ESG: an introduction to the European framework and recent initiatives in Belgium

Introduction

The COVID-19 pandemic has illustrated more clearly than ever that there is a global need for sustainable, social and ethical business leadership. A conscious and effective ESG policy is therefore high on the agenda of private and public companies and is becoming increasingly important for shareholders, investors and customers. Also, legislators are not lagging behind and there are many recent initiatives, especially at EU level, that will have an impact on the sustainability policies of companies. 

The EU has set itself the ambitious target to reduce its emissions by at least 55% by 2030 and achieve climate neutrality by 2050. A whole series of recent EU initiatives have been taken in this area, including the EU Action Plan on Financing Sustainable Growth (March 2018), the Green Deal (December 2019), the Proposal for a European Climate Law (March 2019), the Circular Economy Action Plan (March 2020), the Farm to Fork Strategy (May 2020), the Climate Pact (December 2020) and the EU Regulation on Sustainability-Related Disclosures (March 2021). In April 2021, the European Commission presented its new Sustainable Finance Package, intended to help improve financing of sustainable activities across the European Union. And most recently, the Fit for 55-pack was launched on July 14, 2021. This package of proposals aims at making the EU's climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. 

ESG from a European perspective

While the concept of “ESG” is now broadly understood, some confusion remains regarding which environmental, social and governance factors should count towards the EU’s sustainability target, and which legislative instruments should regulate the different aspects of ESG. Moreover, a lack of transparency, accountability and comparability makes it difficult for investors to fully understand the financial risks resulting from the various sustainability-related crises we face, and to proactively look for investment opportunities addressing environmental and social problems.

The 2019 Communication on the European Green Deal is the EU’s response to our current climate and environment-related challenges. This Communication proposes a series of measures and legislative instruments that are intended to transform the EU by 2050 into a modern, resource-efficient and competitive economy, with no net emissions of greenhouse gases, and where economic growth is decoupled from resource use. It also aims to protect, conserve and enhance the EU's natural capital, and to protect the health and well-being of citizens from environment-related risks and impacts. The Green Deal is looking to achieve a socially-just transition to a sustainable economic system by providing a Just Transition Mechanism and Fund, focusing on the regions, sectors and citizens most at risk from this transition.

One of the means to achieve the objectives relating to climate neutrality is the transformation of industry towards a circular economy. With a focus on resource-intensive sectors (like textiles, construction, plastic and electronics), the Circular Economy Action Plan will include a “sustainable products” policy to support the circular design of all products based on a common methodology and common principles, as well as a “right to repair,” and measures to empower consumers to make informed decisions and play an active role in the ecological transition. By prioritizing the reduction and reuse of materials before recycling them, and by fostering new business models with innovative products / services, the Circular Economy Action Plan aims at preventing environmentally harmful products from being placed on the EU market.

In July of this year, the European Commission adopted a package of proposals to make the EU's climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. Besides a proposal for an extended emissions trading system, an effort sharing Regulation, a Regulation on land use, forestry and agriculture, the pack also contains proposed Directives on renewable energy and energy efficiency. By 2030, the European Commission has set the target to produce 40% of the EU’s energy from renewable sources.

As significant investments are required to achieve the climate and energy targets that have already been set for 2030, public and private funding will need to be explored and facilitated. Hence, as one of the first steps in the strategy towards sustainable growth, the European Commission has reviewed the Non-Financial Reporting Directive (2014/95/EU, see below for more details). The disclosure of non-financial information should contribute to the measuring, monitoring and managing of undertakings' performance and their impact on society. In turn, this should allow investors to direct financial and capital flows to green, social and overall sustainable investments.

To further incentivize ESG commitments, investments and sustainable growth, the European legislator has developed a common language and definition of what is considered “sustainable” in the EU Taxonomy Regulation (2020/852). This Regulation, which established a framework to facilitate sustainable investment, will be amended, updated and completed in the course of the coming months and years. Currently, it sets out a classification system for environmentally sustainable activities in relation only to climate change mitigation and climate change adaptation objectives. In the near future, the Regulation will be amended to cover other objectives as well – relating to pollution prevention, the transition to a circular economy, the sustainable use and protection of water, and the protection and restoration of biodiversity and ecosystems.

Finally, on April 21, 2021 the European Commission announced its Sustainable Finance Package, which aims to provide the legal fundaments and framework to create a sustainable financial EU ecosystem. The focus lies on increased transparency and the provision of tools for investors to identify sustainable investment opportunities. Such opportunities have a key role to play in channeling private investment (as a complement to public funding) for the successful transition to a climate-neutral, climate-resilient, fair economy.

As a main game-changer, the Sustainable Finance Package introduces the EU Taxonomy Climate Delegated Act (supplementing the EU Taxonomy Regulation, described above), which makes it clearer which economic activities most contribute to meeting the EU's environmental objectives and which categorizes the activities strongly contributing to preventing and responding to climate change. It aims to help investors in their decision-making process and incentivizes sustainable solutions using science-based criteria. The Delegated Act was officially adopted by the EU at the end of May 2021.

National legislation in Belgium

At a national level, there are also Belgian initiatives that may lead to increased  ESG obligations for companies. A draft bill was introduced in the federal parliament on 2 April 2021 which, if adopted, will create a duty of care and accountability for companies, who will have to ensure compliance with human rights, labor rights and the overall environment for their entire value chain.

In accordance with the proposal, all companies established or active in Belgium will be subject to a general duty of care and a reparation duty. The scope of these respective duties will however depend on the size of the undertaking, the means at its disposal, and the level of risk within the sector or region where the undertaking’s activities take place.

If an undertaking fails to comply with its duty of care or reparation duty, it could be held liable before the civil courts for the damage inflicted upon others as a result of its activities, the activities of its subsidiaries or the activities of third parties which could reasonably have been prevented by the undertaking. Furthermore, administrative sanctions and penalties are foreseen to ensure compliance with this new piece of legislation.

Besides this proposed legislation, the Belgian government has also published its 2020 Climate Pact, as well as a national energy and climate plan 2021-2030, which, among others, aims at restructuring the internal energy market, lowering emissions, increasing energy efficiency and encouraging research, development and innovation in the sectors involved.