What are the main drivers of ESG regulations?
The EU has led the development of sustainability and ESG measures in Europe under the EU Green Deal. These measures are to a large extent being followed by the UK but since Brexit the UK no longer adopts EU legislation; the pace and standards between the EU 27 member states and the UK will differ as a result. The EU Green Deal sets out a package of measures to reorient financial flows and set a path for the EU to reach its net-zero targets. The package of measures include a climate law committing the EU to being climate neutral by 2050, a classification system for environmentally sustainable activities, the Taxonomy Regulation, an EU Green Bond Regulation, directives for the fund industry, the Sustainable Finance Disclosure Regulation (SFDR), corporate reporting, the Corporate Sustainability Reporting Directive (CSRD), requirements for companies to incorporate sustainability into their business, the Corporate Sustainability Due Diligence Directive (CSDDD), proposed regulations on ‘Green Claims’ and ESG rating agencies. Ireland, like all EU member states, is required to implement and apply each of the EU directives and regulations.
What are the specific ESG reporting requirements in Ireland?
This summary is intended as an overview of ESG reporting requirements in Ireland and is not exhaustive, as other sector-specific requirements may apply.
Financial disclosure
The EU Green Taxonomy Regulation (EU 2020/852) defines environmentally sustainable activities. The taxonomy guidance has recently been updated to include, amongst other things, four new environmental objectives such as pollution prevention1.
The Sustainable Finance Disclosure Regulation (EU 2019/2088) (‘SFDR’) supplements the taxonomy by prescribing disclosure of sustainability related information for asset managers and financial investments. In Ireland, financial market participants providing SFDR-regulated products and financial advisors advising on such products are required to disclose information, including:
- the way sustainability risks are integrated into investment decisions and their likely impact on returns of investment products; and
- where a product promotes environmental and/or social characteristics, or sustainable investment as its objective, information on how such criteria are met.
Sustainability reporting by companies
The Non-Financial Reporting Directive (EU 2013/34) (‘NFRD’) established ‘non-financial’ reporting obligations for certain companies2. A director that fails
to comply shall be liable to a fine not exceeding €5,000 or up to six months imprisonment, or both.
The Corporate Sustainability Reporting Directive (EU 2022/2464) (‘CSRD’) expands the scope of sustainability reporting obligations of large corporates (250+ employees/€50m turnover/€25m balance sheet) in particular by requiring them to include disclosure in a dedicated section of their management report on sustainability matters affecting the businesses development, performance and position including upstream and downstream value chains. For Irish companies already covered by the NFRD, first reporting under the CSRD is in 2025 for financial year 2024. Further phased-in implementation will occur for other companies. The CSRD requires companies to provide information on how sustainability matters affect the company and the impact of the company’s activities on the environment and people. SMEs within a large corporate’s value chain will be indirectly caught by sustainability reporting requirements under CSRD which will lead to increased focus on sustainability matters for SMEs. The European Financial Reporting Advisory Group (EFRAG) has developed reporting standards and guidance to be used by corporates in order to assist with implementation and standardisation of reporting. These have been prepared to ensure a high degree of interoperability with international reporting standards developed by the International Sustainability Standards Board (ISSB).
A proposal for a Corporate Sustainability Due Diligence Directive (2022/0051/COD) (‘CSDDD’) has been provisionally agreed on pending adoption by the European Parliament and the Council. This directive would establish a duty on specific Irish companies to identify, prevent, mitigate and account for their negative human rights and environmental impacts. The CSDDD is expected to be adopted this year and member states will have two years to implement it into national law.
In the banking, insurance and funds sector, sustainability and ESG-related risks are now priority issues for regulators for the supervision and prudential
regulation of financial market participants as these key transmission channels have the capacity to impact on the resilience and orderly functioning of the financial system.
How can corporations integrate environmental, social, and governance (ESG) measures effectively?
