The EU Sustainability Regulation landscape: Looking ahead to the next phase of the EU Green Deal

At a glance

• The European Green Deal – the EU’s blueprint for delivering its ambition to be climate neutral by 2050 – has driven significant legislative activity on sustainability in the EU over the past five years, becoming a critical consideration for companies as they implement their sustainability strategies. In the run-up to the European Parliament elections taking place in June, the natural winding down of the legislative machinery in the EU and the prospective change in composition of the Parliament creates uncertainty about future policy changes.
• In practice, momentum on enacting the European Green Deal is not being lost. Behind the scenes, the Commission is laying the groundwork for the mandate of the next Parliament to ensure continuity. The Commission has written or commissioned a number of reports and is taking other actions such as setting the EU’s strategic agenda for 2024-2029 through spring and summer that will shape the next phase of the EU Green Deal.
• In the meantime, some specific policy decisions remain to be made – some will be approved by this Parliament in time, but others will be deferred to the next Parliament, with the risk that that key decisions that had been all but finalised are re-opened.
• Companies already tracking regulatory developments will want to follow carefully the Commission’s work during this period. Based on the information already available, the ambition of the Commission – and the EU – will not change. The Commission’s far-reaching 2040 climate plan proposed earlier this year supports this view. But the pace of change, and the prioritisation of sustainability versus other factors – in particular growth, competitiveness and security, is likely to be different.
• The change of focus could in principle be a benefit for companies – for example, if it means that a smaller number of initiatives need to be managed at any one time. Since sustainability will be balanced against competitiveness, industries that are key in achieving climate goals could have considerable gains through preferential policy treatments or streamlined access to finance. Further, industry in general could play a more prominent role and work with policymakers on how the climate goals are achieved.

Who this blog is for:  a range of high-level stakeholders in companies across sectors including professionals responsible for sustainability strategy, risk management, and regulatory affairs and compliance.

Aligning the EU Green Deal with EU’s 2024-2029 Strategic Agenda

The European Green Deal – the EU’s blueprint for delivering its ambition to be climate neutral by 2050 – has driven legislative activity on sustainability in the EU over the past five years, becoming a critical consideration for companies as they implement their sustainability strategies and corporate plans. In the run-up to the European Parliament elections taking place in June, there is a natural winding down of the legislative machinery in the EU.  However, momentum on enacting the European Green Deal is not being lost.

Behind the scenes, the Commission is laying the groundwork for the mandate of the next Parliament to ensure continuity in the next phase of the EU Green Deal.  The Commission has written or commissioned several reports and is taking other actions during the spring and summer that will shape the next phase of the EU Green Deal.

A key step is preparations for the EU’s 2024-2029 Strategic Agenda setting being led by Charles Michel, President of the European Council. Back in 2019, when the Green Deal was first announced, Michel highlighted that building a climate-neutral, green, fair and social Europe was a priority for the EU. Michel is now leading preparations for the new Strategic Agenda, which will be set in June following the European Parliament elections and ahead of the appointment of new Commissioners. He has said that sustainability will need to be balanced against other factors. In particular, he has highlighted that the EU’s new priorities must be rooted in four major areas - the economic and social base (the green and digital transitions, competitiveness, innovation, health); tackling the energy challenge; strengthening security and defence capabilities; and deepening EU’s engagement with the rest of the world.

Alongside the EU’s strategic agenda, two further high-level reports have been commissioned. Enrico Letta, Italy’s Former Prime Minister, has written a report on the future of the EU’s internal market (published on 17 April), and Mario Draghi, formerly President of the ECB, is preparing a report on EU competitiveness (expected by July).

In recent comments, both Letta and Draghi have shown that their thoughts are aligned with Michel’s, expressing concern in the ability of the EU to finance the Green Deal in the aftermath of the pandemic, and given the longer-term consequences of the geopolitical crises for energy and import costs, and for likely European defence spending. Draghi highlighted that the EU will have to spend €500 billion a year to realise the digital and green transition alone. Similarly, Letta outlined that keeping the geopolitical crises in mind, the future of the Single Market must be centred around defence, telecommunications, energy and finance.

