7 things businesses should know about climate change and the law

We have gathered here some of the most important legislative initiatives that tackle the climate change challenge. These initiatives affect the way business need to operate in the future.

Net Zero Industry Act proposal – Tackling Climate Change

1.1 Background for the proposal

Net Zero Industry Act is a proposal for a Regulation of the European Parliament and of the Council on establishing a framework of measures for strengthening Europe’s net-zero technology products manufacturing ecosystem and tackling climate change by this way. Background for the proposal is that the global market for key mass manufactured net-zero technologies is set to triple by 2030 with an annual worth of around EUR 600 billion.

Net-zero energy technologies are at the centre of strong geostrategic interests and at the core of the global technological race. Countries are keen to secure their supply in the most advanced energy production technologies and drive the clean transition. It will create better conditions to set up net-zero projects in Europe and attract investments, with the aim that the European Union’s overall strategic net-zero technologies manufacturing capacity approaches or reaches at least 40% of the European Union’s deployment needs by 2030.

The Regulation proposal set to pursue the general objective of setting up a legal framework which supports the development of the manufacturing of net-zero energy technologies in the European Union, in order to support the Union’s 2030 decarbonisation targets and 2050 climate neutrality target and to ensure the security of supply for net-zero technologies needed to safeguard the resilience of the European Union’s energy system.

The legal basis for the proposal Regulation is Article 114 of the Treaty on the Functioning of the European Union (‘the Treaty’), which provides the adoption of measures to ensure the establishment and functioning of the internal market.

1.2 Facilitating investments to the net-zero technologies

The general objective of net-zero energy technologies translates into specific objectives of facilitating investments for net- zero technologies, reducing CO2 emissions, facilitating access to markets, enhancing skills for quality job creation in net-zero technologies, supporting innovation and creating a specific structure for implementing these objectives both in terms of governance and of monitoring.

The proposal is designed to strengthen Europe’s net-zero technologies manufacturing ecosystem via measures to facilitate investments, incentivise demand and up- and re-skill Europe’s labour force.

The proposed legislation addresses technologies that will make a significant contribution to decarbonisation. These include: solar photovoltaic and solar thermal, onshore wind and offshore renewable energy, batteries and storage, heat pumps and geothermal energy, electrolysers and fuel cells, biogas/biomethane, carbon capture, utilisation and storage, and grid technologies, sustainable alternative fuels technologies, advanced technologies to produce energy from nuclear processes with minimal waste from the fuel cycle, small modular reactors, and related best-in-class fuels. The Strategic Net Zero technologies will receive particular support and are subject to the 40% domestic production benchmark.

  1. Taxonomy Regulation 2020 – (Regulation (EU) 2020/852) – Solving Climate Change

Sustainability and the transition to a safe, climate-neutral, climate-resilient, more resource-efficient and circular economy are crucial to ensuring the long-term competitiveness of the European Union economy. One of the objectives set out in this action plan is to reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth.

The action plan recognises that the shift of capital flows towards more sustainable activities has to be underpinned by a shared, holistic understanding of the environmental sustainability of activities and investments.

2.1 Guidance to investors – How climate change affects investing

As a first step, clear guidance on activities that qualify as contributing to environmental objectives would help inform investors about the investments that fund environmentally sustainable economic activities. Further guidance on activities that contribute to other sustainability objectives, including social objectives, might be developed at a later stage.

The criteria for determining whether an economic activity qualifies as environmentally sustainable should be harmonised at European Union level in order to remove barriers to the functioning of the internal market with regard to raising funds for sustainability projects, and to prevent the future emergence of barriers to such projects. To avoid harming investor interests, fund managers and institutional investors that make available financial products should disclose how and to what extent they use the criteria for environmentally sustainable economic activities to determine the environmental sustainability of their investments.

The information disclosed should enable investors to understand the proportion of the investments underlying the financial product in environmentally sustainable economic activities as a percentage of all investments underlying that financial product, thereby enabling investors to understand the degree of environmental sustainability of the investment.

Where the investments underlying the financial product are in economic activities that contribute to an environmental objective, the information to be disclosed should specify the environmental objective or objectives to which the investment underlying the financial product contributes, as well as how and to what extent the investments underlying the financial product fund environmentally sustainable economic activities, and should include details on the respective proportions of enabling and transitional activities.

  1. SFDR 2019 Regulation – Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088)

This Regulation aims to reduce information asymmetries in principal‐agent relationships with regard to the integration of sustainability risks, the consideration of adverse sustainability impacts, the promotion of environmental or social characteristics, and sustainable investment, by requiring financial market participants and financial advisers to make pre‐contractual and ongoing disclosures to end investors when they act as agents of those end investors (principals).

Furthermore, this Regulation requires financial market participants and financial advisers which provide investment advice or insurance advice with regard to insurance‐based investment products (IBIPs), regardless of the design of the financial product and the target market, to publish written policies on the integration of sustainability risks and ensure the transparency of such integration.A sustainability risk means an environmental, social or governance event or condition that, if it occurs, could cause a negative material impact on the value of the investment, as specified in sectoral legislation, in particular in Directives 2009/65/EC, 2009/138/EC, 2011/61/EU, 2013/36/EU, 2014/65/EU, (EU) 2016/97, (EU) 2016/2341, or delegated acts and regulatory technical standards adopted pursuant to them.

  1. Green Bonds 2023 proposal

The EU is taking further steps to implement its strategy on financing sustainable growth and the transition to a climate-neutral, resource-efficient economy. Negotiators of the Council and the European Parliament reached a provisional agreement on the creation of European green bonds (EuGB).

