ESG and sustainability toolkit (EU) | Practical Law
A toolkit to guide those working across jurisdictions through Practical Law's content on environmental, social and governance (ESG) and sustainability factors and regulation in the EU.
A toolkit to guide those working across jurisdictions through Practical Law's content on environmental, social and governance (ESG) and sustainability factors and regulation in the EU.
About this toolkit
This toolkit links to the main Practical Law resources on common environmental, social and governance (ESG) and sustainability factors and regulation under EU law.
ESG is an umbrella term for a broad range of environmental, social and governance factors against which investors can assess the behaviour of the entities they are considering for investment. ESG is the term often preferred by the investment world when using these types of factors to assess corporate behaviour, evaluate the future financial performance of companies (particularly in the long term) and to manage risk.
The terms corporate responsibility (CR), corporate social responsibility (CSR) and sustainability are also sometimes used to refer to a broad range of environmental and social responsibility behaviours demonstrated by businesses.
The June 2022 issue of PLC Magazine is dedicated to ESG articles (see PLC Magazine: June 2022).
Illustrative diagram of ESG factors
The following diagram illustrates the types of factors that are commonly included in the concept of ESG. However, the ESG factors that are relevant to a particular business will differ depending on the sector and the countries in which the business operates and its supply chain. The later sections of this toolkit note list key Practical Law materials on the legal aspects of these factors.
For a summary of the key legal and policy drivers on ESG for corporates and financial institutions, see Practice note, ESG horizon scanning: policy and legal measures. This note covers initiatives in the UK and the EU, and international initiatives.
For a series of high-level timelines focused on new and emerging ESG initiatives expected in the short-term and beyond, see Practice note, ESG horizon scanning: timeline of developments. This note covers initiatives in the UK and the EU, and international initiatives.
Practice note, EU Conflict Minerals Regulation 2017 explains the EU requirements on importers of certain minerals and metals that originate in conflict-affected and high-risk areas to carry out mandatory supply chain due diligence.
Practice note, EU Batteries Directive 2006 includes a summary of the Commission's 2020 proposal for a Regulation to impose obligations on operators placing rechargeable industrial batteries or electric vehicle batteries larger than 2 kWh on the EU market to establish supply chain due diligence policies, with a particular focus on raw materials that may have adverse social or environmental impacts.
Practice note, ESG-Related Supply Chain Due Diligence: Key European Legislation (Global subscription required) compares legal developments across Europe that mandate ESG-related supply chain due diligence and comments on this developing trend and the connected expansion of corporate sustainability reporting requirements.
Practice note, German Supply Chain Due Diligence Act: Q&A (Global subscription required) provides help and information in a question-and-answer format about The Act on Corporate Due Diligence Obligations in Supply Chains (commonly known as the German Supply Chain Due Diligence Act). This note is intended primarily to assist international companies with a presence in Germany (and their counsel) in understanding the impact of this legislation on their business.
Practice note, Product sustainability summarises the main aspects of the legal framework and compliance challenges associated with product sustainability, including information about the legal implications of the circular economy, sustainable sourcing and consumer rights.
EU sustainable finance regulation
Sustainable finance is the process of taking ESG considerations into account in investment decision-making, with the aim of increasing investment in longer-term and sustainable activities. Sustainable finance also encompasses growing awareness of and transparency about the risks that may impact the sustainability of the financial system, and the need for financial and corporate businesses to mitigate those risks through appropriate governance.
Many companies are subject to mandatory requirements to report on their sustainability impacts. For information on EU requirements, including the Corporate Sustainability Reporting Directive (CSRD) and the SFDR, see:
For resources on supply chain due diligence reporting, see ESG in supply chains.
EU competition law and sustainability agreements
Businesses are increasingly seeking to co-operate on environmental and sustainability improvements to production, products and market delivery. However, discussions between competitors and market operators could have competition law risk. For information on the interaction of competition law with sustainability agreements, see Practice note, Transactions and practices: EU Co-operation between competitors: Sustainability agreements.
Environment
Environmental factors relate to how a company performs as a steward of the natural environment.
Climate change
Climate change can affect a wide range of organisations. The risks include direct physical risk from flooding or other extreme weather events, impacts on international supply chains, distribution networks and global markets, increased regulatory requirements, litigation and reputational risk. For resources on key EU regimes, see Practice notes:
For information on the key EU regimes regulating the impact of projects or business operations on the environment, habitats, biodiversity and wildlife, see Practice notes:
An environmental policy sets out the organisation's objectives in managing its environmental impacts. For information, see Practice note, Environmental policies.
