Regional Summary: Europe

Introduction: Climate commitment resulting in growing regulation

The EU has taken an ambitious stance on creating a net zero economy, enshrining the need to tackle climate change in its constitution and declaring that it wants to be the first ‘climate-neutral continent’ by 2050[1] . This has resulted in a constant wave of new regulation governing how companies approach, and report on, their net zero transition.

While no longer a member of the EU, the UK has similarly transposed its net zero ambitions into law and created a series of new regulations requiring companies to report on climate impact, noted the late Emily Webster, Assistant Professor of Environmental Law at the University of Cambridge.

Regulation across Europe is increasingly prescriptive about the information companies need to report and becoming mandatory for an ever-larger group of companies. A recent extension to EU law, requiring medium-sized companies with over 250 employees and all listed companies to report on their climate impacts, means that almost 50,000 EU companies (plus 10,000 non-EU companies) will be required (starting from 2024) to produce reports, according to Sabrina Bruno, Professor of Private Comparative Law at the University of Calabria.

Board directors need to keep pace with all the different regulations that are coming into force and how they are applied in different EU member states, not to mention differing regulatory requirements in non-EU members states such as Switzerland and the UK. There may be slight differences in requirements between individual member states, according to Simon Learmount, Associate Professor in Corporate Governance at Cambridge Judge Business School, resulting from individual member states not adopting these changes into national law in exactly the same way. They may not have adopted them at the same time due to the timing of elections or other political factors, added Jolene Lin, Associate Professor at the National University of Singapore.

Directors’ risks & responsibilities

For board directors, the recent pace of regulatory development has resulted in growing uncertainty about their responsibilities, or what the risks are, Webster told delegates. This uncertainty has been further exacerbated by the ongoing war in Ukraine and the need to verify companies’ own, partner, client and supply chain compliance with sanctions against Russia, added Marianna Kozintseva, Founder & CEO of Turning Point Macro & Visiting Faculty at the SKBI Institute for Financial Economics, Singapore Management University. There has also been a limited sense from regulators about the ‘direction of travel’, indicating what the regulatory landscape might look like in five to ten years’ time, making it hard to plan. However, it is clear that companies will be required to deliver more substantive action on climate and have clear targets in place to reach net zero greenhouse gas emissions.

Michael Hilb, Titular Professor at the University of Fribourg, was concerned that – with growing complexity – there was a risk that ESG became a technical or functional topic at board level, delegated to the general counsel or a sustainability specialist. Markus Gehring, Associate Professor, Faculty of Law, University of Cambridge and Director of Studies for Law at Hughes Hall agreed, saying that it needed to be treated as a strategic priority by the full board.

Belinda Bell, Senior Research Associate at Jesus College, University of Cambridge felt directors needed to educate themselves about ESG issues and what is being expected of them to ensure action. Bell also cautioned about the danger of what she termed ‘pluralistic ignorance’ on boards, which can make companies slow to act. Members of a group believe that those around them think differently about an issue, so fail to speak about it and never discover that there is much greater consensus than they believe.

Martin Nerlinger, Assistant Professor at the University of St. Gallen, observed that financial markets have become increasingly attuned to the challenges posed by climate change, recognising its potential risks to businesses. This heightened awareness has led to active engagement with corporate board members to ensure that climate-related issues are adequately addressed in business strategies and operations. While it is the board’s responsibility to mitigate climate risks, it also plays a pivotal role in identifying and promoting opportunities for impact investing and sustainable value creation, aligning financial interests with environmental and social goals.

Growing threat of litigation

Speakers commented on the growing amount of climate litigation across Europe and the potential for this to set significant precedents and create new risks.

Lin pointed to the case brought against RWE AG, in which a Peruvian farmer argued that, as a major polluter and user of fossil fuels, RWE AG was responsible for an increased incidence of flooding in his village. Whilst, at €20,000, the damages were relatively low, the case sets a precedent that companies can be held to account for their impact if deemed ‘imminent enough’, even if that impact is outside the jurisdiction where the company operates.