Environmentally sustainable bonds are one of the main instruments for financing investments related to green technologies, energy efficiency and resource efficiency as well as sustainable transport infrastructure and research infrastructure.

Under the provisional agreement, all proceeds of EuGBs will need to be invested in economic activities that are aligned with the EU taxonomy, provided the sectors concerned are already covered by it. For those sectors not yet covered by the EU taxonomy and for certain very specific activities there will be a flexibility pocket of 15%. In particular, issuers of EuGBs would need to ensure that at least 85% of the funds raised by the bond are allocated to economic activities that align with the Taxonomy Regulation.

This is to ensure the usability of the European green bond standard from the start of its existence. The use and the need for this flexibility pocket will be re-evaluated as Europe’s transition towards climate neutrality progresses and with the ever-increasing number of attractive and green investment opportunities that are expected to become available in the coming years. The Regulation also creates a regime for the registration and supervision of external reviewers. External reviewers play an important role in the market by assessing green bonds in detail and providing confirmation to investors about their environmental credentials.

The EU and its member states are the largest provider of public climate finance in the world, with €2304 billion provided in 2021.

The European Green Deal further underlined the need to mobilise private financial and capital flows to green investments.

  1. CSRD 2022 Directive – Corporate Sustainability Reporting (Directive (EU) 2022/2464)   

The requirement provided for in this Directive is that also large undertakings whose securities are not admitted to trading on a regulated market in the European Union should disclose information on sustainability matters is mainly justified by concerns about the impacts and accountability of such undertakings, including through their value chain. In this respect, all large undertakings should be subject to the same requirements to report sustainability information publicly. In addition, financial market participants also need information from those large undertakings whose securities are not admitted to trading on a regulated market in the European Union.

Furthermore, the requirement provided for in this amending Directive is that third-country undertakings whose securities are admitted to trading on a regulated market in the European Union should also disclose information on sustainability matters. This requirement is aimed at responding to the needs of financial market participants for information from such undertakings in order to enable them to understand the risks and impacts of their investments and to comply with the disclosure requirements laid down in Regulation (EU) 2019/2088.

5.1 Requirements for small and medium-sized undertakings

Therefore, the provisions on corporate sustainability reporting as regards small and medium-sized undertakings, except micro undertakings, whose securities are admitted to trading on a regulated market in the European Union should apply for financial years starting on or after 1 January 2026. Following that date, for a transitional period of two years, small and medium-sized undertakings whose securities are admitted to trading on a regulated market in the European Union should have the possibility of opting-out from the sustainability reporting requirements laid down in this amending Directive, provided they briefly state in their management report why the sustainability information has not been provided.

From 2024, large companies will need to publicly disclose information on the way they operate and manage social and environmental risks. The new EU sustainability reporting requirements will apply to all large companies (with over 250 employees and a 40-million-euro turnover), whether listed or not. Non-EU companies with substantial activity in the EU market (150 million euro in annual turnover in the EU) will have to follow equivalent reporting rules.

  1. NFRD – Non-Financial Reporting Directive – Directive 2013/34/EU

Large undertakings which are public-interest entities exceeding on their balance sheet dates the criterion of the average number of 500 employees during the financial year shall include in the management report a non-financial statement. Therefore, in order to enhance the consistency and comparability of non-financial information disclosed throughout the European Union, these undertakings should prepare a non-financial statement containing information relating to at least environmental matters, social and employee-related matters, respect for human rights, anti-corruption and bribery matters.

Such statements should include a description of the policies, outcomes and risks related to those matters and should be included in the management report of the undertaking concerned. The non-financial statement should also include information on the due diligence processes implemented by the undertaking, also regarding, where relevant and proportionate, its supply and subcontracting chains, in order to identify, prevent and mitigate existing and potential adverse impacts. It should be possible for Member States to exempt undertakings which are subject to this Directive from the obligation to prepare a non-financial statement when a separate report corresponding to the same financial year and covering the same content is provided.

6.1 When preparing a non-financial statement

Where undertakings are required to prepare a non-financial statement, that statement should contain, as regards environmental matters, details of the current and foreseeable impacts of the undertaking’s operations on the environment, and, as appropriate, on health and safety, the use of renewable and/or non-renewable energy, greenhouse gas emissions, water use and air pollution.

As regards social and employee-related matters, the information provided in the statement may concern the actions taken to ensure gender equality, implementation of fundamental conventions of the International Labour Organisation, working conditions, social dialogue, respect for the right of workers to be informed and consulted, respect for trade union rights, health and safety at work and the dialogue with local communities, and/or the actions taken to ensure the protection and the development of those communities.

With regard to human rights, anti-corruption and bribery, the non-financial statement could include information on the prevention of human rights abuses and/or on instruments in place to fight corruption and bribery.

  1. Are you already using climate aligned clauses in your contracts?

Are you aware that there already exists climate aligned contractual clauses? Currently there are ongoing projects which aim to draft contractual clauses ready to be used on business contracts.

These clauses are practical contractual clauses ready to incorporate into law firm precedents and commercial agreements to deliver climate solutions. These projects aim to work with lawyers to ensure effective and impactful implementation of the clauses across industries, practice areas and jurisdictions.

Initiations to tackle climate change are also affecting how business lawyers should draft and advise their clients. If you are interested to hear more how your business can implement and apply efficiently climate aligned contract clauses, please do not hesitate to contact our specialists for further practical advice.

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Contact our experts, Liene Krumina or  Oscari Seppälä in the subject area. We will be happy to tell you more about our expertise and how we can successfully solve your challenges related to climate change and business law.

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** The article is for information and not as a legal advice.