You may have already received questions from a listed company in the supply chain about issues such as carbon footprint calculation or whether the company has at least a minimum wage level. You may have already encountered sustainability issues in loan negotiations or public tenders. With the new EU sustainability regulations already in force and those to come, they will be even more prominent, whether we like it or not.
Sustainability laws and regulations are not new in themselves. For example, many national laws have guided financial responsibility for decades, protecting the economic system and ensuring fair business practices. For example, the Finnish Accounting Act obliges companies to follow good accounting practice and to report on their financial situation in a transparent manner. In the future, the various directives, regulations and guiding legislation that will come through EU sustainability regulation will also affect, at least indirectly, the activities of small and medium-sized enterprises, not forgetting micro-enterprises.
The European Green Deal is the EU's comprehensive action plan for sustainable development, aiming for a climate-neutral Europe by 2050. In addition, the EU has a number of other regulations and directives related to responsibility and sustainability, focusing on issues such as workers' rights, pay equity, the platform economy or the prevention of greenwashing and misleading environmental claims. In this blog post, however, we will focus more specifically on three key EU sustainability regulations or directives: the taxonomy, sustainability reporting and the CSR Directive.
The EU taxonomy refers to the EU's sustainable finance rating system, which lists environmentally sustainable economic activities. The EU taxonomy is part of the EU Green Deal and its first part, the Climate Impacts Regulation, has entered into force at the beginning of 2022. The EU Taxonomy Regulation currently applies not only to financial market participants but also to large companies. The EU taxonomy contains six sets of criteria, one of which must be promoted while the other five must not be adversely affected. These criteria include climate change mitigation, adaptation to climate change, sustainable use of water resources, transition to a circular economy, pollution prevention and protection of ecosystems. The EU taxonomy is constantly evolving and will cover the majority of sectors in the future. In practice, the EU taxonomy aims to guide funding for sustainable investments and to provide uniform guidance on sustainability across sectors. SMEs are not yet covered by the taxonomy, but the indirect effects will be felt as larger companies require more rigorous sustainability reporting from their partners.
The new EU Corporate Sustainability Reporting Directive (CSRD) will apply from the beginning of 2024. For the first year, listed companies with more than 500 employees will be covered. It will gradually be extended to companies of all sizes. The European Commission has developed a new ESRS standard for sustainability reporting. Companies covered by the CSRD must report according to the European Sustainability Reporting Standards. The ESRS will apply to all companies subject to the Directive, with the exception of the public SME sector, which has its own ESRS standard. There are 12 ESRS standards in total, of which ESRS 1 General Requirements and ESRS 2 General Information are mandatory for all.
Significant innovations to the Sustainability Reporting Standard include dual sovereignty and supply chain due diligence, which obliges companies to ensure that their supply chains comply with human rights and environmental standards. In addition, the report is required to be in a technical XHTML format and to be externally audited, in practice by an auditor with ESG qualifications. Although the CSRD does not, at least at this stage, affect SMEs, it already indirectly affects a number of smaller companies. Companies subject to sustainability reporting in the EU need information on their suppliers and the origin of raw materials. Smaller companies may therefore also have to produce ESG (environmental, social and governance responsibility) data for their own companies, where applicable.
In spring, the European Parliament adopted the Corporate Sustainability Due Diligence Directive (CSDDD), which will be phased in from 2027. In summary, the Directive aims to ensure that the largest companies are held accountable for the adverse human rights and environmental impacts of their actions and business relationships. The CSR Directive affects the largest companies, unlike, for example, the Sustainability Reporting Directive, which also affects medium-sized companies. Although it only covers large companies, the responsibility also extends to their supply chain and subsidiaries. A company covered by the Directive can be sanctioned for infringements, so micro and SMEs may also be indirectly affected.
In the near future, many sustainability laws and directives will increasingly become part of the daily life of small businesses, even if they are not yet directly binding on micro and SMEs. Indirectly, however, they will affect more and more micro and SMEs, especially if they are part of a supply chain, for example as a subcontractor. Failure to demonstrate accountability can, in the worst case, lead to the breakdown of a business relationship. In addition, banks take sustainability issues into account when granting loans.
Author:
Anne-Mari Kukkola, Master of Business Administration YAMK (Financial Management),
Business Specialist, VATUPASSI - Responsible Future Project
Nivala-Haapajärvi Region NIHAK ry
Photo: Design Inspis
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