Why It Matters
ESG has moved from a voluntary initiative to a regulatory requirement in the EU. The Corporate Sustainability Reporting Directive (CSRD) requires thousands of companies to report on ESG metrics starting in 2024. Investors, customers, and regulators increasingly evaluate companies based on ESG performance, and greenwashing is now subject to enforcement action.
The Three Pillars
Environmental (E)
- Climate change — carbon emissions (Scope 1, 2, 3), net-zero targets
- Resource use — energy efficiency, water consumption, waste management
- Biodiversity — impact on ecosystems and natural habitats
- Pollution — air, water, soil contamination
- Circular economy — recycling, product lifecycle management
Social (S)
- Labor practices — fair wages, working conditions, health and safety
- Diversity, equity, and inclusion (DEI) — gender pay gap, board diversity, accessibility
- Human rights — supply chain labor standards, modern slavery
- Community impact — local employment, community investment
- Consumer protection — product safety, data privacy
Governance (G)
- Board composition — independence, diversity, expertise
- Executive compensation — alignment with long-term performance
- Ethics and anti-corruption — codes of conduct, whistleblower channels
- Risk management — enterprise risk frameworks, internal controls
- Transparency — shareholder rights, audit quality, tax transparency
EU Regulatory Framework
CSRD (Corporate Sustainability Reporting Directive)
- Who: Large companies (250+ employees), listed SMEs, and non-EU companies with significant EU revenue
- What: Report on environmental, social, and governance metrics using European Sustainability Reporting Standards (ESRS)
- When: Phased rollout from 2024 (large public companies) through 2028 (non-EU companies)
- Assurance: Initially limited, moving to reasonable assurance
EU Taxonomy
Classifies economic activities as "environmentally sustainable" based on six objectives: climate mitigation, adaptation, water, circular economy, pollution, and biodiversity.
SFDR (Sustainable Finance Disclosure Regulation)
Requires financial market participants to disclose sustainability risks and impacts of their investment products.
ESG Frameworks and Standards
- ESRS — EU's mandatory sustainability reporting standards (under CSRD)
- GRI — Global Reporting Initiative (widely used worldwide)
- SASB — industry-specific sustainability standards (now under ISSB)
- TCFD — Task Force on Climate-related Financial Disclosures
- ISSB/IFRS S1 & S2 — global sustainability disclosure standards
Key Regulation
- Directive 2022/2464 (CSRD) — EU sustainability reporting
- Regulation 2020/852 (EU Taxonomy) — classification of sustainable activities
- Regulation 2019/2088 (SFDR) — sustainability disclosures in financial services