Sustainability Blog #4

Legislation

December kicked off with major developments regarding the corporate sustainability due diligence directive (CSDDD). The Council of EU adopted its negotiating position (general approach) regarding the CSDDD on 1 December which means that they now have a mandate to start negotiations with the European Parliament. The Council’s press release states that “the rules of the directive will apply to a company’s ‘chain of activities’, which covers a company’s upstream and in a limited manner also downstream business partners as it leaves out the phase of the use of the company’s products or the provision of services”. The press release also highlights that with this general approach Council “strengthens the risk-based approach and the rules on the prioritisation of the adverse impacts to ensure that carrying out due diligence obligations is feasible for companies”.

On 9 December, EU bodies agreed on the new law on more sustainable and circular batteries to support EU's energy transition and competitive industry. The agreement between the EP and the Council was built upon the Commission’s proposal from December 2020 which addressed the social, economic and environmental matters related to batteries and which had a goal of making all batteries on the EU market more sustainable, circular and safe. The European Parliament and the Council will now formally have to adopt the new Regulation before it can enter into force. The new Regulation will replace the existing Batteries Directive from 2006.

Speaking of political agreements, on 9 December the EP and the Council also reached an agreement on the revision of the EU Emissions Trading System (EU ETS) on aviation. These new rules will have a big impact on achieving the Fit for 55 goals because they will accelerate the implementation of the polluter pays principle by phasing out free allowances for the aviation sector by 2026. Basically, the aviation industry would have a greater responsibility to pay for its carbon footprint, but also there will be more financial incentives for airlines to reduce emissions. This was followed by the reached provisional agreement between the EP and the Council on 18 December to strengthen the EU ETS, apply emissions trading to new sectors for effective economy-wide climate action, and to establish a Social Climate Fund. When it comes to strengthening and expanding EU emissions trading, the focus will be on reducing emissions from the EU ETS sectors by 62% by 2030, compared to 2005 levels. The speed of annual emission reductions would also increase, from 2.2% per year under the current system to 4.3% from 2024 to 2027 and 4.4% from 2028. Finally, the plan is to gradually phase out free emission allowances to certain enterprises and phase in the CBAM between 2026 and 2034 for the sectors covered. We will cover more on the CBAM in the paragraphs below. The new Social Climate Fund will provide dedicated financial support to Member States to help vulnerable citizens and micro-enterprises with investments in energy efficiency measures such as home insulation, heat pumps, solar panels, and electric mobility.

Moreover, The EP and the Council reached a political agreement on the Carbon Border Adjustment Mechanism (CBAM) on the morning of 13 December. The Commission issued an official press release which states that “the CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. With this enlarged scope, CBAM will eventually – when fully phased in – capture more than 50% the emissions of the ETS covered sectors.” The CBAM will enter into force in its transitional phase as of 1 October 2023.

Also, it’s worth mentioning that following the formal adoption of the CSRD by the EP in November, the text of the directive was published in the Official Journal of the Union on 13 December. The member countries will now have 18 months to integrate it into their legislations.

News and reports

On 8 December, the European Commission published its first Zero Pollution Monitoring and Outlook report and its third Clean Air Outlook report. The reports show that EU policies have contributed to reducing air pollution as well as pollution from pesticides. However, pollution levels are still too high. In other areas such as harmful noise, nutrient pollution or municipal waste generation, progress has stalled. The Commission states that the results show that overall, much stronger action is necessary if the EU is to achieve 2030 pollution reduction targets, by adopting new anti-pollution laws and better implementing existing ones.

The European Commission also raised €7.05 billion for SURE (Support to mitigate Unemployment Risks in an Emergency) and MFA programmes in its last syndicated transaction of the year on 7 December by issuing a € 6.548 billion 15-year social bond due in December 2037 and a €500 million tap of an existing bond due in 2052. The proceeds from the social bond will be used for the implementation of the SURE programme in Bulgaria, Cyprus, Czechia, Greece, Croatia, Lithuania, Latvia, Poland and Portugal, while the funds from the MFA programme are intended for Ukraine.

On 13 December 2022, the EBA (European Banking Authority) published its Roadmap on sustainable finance which outlines the objectives and timeline for sustainable finance and ESG risks. The EBA’s work on ESG risks will primarily cover the three pillars of the banking framework (market discipline, supervision, prudential requirements). Besides that, the focus will also be on fostering transparency and market discipline on ESG issues through enhanced disclosures, and on maintaining a safe and resilient banking sector by having institutions' practices and exposures to ESG risks assessed and supervised by competent authorities under Pillar 2.

Finally, ECB (European Central Bank) issued a report on good practices for climate stress testing. The aim of the report is to provide banks with examples and suggestions on how to improve their climate stress testing capabilities based on identified good practices from the ECB's 2022 climate stress test, the results of which were published in July 2022. The report highlights amongst other things that, whilst banks have made some progress on incorporating climate-related risks into their stress testing frameworks, there is still a high level of inconsistency across banks’ practices, and several areas of climate stress testing have identified where there is need for improvement.