CSRD, CSDDD, ETS, CBAM – 4 EU sustainability regulations that will shape companies’ business models (2024)

Global temperatures are rising around us. 2023 was the hottest year on record, with global temperatures close to the 1.5°C limit of the Paris Agreement on climate change. Restoring the health of our planet and reversing the trend requires collective action from businesses, financial institutions, governments, communities and all of us. Regulation is an important driver of this change and will shape the business environment in the years to come.

When it comes to sustainability regulations, the scope and pace of implementation will heavily influence changes to business models in both the corporate and financial sectors. Global climate- and biodiversity commitments are driving major legislative programmes, which have far-reaching impact. For example, 151 countries are committed to net-zero climate targets under theParis Agreement, and 196 countries are committed to theKunming-Montreal Global Biodiversity Framework targets.

For climate and environment targets, especially on biodiversity loss, the implementation gap remains significant, which increases the transition risk for many sectors. Within the EU, theEuropean Green Deal andFit for 55 framework encompass a wide range of new laws and regulations that are expected to shape corporate activity on climate and environment in the run-up to 2030 and beyond. Starting from 2026, there will be a significant ramp up both in the scope and ambition of EU regulation.

While these regulations are designed to deliver on climate and environmental goals, they will also be a source of disruption for sectors and business models and could increase costs for both businesses and households. Some regulations are clearly defined and narrow in scope, while others will have a broader impact. Here are some of the broad sustainability-related regulations to watch:

Corporate Sustainability Reporting Directive (CSRD)

TheCSRD is an EU regulation that requires large companies to report on their environmental and social risks, and on how their activities impact people and the environment. The regulation requires a broader set of large companies, as well as listed SMEs, to report on their sustainability. Some non-EU companies are also required to report if they generate over EUR 150 million on the EU market.

The new rules entered force in January 2023, and the first companies will have to start reporting for the first time for the 2024 financial year in 2025, with phased implementation through 2027 and beyond. The CSRD also requires companies to provide assurance on the sustainability information they report.

“The CSRD will create greater transparency and comparability around sustainability matters,” says Peter Sandahl, Head of Climate and Environment in Group Sustainability at Nordea. “This might also lead to increased peer pressure which could drive increased ambition and more strategic changes by companies that do not meet the same level of performance as their peers.”

Corporate Sustainability Due Diligence Directive (CSDDD)

TheCSDDD is another major EU legislation that establishes a corporate due diligence duty, requiring companies to address negative impacts on the environment and human rights in their own operations, subsidiaries and value chains. In addition, it requires certain companies to have in place a 1.5°C-based transition plan in line with the Paris Agreement.

Passed by the EU Parliament in April, the regulation applies to both EU and non-EU companies that meet certain turnover thresholds, starting from 2027 and widening in scope in the years to follow. By extending due diligence obligations to a company’s upstream and downstream business partners, it has the potential to disrupt supply chains and increase costs until a new equilibrium is reached.

EU Emissions Trading System (ETS and ETS II)

TheEU’s Emissions Trading System is a “cap and trade” system designed to reduce greenhouse gas (GHG) emissions via a carbon market. The ETS scheme imposes a direct price on the GHG emissions of operations. The EU sets a cap on how much CO2 can be emitted, which decreases each year in line with the EU’s climate targets. Companies need an allowance for every tonne of CO2 they emit for a given calendar year and can buy and trade them. For each year, they must surrender enough allowances to cover their emissions, or face heavy fines.

Launched in 2005, the scheme is now in its fourth trading phase (2021-2030). Going forward, the ETS scope will be increased to cover a wider group of industries than at present.

“The ETS has played and will continue to play an essential role in EU’s decarbonisation strategy,” says Sandahl. He notes that the impact on the real economy will likely be determined by the pace of transition, and delays will likely translate into increased cost pressures on companies as the scope of the ETS widens. For phase 4 (2021-30), recent forecasts expect a price of 100-140 EUR per tonne during this decade.

“This will significantly incentivise companies in scope to reduce emissions,” says Sandahl.

Carbon Border Adjustment Mechanism (CBAM)

TheCBAM introduces new reporting and cost mechanisms to control the carbon intensity of goods imported into the EU. The scope of the CBAM will gradually be widened, with a transitional phase lasting between 2023 and 2026, and the definitive regime entering force from 2026.

If the transition to a low-carbon economy outside the EU is too slow, CBAM has the potential to increase costs for EU firms. It could also disrupt business models, as low-carbon, cost-effective alternatives may become more widespread within the EU or among non-EU competitors.