Alongside shaping the mandate of the next Parliament, the Commission published earlier this year a proposal for a 2040 climate target for the EU, which is expected to be adopted as a legislative proposal by the next Commission. The 2040 climate target will be a key document shaping specifically the energy and climate agenda for the next five years. The proposed goals set a minimum net reduction target of 90% in greenhouse gas emissions (GHG) by 2040 (as compared to 1990 levels) and outline the EU’s vision to achieve this reduction. Up until this point, the EU had only set a 2030 target to decrease net GHG emissions by at least 55%, on the path to its target to be carbon neutral by 2050. The Commission suggested the most ambitious option from the possible transition paths it considered, necessitating a faster deployment of low carbon technologies being the most disruptive option in the near-term. To deliver this target, key steps outlined include implementing the 2030 energy and climate policy framework (further details on plan yet to be published), completely decarbonising the electricity in the EU by the second half of 2030 and developing an industry decarbonisation deal which would attract public and private investment while remaining competitive. For some industries this implies potential scaling opportunities on the horizon, such as for renewable energy including solar and wind, zero and low carbon solutions, and accelerated electrification with smarter grids. On the other hand, if the 2040 climate goal is adopted by the next mandate, it will require many EU companies to reassess their strategy and processes to adapt and almost completely decarbonise by 2040. Specifically, companies operating in the oil and gas industry, will need to consider impact on their business operations, reassess their transition plans or transition risks against an accelerated decarbonisation timeline. Meanwhile, financial services industry is also likely to have a key role in enabling the solutions to deliver the 2040 target.

Another example of an area where the Commission has indicated a closer focus in the next five years are measures related to water.  The Commission had been expected to publish a Water Resilience Initiative during Q1 2024, but this is understood to have been put on hold and instead measures on water are expected to be adopted through secondary legislation under existing and proposed rules. For instance, the Commission has adopted a Delegated Act (DA) to measure microplastics in water, and a DA to ensure treated wastewater that is reused for agriculture is safe under the Water Reuse Regulation, and included provisions related to Extended Producer Responsibility schemes for water treatment under the Urban Wastewater Treatment Directive. Similarly, there is expected to be focus on water consumption and usage concerning product-specific rules under the Ecodesign for Sustainable Products Regulation (ESPR). 

Navigating the current regulatory landscape

In the meantime, some specific policy decisions remain to be made – some will be approved by Parliament in time, but others will be deferred to the next Parliament, with the risk that key decisions that had been all but finalised are re-opened. The table below provides an overview of the status of key legislation proposed under the current Commission – whether it has already been adopted, is expected to be adopted, or is unlikely to be adopted before the end of the current Parliament.  

For all of the legislative acts in the table below, the practical application will depend on secondary legislation. For example, the ESPR is expected to be finalised and enter into force in Q2 2024, ahead of the elections. However, since the regulation sets out new rules for a wide range of products, product-specific DAs will be key in setting ecodesign requirements for product groups and application timelines. Likewise, for the Carbon Border Adjustment Mechanism, key information necessary for implementation such as a standardised methodology to cover carbon footprint will be determined through a DA.

Implications for companies

Companies already tracking regulatory developments will want to follow carefully the Commission’s work during this period. Reflecting on these developments, the ultimate ambition of the Commission – and the EU – will not change, but the pace of change, and the prioritisation of sustainability versus other factors – in particular growth, competitiveness and security, is likely to be different. Critically, sustainability will no longer be pursued as a topic in its own silo.

The change of focus could in principle be a benefit for companies – for example, if it means that a smaller number of initiatives need to be managed at any one time. There could be opportunities for greater interactions between policymakers and industry to identify new means to achieve climate goals with competitiveness in mind, for example by reducing administrative burdens for companies, and streamlining access to finance or funding of key technologies. The Net Zero Industry Act and the Critical Raw Materials Act are both key instruments in this regard for industries that are critical to achieving climate goals. Further, tracking the development of DAs and engaging with policymakers by contributing through consultations or workshops at both EU and national levels, will help companies shape secondary legislation.

But the changes are also likely to exacerbate the uncertainty and complexity of the regulatory landscape. To be able to develop sustainability strategies against that backdrop, companies should consider the transformational opportunities created by the regulations (rather than just the compliance case)  e.g. in the area of corporate sustainability reporting , i.e., the extent to which capabilities needed to meet regulatory requirements and new industry standards also support strategic ambitions.

Finally, for companies tracking regulatory developments, extending their observations to national implementation of directives will be beneficial.  Since fines and penalties will be determined at the Member State level, keeping tabs on transposition of directives into national laws will allow companies to understand implications across different states.

Footnotes:

¹ CS3D has been formally approved by the European Council. The European Parliament now needs to formally approve the text before the CSDDD can be published in the EU Official Journal and enter into force.

The European Parliament could vote in April, in which case the Directive could enter into force in May or June 2024 at the earliest. If this is the case, the rules would start to apply in mid-2027 for the largest companies.

² Refer above.

³ The Critical Raw Materials Act does not outline specific deadlines for companies but rather specifies benchmarks for companies to achieve by 2030 with respect to extraction, processing and recycling for strategic raw materials.