green Claims Directive, on the other hand, is a binding proposal that all companies selling products or services in the EU must follow. It has detailed rules requiring that environmental claims be backed by evidence and verified by an accredited and independent third party. Greenwashing allegations not only damage corporate reputation, but they could also result in penalties of up to 4% of business revenues for false environmental claims.

Carbon accounting

The Corporate Sustainability Reporting Directive, (CSRD), that goes into effect for approximately 11,700 EU-based companies next year, presents significantly bigger challenges for companies that have been reporting under the Non-Financial Reporting Directive (NFRD). Smaller companies that were not subject to the NFRD, must comply with the new rules in 2025 and 2026. Non-EU based companies with turnover of more than E150 million in the EU for two consecutive years will also have to comply. In all, the CSRD is expected to apply to approximately 50,000 companies worldwide.

It requires businesses to provide more detailed reports on sustainability topics including environmental matters, social responsibility, human rights, anti-corruption measures, and corporate board diversity. 

One of the biggest challenges of the new regulations for companies will be reporting their carbon footprints. For the first time, companies must report their total greenhouse gas emissions. That includes emissions from their operations, (Scope1), their use of energy, (Scope 2), and the emissions produced by suppliers and customers related to the product’s lifecycle, (Scope3). To put it mildly, Scope 3 emissions are complicated, particularly for large companies with global supply chains. Often the data from those suppliers may be unreliable or unavailable. Many large companies have already been testing their emissions reporting processes to determine where they have holes along their value chain and how they can fill them.

Going Circular

The European Commission is also taking the lead on planning for an economy that reuses materials more efficiently and minimizes waste. The Circular Economy Action Plan adopted by the EC in 2020 lays out plans to require that products be more durable, reusable and recyclable. The Commission has already proposed rules restricting single-use plastics and requiring that all smartphones and electronic devices come with universal USB-C charging ports. It also plans to create digital passports for virtually all products other than food and medicine. Such passports would provide information such as a product’s origins, composition and recyclability, giving consumers a clearer picture of its long-term sustainability.

 

None of these circular economy rules are yet binding, but they will be. The International Organisation for Standardization, (ISO), is also expected to issue standards next year defining the circular economy and ways to make the transition to that production model. As always, ISO standards are non-binding. However, companies and brands would do well to think about circularity and how sustainable their products and production processes are.

The coming ESG regulations from the EU will impact virtually every business in the Eurozone from manufacturers to retailers to financial institutions. They will affect everything from product packaging to printing functions to retail space design. While the new reporting regime will pose major compliance challenges for businesses, it is also an opportunity. Companies that take steps to reduce the negative impacts they have on the environment and society will be rewarded by consumers and investors.