Commercial Awareness

EU Legislators Diluting Corporate Sustainability Disclosure Rules?

In this article, our Commercial Awareness Analyst Muqaddas Hussain, delves into the challenges posed by the litigation associated with greenwashing.

The European Sustainability Reporting Standards (ESRS), adopted by the European Commission in July 2023, have recently faced pushback from EU lawmakers. Recognised as “ambitious,” the Standards are to be used by the 50,000 companies subject to the Corporate Sustainability Reporting Directive (CSDR). They introduce more detailed reporting rules concerning sustainability focused impacts, opportunities, and risks.

However, 44 Members of theEuropean Parliament, spanning from the European People’s Party to Renew Europe, have submitted a resolution aiming to reject the ESRS’s. The resolution contends that the disclosure requirements proposed by the European Commission place a “high administrative burden for companies due to the high complexity of sustainability reporting standard.” This burden could disproportionately impact businesses, especially smaller ones. The motion also asserts that these requirements undermine the European Union’s broader focus to streamline bureaucracy and reporting obligations. Additionally, it notes that the ESRS “fall short of usable Key Performance Indicators,” thereby failing to establish consistent and comparable standards to be used for all companies.

Despite being part of an ongoing effort by centre-right political parties to amend the EU’s ambitious environmental agenda, gaining majority support for the rejection of the ESRS requirements proved to be extremely difficult. In fact, Parliament voted in favour of the Standards, rejecting the resolution which sought to supress its impact. Senior policy advisor Tsvetelina Kuzmanova commented, “among international backlash to corporate sustainability reporting and a growing anti-ESG movement, Europe held the fort for sustainable businesses today." Further support for the ESRS came from Global Reporting Initiative CEO, who welcomed the endorsement of the Standards as a “transition from political debate to practical implementation” and is considered a “game changer” for corporate accountability, both at the EU and global levels.

Impact on the Legal Industry

Indeed, the number of sustainability focused reporting disclosures has seen unprecedented growth. The CSDR, the Task Force on Climate related Disclosures and the GRI, among others, serve as examples. As concerns over the robustness of the Standards persist, law firms face both challenges and opportunities. From a regulatory standpoint, more clients will require assistance in ensuring compliance in their reporting due to the sector agnostic nature of the Standards. Especially as the global landscape is not consistent in its approach, the reputational risk and costs associated with litigation arising from claims such as greenwashing due to non-compliance has significantly increased.

The constant growth and evolution of sustainability reporting requirements presents opportunities for the greater use of technology, such as tools to offer compliance monitoring and reporting solutions, especially where there is a kaleidoscope of potentially overlapping frameworks. Law firms will be increasingly relied upon to dissect developments in rules and to engage in think tank style forums to provide a basic benchmark approach across the legal industry. While these rules are EU specific, non-member state companies such UK incorporated companies must take advice on domestic implementation measures to ensure their corporate activities comply in each EU jurisdiction.