By Benita Dreesen and Gabriel Webber Ziero
The EU new deal has now been launched and regulators are working out the different scenarios. What are the first regulations for companies to consider (and to comply with?); what is the timeframe?
The EU Green Deal is a strategy that sets the tone for how the next few years of the EU’s efforts will unfold to achieve the Paris Agreement’s targets. The EU is currently drafting the thematic action plans, such as the Circular Economy Action Plan (recently launched), which includes specific actions and goals. At the moment, it is too early to decisively say how companies will be impacted by this future regulatory action—most of the legislative measures are still being drafted. However, we do know that the EU has an ambitious plan, as announced by the President of the EU Commission Ursula von der Leyen, which is to cut greenhouse gas emissions (GHG) by at least 55% by 2030 with a goal of carbon neutrality by 2050. The next steps are translating this proposal into plans of action at the EU and EU member-state levels, as well as implementing regulations that clearly define how these goals will be achieved. The EU Commission is aiming to conclude its review of what needs to be done at the EU level by June 2021.
Without a doubt, the recently adopted EU Sustainability Taxonomy Regulation (Taxonomy Regulation) and its future Technical Screening Criteria will play a key role in the journey Europe is taking towards carbon neutrality. Launched before the EU Green Deal, the Taxonomy Regulation derives from the EU Action Plan on Sustainable Finance and defines six environmental objectives. Companies are required to disclose in their non-financial statements how their products and services are associated with these objectives. Financial institutions are also required to observe the Taxonomy Regulation when issuing sustainable investment products.
Will Swiss companies need to comply?
Since most of the legislative measures are still being drafted it is too early to say how Swiss companies will be impacted. However, it can be said that the applicability of EU regulations to non-EU companies often follows pre-established approaches/criteria related to what is regulated. For example, when it comes to the disclosure of non-financial information and due diligence practices related to sustainability factors, the EU adopts applicability criteria focusing on the number of employees in a company (e.g. 500 employees) and accounting data (e.g. net turnover or total assets). When looking at financial regulations, common applicability criteria for EU rules are where the client is domiciled and the place of registration of the financial product/institution. Therefore, it is likely that Swiss companies will be directly required to comply with EU rules deriving from the EU Green Deal because of their presence in the EU market, or indirectly obligated, for example in contractual relations with EU clients that require their business partners to comply with EU standards.
How do companies need to prepare internally and externally?
Implementing new regulatory requirements is often a challenging process as they might directly impact companies’ strategies, processes, culture, and even in certain circumstances their business model and value proposition.
When companies start to plan internally to be prepared for what is coming, I believe that they need to consider three important elements:
- Have/set-up a sustainability-specific unit, which is responsible for assessing and integrating sustainability-related considerations into their existing business models, processes (e.g. risk management and compliance), product offerings, etc.
- Monitoring what is going on in the policy and regulatory landscape, in particular at the EU level.
- Make early assessments of current and future sustainability-related trends at different internal dimensions (e.g. policy, regulation, clients’ perception, peer practice) to get a handle on what these mean for the company. Then, start a discussion around adequate ways to address the identified developments with effective strategies and frameworks.
When thinking about the external dimension, I believe the keyword is engagement. It is important that companies keep their eyes and ears open to what is going on elsewhere and establish open lines of communication-based on clear and transparent approaches that reference commonly understood concepts. Therefore, I would suggest companies engage with:
- Peers (such as industry association peers) to exchange ideas and shape a common view and understanding of how sustainability-related developments are impacting your industry sector.
- Employees and clients, and do not forget to speak with non-clients, such as civil society organizations.
- Regulators in a constructive way (e.g. submit comments to open consultations).
In your opinion, what are the opportunities for companies; and where do you see the challenges?
We see many opportunities. Companies that choose to take sustainability factors seriously and action them beyond marketing approaches can seize this moment to build real leadership, enhance their market position, and decrease competition. Companies can also take this opportunity to build more resilient business models and significantly reduce their risk exposure.
One of the main challenges for businesses is that sustainability will not be ‘a walk in the park’ or an area where every player decides what is best for itself. Now companies will need to follow mandatory rules, abide to common requirements, educate and inform their employees and business partners, and invest in new resources.
Another challenge that could arise might be competitive (dis)advantages between companies doing business within Europe (as they need to comply with EU regulations) and those acting globally. However, it is important to remember that the General Agreement on Tariffs and Trade says that adoption or enforcement of measures by countries “necessary to protect human, animal or plant life or health” as well as “the conservation of exhaustible natural resources” do not constitute a restriction on international trade relations.