Meanwhile, Learmount noted that Client Earth’s case against Shell, while not allowed to proceed, has shown that stakeholders will look to hold directors personally liable for a company failing to go far or fast enough to decarbonise its business.

For Bell, the rise in litigation could have a positive outcome, stimulating companies to make changes to their operations. However, directors need to act quickly to assess their business strategy in light of growing litigation, identify potential risks and work to address them.

International reach

Not only is the amount of regulation on climate change growing, but its scope is also expanding significantly, covering large parts of an organisation’s supply chain and with implications for companies in other regions that supply European companies.

Increasingly stringent reporting requirements, particularly in relation to the EU Green Taxonomy, will mean that European companies will be requesting more and ever better quality data of their partners, Gehring told delegates. The Carbon Border Adjustment Mechanism, or CBAM, places a tariff on carbon-intensive products for use in the EU wherever they may be produced, while anti-deforestation regulation aims to prevent deforestation associated with production of a wider range of products, including cacao, soy and palm oil. Both will result in increased scrutiny from European companies about how the goods and raw materials they buy are produced.

For companies selling into Europe, compliance with these regulations comes at a cost, which they may decide is more or less justifiable depending on the volume of business they conduct in Europe. But the implications are not purely commercial. Speakers worried that in some ways European regulation was setting the requirements for other regions. Bell noted that the European approach did not necessarily align with the need to prioritise social issues and a just transition seen in other regions, such as Africa. Gehring highlighted that alignment with the Paris Agreement on Climate Change was a global effort and emphasised the efforts made by the EU to cooperate and collaborate on this issue.

More reporting on the horizon

There is no let-up in the pace of reporting requirements. The EU’s new European Sustainability Reporting Standards (ESRS) will come into effect in early 2025 and cover the reporting of 2024 results, according to Michael Willis, Management Practice Associate Professor at Cambridge Judge Business School. In January 2023, the new EU Corporate Sustainability Reporting Directive (CSRD)[2] entered into force. There are also expected to be new corporate governance principles in the UK from 2025, Learmount noted, prompting changes to the Companies Act. Learmount also speculated that directors in the UK may be made responsible to all their stakeholders, not just shareholders. Again, the UK changes extend the reach of regulation to a broader group of medium-sized enterprises.

Conclusion 

Regulatory change supporting the transition to a net zero economy has come thick and fast in Europe, resulting in a complex range of obligations for companies and private individuals alike. Board directors must actively work to stay on top of these changes and ensure they are not exposed to  growing litigation risks. They also need to be aware of how European regulation has broad-reaching implications for company supply chains that stretch far beyond the boundaries of the European continent.

[1] https://climate.ec.europa.eu/eu-action/climate-strategies-targets/2050-long-term-strategy_en#:~:text=The%20EU%20aims%20to%20be,action%20under%20the%20Paris%20Agreement%20.

[2] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2464

Acknowledgements

This summary is based on expert contributions to the International conference on ESG and Climate Governance from:

• Belinda Bell, Senior Research Associate at Jesus College, University of Cambridge
• Sabrina Bruno, Professor of Private Comparative Law at the University of Calabria
• Kornelia Fabisik, Assistant Professor of Finance at the University of Bern
• Markus Gehring, Associate Professor, Faculty of Law, University of Cambridge and Director of Studies for Law at Hughes Hall
• Michael Hilb, Titular Professor at the University of Fribourg
• Marianna Kozintseva, Founder & CEO at Turning Point Macro & Visiting Faculty at the SKB Institute for Financial Economics, Singapore Management University
• Simon Learmount, Associate Professor in Corporate Governance at Judge Business School, University of Cambridge
• Jolene Lin, Associate Professor at the National University of Singapore
• Martin Nerlinger, Assistant Professor at the University of St Gallen
• Martin Steinfeld, Affiliated Lecturer in EU law and Charnley Fellow at Hughes Hall, University of Cambridge
• Emily Webster, Assistant Professor of Environmental Law and Law Fellow at Queen’s College, University of Cambridge ^(†)
• Michael Willis, Management Practice Associate Professor at Judge Business School, University of Cambridge