Insight

Here Bettina Mertgen, partner – customs, excise taxes and foreign trade law at Deloitte Legal Rechtsanwaltsgesellschaft GmbH, provides an overview of some key upcoming EU regulations, their challenges, as well as an approach to navigate through this regulatory jungle – both now and in the future.

The European Union has committed to playing a leading role in the transition to a sustainable future through the European Green Deal, which includes several regulatory frameworks introducing obligations for companies.

Corporate Sustainability Due Diligence Directive

Firstly, the Corporate Sustainability Due Diligence Directive (CSDDD) is the European approach to a legislative act on due diligence in supply chains. Companies must establish certain due diligence measures regarding basic human rights, such as working conditions, no child labour or slavery, as well as fulfilment of comprehensive obligations regarding environmental protection.

It applies to companies in the EU with 1,000 employees or more and a net annual turnover of more than €450 million worldwide. It also applies to companies located outside of the EU with a net annual turnover of more than €450 million in the EU. The scope is limited to corporations or limited liability companies. While it does not directly apply to smaller companies or other foreign companies, it is likely that they will be affected as being part of a larger company’s supply chain.

The directive results in a considerable expansion of the protected legal interests in the supply chain compared to existing legislation in the EU Member States, such as the Supply Chain Due Diligence Act (SCDDA) currently in force in Germany. 

Traditionally, due diligence measures are focused on the company itself and therefore on conditions under its direct control. This changed already with the SCDDA in Germany but will be extended with the CSDDD even further. In the context of the CSDDD, the so called ‘chain of activities’ includes direct suppliers, certain indirect suppliers, and parts of the downstream supply chain, such as the distribution of the products. There are also special due diligence obligations if the company is becoming aware of grievances or violations of the covered rights within its supply chain.

Companies are expected to include the relevant topics into compliance management systems, conduct regular risk analyses, prevent violations, as well as implement remedy measures. They also must establish a complaint procedure and document the situation, as well as the progress in an annual report.

An important aspect in the CSDDD compared to most existing regulatory frameworks is the civil liability of companies for violations. Usually, companies violating any requirements can be fined or subjected to other administrative actions. In addition to potential high fines, companies can now under specific circumstances also be confronted with claims from persons who were affected. This includes full compensation of resulting damages. 

EU Member States must transpose the directive into national law within two years after coming into force. The applicable regulations should therefore apply to the first companies in 2028.

Although small companies and companies outside the EU are not addressees of the directive and the implementing national laws, they will be impacted as well when dealing with EU entities. They will receive requests regarding new contract clauses on the fulfilment of the relevant obligations, as well as regarding the confirmation of being compliant with the respective laws. Therefore, it is highly recommended to set-up a robust compliance system and to gather the relevant information within the supply chain.

Corporate Sustainability Reporting Directive

The Corporate Sustainability Reporting Directive (CSRD) establishes obligations for companies to make certain ESG data available to the public in an annual report. It applies to large companies meaning that at least two out of the following three thresholds must be exceeded: A €25 million balance sheet total; €50 million net turnover; and 250 average employees.

While the CSRD does not apply to non-EU companies directly, EU companies in scope with a third country ultimate parent will also have to request sustainability data from their ultimate parent if certain revenue thresholds are reached.

Companies in scope must gather sustainability data in different ESG areas and report them annually. The report must be included in the financial statement and must be validated externally. Relevant datapoints to be reported are published by the EU and require a company to disclose information in certain areas with a financial impact on the company, an impact of the company on the environment, or both. The data is related to data gathered according to the CSDDD and therefore certain synergies can be utilised.

The CSRD applies to the mentioned large companies beginning in business years starting on or after 1^st January 2025, with the first report to be made in 2026. Other timelines apply to companies that are public interest entities, for example because they are listed on a capital market.

Challenges for companies will in many cases be the limited quality of existing sustainability data, and a complicated process of gathering new data. As already mentioned, such companies should ensure a robust data basis and a compliance management system – enabling them to align the different requirements in one central system.

EU Taxonomy Regulation

The regulatory background of the EU Taxonomy Regulation is closely related to the CSRD. It aims to classify the business activities of a company according to their environmental performance and to direct investments into more sustainable activities. 

It is applicable to all companies that must report on sustainability topics according to the CSRD. Companies must conduct an analysis of their business activities and check any eligible activities against a catalogue of requirements for the specific activity, including the availability of certain certifications or reductions in CO₂ emissions. Depending on the outcome, the activity can be reported as conforming with the EU Taxonomy in a mandatory annual report. Like the CSRD, the EU Taxonomy does not require companies to directly improve their sustainability indicators, but rather to establish transparency about the sustainability of ongoing business activities.

Indicators reported under the CSRD and EU Taxonomy will only become more relevant in the future, when present and upcoming regulations require financial institutes to increase the share of sustainable investments. Publicly available sustainability data will likely be important indicators for determining if the company can be seen as a sustainable investment in this context.

Carbon Border Adjustment Mechanism

Carbon Border Adjustment Mechanism (CBAM) aims to compensate for carbon emissions caused by the production of certain goods that are imported into the EU, but produced in third countries, preventing the outsourcing of energy intensive productions into low cost countries ‘carbon leakage’. It is applicable to any company acting as a so called ‘operator’ importing goods, including cement, fertilisers, iron and steel, hydrogen and electricity. The specific goods are determined by tariff codes in the annex to the CBAM regulation and cover certain products relevant for the fastener industry, such as screws, bolts and nuts.

Companies importing the goods need to collect the necessary information about the production from their suppliers or producers and register as an importer. They need to report the amount of goods imported and pay a fee in the form of buying a certain amount of so called CBAM certificates. The price for available certificates will be increased in the future to encourage a sustainable transformation.

CBAM is in a transitional period since 2023. While the first reports could be based on estimates for certain emission values, future reports must include specific emission data after entering a definitive phase from 2026 and onwards. However, it has turned out that the requirements are so complex and complicated that the suppliers and, consequently, the companies are not yet able to provide this data. It is yet to be seen how the authorities will react if almost no company can provide such data.

Compliance management systems

There are several upcoming requirements for companies around sustainability topics and there will be even more in the long-term. It is therefore more important than ever to ensure a robust, general and adjustable compliance management system that covers all regulatory requirements now – which is prepared to cover additional requirements in the future. The existence of a solid foundation of sustainability data and information about the own supply chain is a central topic. 

However, it must be ensured that this data is centralised rather than used in isolated compliance silos. Even if the effort is substantial, companies can use gathered data to fulfil multiple requirements. They will get a better understanding of the effects of sustainability factors on the own business model within their compliance management system. This does not only support the idea of ESG, but using the gained transparency can help optimise the business set-up as such. Mastering the aforementioned challenges can lead to a more robust business in the future. 

For more guidance on these, as well as other regulations, contact Bettina: https://tinyurl.com/23es3zh2