Addressing environmental, social, and governance reporting and sustainability can be challenging for companies, dependent on a company’s scale, sector, and state of readiness or sustainability awareness. At the outset an analysis and understanding of the company’s core sustainability impacts and metrics is needed, in terms of greenhouse gas (GHG) emissions, energy consumed in KWh, waste/pollution generated in tonnes, water usage in M3. How the company manages its societal impacts, treatment of workers, value chain workers and communities. From a governance perspective it is a question of how those impacts are controlled, managed, policies implemented and understood by management and employees. Once a business understands its principal impacts it can then consider its sustainability strategy, targets and an implementation plan formulated to minimise its impacts. Target setting and reporting forms a key part of any sustainability strategy and businesses need to consider the use of auditing and verification of its target setting and if science-based targets (SBTi) are to be adopted.
What specific measures are Irish companies expected to take concerning climate change?
Companies in certain high-emitting sectors are subject to the EU Emissions Trading Scheme (EU ETS), which will be expanded to the built environment, road transport and other specific sectors in 2027. As free allowances are reducing under the EU ETS, companies need to reduce emissions internally by undertaking voluntary action, such as setting and meeting SBTi approved or aligned targets.
All companies but especially those in the retail and manufacturing sectors should be aware of the forthcoming EU Green Claims Directive, which aims to ensure credible environmental labels, and claims backed by verified evidence. These requirements are expected to apply from 2026, subject to the timeline of EU negotiations. Non-compliance could result in penalties up to 4% of annual turnover. Additionally, the EU plans to ban certain environmental claims such as ‘carbon neutral’ by 2026, unless companies can validate their accuracy.
Climate litigation and greenwashing claims have become more common through shareholder activism and direct litigation related to sustainability reporting, sustainability commitments or claims made by businesses or in relation to products. Recently, the Compliance Institute conducted a survey which found that 38% of respondents would avoid or are avoiding products from companies engaging in greenwashing. Also, in Ireland there have been examples of strategic litigation. For example, the Friends of the Irish Environment succeeded in a case against the Irish Government where they challenged the adequacy of the government’s National Mitigation Plan.
What about carbon credits – are these regulated, and is there a concern about greenwashing?
Corporates looking to meet net-zero targets are also increasingly considering the purchase of high-quality carbon credits to complement their internal decarbonisation efforts. Carbon credits are not currently regulated but this is likely to evolve as demand for financial instruments relating to carbon increases. At COP28, the parties did not reach consensus on the rules for the UN-regulated market under Article 6.4 of the Paris Agreement, meaning that market will not now be operational until 2025 at the earliest. Increasingly, the voluntary carbon market is operating under robust frameworks developed by global standard-setting bodies including ICROA, ICVCM and VCMI relating to the integrity of credits (and their issuance process), and the claims that may be made by corporates about the use of carbon credits.
It is sometimes thought that companies buying carbon credits are doing so in lieu of decarbonising their own value chains. However, a 2023 report by Ecosystem Marketplace, amongst other studies, indicates companies using carbon credits are 1.8 times more successful in decarbonising. While the voluntary carbon market was affected by negative publicity in 2023, the year ended on a high with historic numbers of credits retired by corporates such as Shell and Volkswagen.
What should companies watch for in the compliance and voluntary spheres?
In addition to the legislative developments noted above, companies that are interested in investing in carbon removals should note the EU’s draft Carbon Removal Certification Framework which aims to instil trust in certified carbon removals. Carbon removal is expected to increase in importance as a means to neutralise residual unabated emissions and is being supported by government incentives such as the US Inflation Reduction Act.
Further, the World Economic Forum has reported that most of the world’s top 500 companies have set climate-related targets, only 5% have set biodiversity targets. The taskforce on nature-related financial disclosures provides voluntary recommendations that align sustainability reporting with biodiversity goals, offering a n opportunity for companies to address nature-related risk measurement and management.
Notes
- Delegated regulation – EU – 2023/2486 – EN – EUR-Lex (europa.eu).
- S.I. No. 360/2017 – European Union (Disclosure of non-financial and diversity information by certain large undertakings and groups) Regulations 2017. (irishstatutebook.ie); S.I. No. 410/2018 – European Union (Disclosure of non-financial and diversity information by certain large undertakings and groups) (Amendment) Regulations 2018 (irishstatutebook.ie).