For information about environmental disclosure and reporting requirements, see ESG reporting.
Product stewardship
Manufacturers and others involved in the life cycle of products are subject to a range of obligations. Products must comply with requirements on chemicals for the product to be placed on the market. Some chemicals are subject to restrictions, are being phased out or are prohibited. For information on the key EU regimes, see Practice notes:
More efficient use of resources, such as energy, materials and water, can improve businesses' resilience and enable sustainable growth. For information on the key EU regimes, see Practice notes:
Greenwashing (the act of misleading third parties about the environmental impact of a product, service, process, brand or business) is also an increasingly significant concern for corporates, giving rise to litigation, regulatory enforcement and reputational risk. For access to information and further resources on greenwashing, see Greenwashing toolkit.
Social
Social factors relate to how a company manages relationships with its employees, suppliers, customers, and the communities it operates in.
Human rights
Complicity in the violation of human rights is a significant issue that has been gaining more attention in recent years. Businesses that are associated with an adverse human rights impact could be open to civil and criminal liability in some jurisdictions, and risk a significant impact to their reputation. Businesses are increasingly required to identify and manage their involvement in adverse social impacts throughout their organisations and supply chains. For more information, see:
Areas that are affected by wars and conflicts can suffer from a break-down of the rule of law, weak or non-existing governance and violations of international law, including human rights abuses. In politically unstable areas, the minerals trade can be used to finance armed groups, fuel forced labour and other human rights abuses, and support corruption and money laundering. Businesses operating in these areas, whether directly or through their supply chains, will need to navigate their legal obligations and ethical position carefully, and consider their reputation.
For a toolkit to help counsel working in the US, UK, EU, Canada, Australia, and New Zealand guide their clients through the business interruptions caused by the Ukraine crisis, including key sanctions imposed on Russia and other countries, persons, and entities, see Russia Sanctions and Related Considerations Toolkit. This covers a wide range of resources, including on business operations, crisis management and disaster preparedness, cybersecurity, employment matters, financial services, fundraising, insurance, oil and gas, sanctions compliance, supply chain disruptions, and social governance.
A safe work environment is considered essential to the wellbeing of employees and to the sustainability of a business's operations. For more information, see Health and safety toolkit.
Diversity, equity and inclusion
Businesses may be required to comply with legal requirements relating to equal pay, inclusion and non-discrimination. Managing these issues is considered to support talent attraction, retention and development. For information, see:
How a company engages with its stakeholders and the wider community within which it operates is an important part of ESG. For information on relevant regimes, see:
For information on provisions on shareholder rights and long-term shareholder engagement to ensure that decisions are made for the long-term stability of a company (including consideration of social and environmental issues), see Practice note, Shareholder Rights Directive: overview.
For an explanation of the requirements for issuers to ensure appropriate transparency for investors by disclosing periodic and ongoing regulated information, see Practice note, Transparency Directive: overview.
Bribery, corruption and anti-money laundering
Bribery is illegal under international law. However, the risk of corruption, money laundering and bribery is higher in some countries and sectors than others. For more information on anti-money laundering in the EU, see Anti-money laundering toolkit: EU AML resources.
Board independence, diversity and structure
It is generally considered that an independent, diverse board can provide objectivity, mitigate conflicts of interest, and better protect shareholders' interests.
For information on developments relating to the proposal for a Directive on improving the gender balance among non-executive directors of companies listed on stock exchanges, see Gender balance on company boards: legislation tracker.
Economic sanctions
Economic sanctions can be imposed by national governments or by international bodies (for example, the UN). They are a tool for exerting political and economic pressure on states through restrictions on trade relationships or travel.
For a toolkit to help counsel working in the US, UK, EU, Canada, Australia, and New Zealand guide their clients through the business interruptions caused by the Ukraine crisis, including key sanctions imposed on Russia and other countries, persons, and entities, see Russia Sanctions and Related Considerations Toolkit. This covers a wide range of resources, including on business operations, crisis management and disaster preparedness, cybersecurity, employment matters, financial services, fundraising, insurance, oil and gas, sanctions compliance, supply chain disruptions, and social governance.