Environmental, Social and Governance (ESG) Compliance

EU Environmental, Social and Governance (ESG) Regulations

European Union regulations on Environmental, Social and Governance (ESG) matters aim to promote responsible and sustainable business practices, in line with the EU's climate and social commitments. The key regulatory instruments are:

1.- The Sustainable Finance Disclosure Regulation (SFDR), which aims to promote transparency in how financial institutions integrate ESG factors into their investment decisions.

• Obligations imposed by the SFDR:
  • Asset managers and financial advisers must disclose how they assess ESG risks within their portfolios.
  • Regulated entities must classify financial products as sustainable (under Articles 6, 8 or 9 of the SFDR, depending on their ESG approach).

2.- The Taxonomy Regulation, which aims to establish a unified framework for identifying sustainable economic activities.

• Obligations imposed by the Taxonomy Regulation:
  • Financial companies and large enterprises must report what percentage of their activities qualifies as sustainable under the EU Taxonomy.
  • It helps prevent "greenwashing" (misleading marketing practices relating to sustainability claims).

3.- The Corporate Sustainability Reporting Directive (CSRD), which aims to replace and expand upon the requirements of the Non-Financial Reporting Directive (NFRD).

• Who it affects:
  • • Large companies (with more than 250 employees, €40 million in turnover or €20 million in total assets)
    • Listed companies, including listed SMEs.

• Obligations:
  • Companies must report on how their operations affect ESG factors and how those factors impact their business (double materiality).
  • Mandatory reporting must follow the standards developed by EFRAG (European Financial Reporting Advisory Group).

4.- The proposed Corporate Sustainability Due Diligence Directive, which aims to ensure that European companies identify and mitigate negative impacts on human rights and the environment throughout their value chain.

• Who it applies to:
  • It will apply to large companies (with more than 500 employees and turnover exceeding €150 million).
• Obligations:
  • Implement monitoring and remediation mechanisms on ESG matters.   

5.- Sustainable Corporate Governance Directive** (proposal in progress), which aims to ensure that boards of directors take environmental and social impact into account in their decision-making.

General objectives of ESG regulation:

1. Transparency and trust: Enabling investors and other stakeholders to identify sustainable companies and financial products.
2. Climate change mitigation: Promoting activities aligned with the EU's climate objectives, such as carbon neutrality by 2050.
3. Encouraging responsible practices: Reducing social, environmental and governance risks across global supply chains.
4. Preventing greenwashing: Establishing a common language and objective criteria for what constitutes a sustainable activity.

Who does ESG regulation affect?

Legal audit on ESG Environmental, Social and Governance (ESG)

A. General information on ESG

1. Does the company have a formally documented ESG policy?
2. Have ESG risks been identified and communicated within the corporate strategy?
3. What mechanisms does the company use to monitor and manage its ESG impacts?
4. Is there a designated person or team responsible for the implementation and oversight of ESG?
5. Have specific, measurable sustainability targets been established?

B. Environmental Aspects

Regulatory Compliance:

1. Does the company comply with applicable EU and national environmental regulations (e.g. emissions, waste management, resource use)?
2. Is the company registered under the EU Eco-Management and Audit Scheme (EMAS), where applicable?

Management of Environmental Impacts:

3. Does the company carry out a regular carbon footprint analysis?
4. What measures are being taken to reduce greenhouse gas emissions?
5. Are there energy-saving policies and use of renewable energy in place?
6. How does the company manage waste and promote the circular economy?
7. Are the impacts on biodiversity monitored across the company's operations?

Reporting and Transparency:

8. Is environmental performance data — such as emissions, energy consumption, or water resource management — publicly disclosed?
9. Do reports comply with international standards such as GRI or ESRS?

C. Social Aspects

Human and Labour Rights:

1. Have human rights risks been identified across the value chain?
2. Does the company comply with regulations on gender equality and non-discrimination?
3. How does the company ensure decent working conditions for its employees?
4. Are the working conditions of suppliers and contractors monitored?

Community Relations:

5. What social impact programmes does the company have in place?
6. Are consultations held or dialogue established with communities affected by the company's operations?
7. What measures are taken to promote economic and social development in local communities?

Occupational Health and Safety:

8. Are all applicable European and national occupational health and safety regulations being complied with?
9. Are there mechanisms in place for health and safety training and awareness in the workplace?

D. Governance Aspects

Corporate Structure:

1. What governance policies are in place (anti-corruption, business ethics, regulatory compliance)?
2. Is there a code of conduct applicable to employees, managers, and suppliers?
3. How is the effectiveness of these policies monitored?

Transparency and Reporting:

4. Are financial and non-financial risks disclosed in annual reports?
5. Has a whistleblowing system been implemented?
6. Is the company aligned with data protection regulations (GDPR) when handling sensitive information?

Diversity and Oversight:

7. What is the composition of the board of directors in terms of gender diversity, experience and background?
8. Is senior executive remuneration monitored against ESG objectives?

E. Value Chain Due Diligence

1. Have adverse impacts relating to human rights and the environment been identified within the supply chain?
2. What mechanisms are used to assess and monitor suppliers and subcontractors?
3. Have contractual clauses on sustainability and human rights been incorporated into supplier agreements?
4. Does the company provide training to its suppliers on ESG standards?

F. Reporting and Verification

1. Is the company required to report under the CSRD? If so, has preparation for the European Sustainability Reporting Standards (ESRS) been initiated?
2. Are there internal or external processes in place to audit the non-financial information disclosed?
3. Is independent external verification of ESG reports being carried out?

G. Readiness for the Corporate Sustainability Due Diligence Directive (CSDDD)

1. Has the company integrated a formal due diligence process into its operations?
2. Are ESG risks identified, prevented and mitigated across the entire value chain?
3. Is there a mechanism in place to remedy harm caused by the company's operations?
4. Is there public communication on how risks are managed and remediation measures implemented?

H. Training and Awareness

1. Is specific ESG training provided to employees and managers?
2. Is a culture of sustainability being promoted throughout the organisation?
3. Are ESG performance objectives incorporated into employee appraisals?