Climate change and sustainability - Environmental considerations for a sustainable business model
Businesses are under increasing pressure from society and investors to move from profit maximisation in the short term toward optimisation of the risk and profit profiles in the longer term. Integrating the relevant risk considerations, including those regarding the environment, into their business strategies is therefore key for organisations to continue to thrive and develop a sustainable and resilient business model.
Climate change has arguably become the most important sustainability issue of our time and is a key driver behind other environmental considerations. In order to cut greenhouse gas emissions with a view to “holding the increase in the global average temperature well below 2° above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5° C above pre-industrial levels”, as set in the 2015 Paris Agreement, the 2021 Glasgow Climate Act aims at accelerating action on climate this decade. Under the umbrella of the European Green Deal, the European Commission is taking important steps with the aim of transforming the EU into a modern, resource-efficient and competitive economy. Thus, many EU environmental regulations are currently being recast with the aim of fighting the climate crisis and meeting the EU’s climate target of a 55% cut in emissions by 2030 as a stepping-stone to the binding target of achieving a sustainable and carbon-free economy by 2050, as laid down in the European Climate Law of 30 June 2021.
Below, we will elaborate on three of the major developments in the field of climate and sustainability that inevitably affect the way businesses operate.
Developments in the field of climate, climate change and sustainability
Fit for 55: roadmap for a green transition
In order to achieve the EU’s 55% target by 2030 and climate neutrality by 2050, current greenhouse gas emission levels must drop substantially in the next decades. The EU is therefore working on the revision and update of its climate, energy and transport-related legislation under the 2021 “Fit for 55 package”, with the aim of aligning current laws with these emissions reduction objectives. The Fit for 55 package consists of a series of interrelated proposals, all pursuing the same goal: ensuring a fair, competitive and green transition by 2030 and beyond. Many of the proposals will affect businesses directly or indirectly. Noteworthy are the following initiatives:
- amendments to the EU emission trading system (“EU-ETS”), that should result in an overall emission reduction in sectors concerned of 61% by 2030 compared to emission levels in 2005. The Environment Council adopted a general approach on the revision of the EU ETS on 29 June 2022;
- strengthening of the contribution of the sector falling under the regulation on land use, land use change and forestry (“LULUCF”) to the EU’s increased overall climate ambition, by setting an EU-level target for net removals of greenhouse gases of at least 310 million tonnes of CO² equivalent by 2020, distributed among the member states as a binding target and simplifying the rules on accounting and compliance. The Environment Council adopted a general approach to the revised LULUCF regulation on 29 June 2022;
- increase of the binding annual greenhouse gas emissions targets for member states in sectors not covered by the EU ETS or the LULUCF sector, in order to achieve a 40% reduction in those sectors by 2030. The EU environment ministers agreed on a Council negotiating position about the revised rules on 29 June 2022; Businesses should anticipate amendments to the existing legal framework in the field of environmental law in order to guarantee business resilience in the longer term.
- revision of the Renewable Energy Directive in order to increase the current EU-level target from at least 32% of renewable energy sources in the overall energy mix to at least 40% by 2030, with sectorial sub-targets, in particular in the fields of transport, buildings and industry. EU energy ministers agreed their joint position on the proposal for a revised EU renewable energy directive on 27 June 2022;
- revision of the Energy Efficiency Directive in order to increase the current EU-level target for energy efficiency from 32.5% to 36% for final energy consumption and to 39% for primary energy consumption by 2030, with a focus on accelerating energy efficient efforts by member states, such as increased annual energy savings obligations. The Council adopted its general approach on the proposed new rules on 27 June 2022;
- revision of the existing legislation aiming to accelerate the deployment of infrastructure for recharging or refuelling vehicles with alternative fuels and to provide alternative power supply for ships in ports and stationary aircraft. Under the ReFuelEU Aviation and FuelEU Maritime framework, the EU aims to reduce the aviation and maritime sectors’ environmental footprint by increasing the uptake of greener fuels, such as advanced biofuels and electrofuels). The Council adopted its general approach on the proposed amendments on 2 June 2022;
- revision of rules on CO² emissions for cars and vans with a phase-out of an internal combustion engine for cars or vans by 2035. The Council adopted its general approach on the proposal on 29 June 2022;
- revision of the directive on the taxation of energy products and electricity with the main aim of aligning the taxation of energy products and electricity with the EU’s energy, environment and climate policies and preserving and improving the EU internal market by updating the scope of energy products and the structure of rates and by rationalising the use of tax exemptions and reductions by member states. The current proposal is currently under discussion within the Council;
- introduction of a carbon border adjustment mechanism (“CBAM”) in order to prevent – in full compliance with international trade rules – the emissions reduction efforts of the EU from being offset by increasing emissions outside the EU through relocation of production to non-EU countries with less ambitious climate policies or increased imports of carbon-intensive products. The Council reached agreement on the proposed CBAM on 15 March 2022; and
- setting up a social climate fund to address the social and distributional impact of the proposed new emissions trading system for buildings and road transport by funding support measures of vulnerable households, micro-enterprises and transport users. The Council agreed on its negotiating position for the creation of the social climate fund on 29 June 2022.
Depending on the nature and form of the legislation, the proposed amendments to the existing legislation will have direct or indirect effects on businesses in the EU. They could lead to authorities tightening permit conditions but may also result in more lenient permitting proceedings (e.g. as regards to green energy installations or circular industrial processes). RePowerEU, the European Commission’s plan to make Europe independent from Russian fossil fuels well before 2030 in light of Russia's invasion of Ukraine, contains similar goals. It aims, among other things, to tackle slow and complex permitting for major renewable projects, and to introduce a targeted amendment to the Renewable Energy Directive in order to recognise renewable energy as an overriding public interest. Businesses should anticipate those amendments to the existing legal framework in the field of environmental law in order to guarantee business resilience in the longer term. It also provides an opportunity to rethink existing processes and make use of more flexible permitting and other regimes that are being put in place.
Circular business models
An important pillar of the EU’s Green Deal is the Circular Economy Action Plan, which focuses on the life cycle of products. It targets how products are designed, promotes circular economy processes, encourages sustainable consumption, and aims to ensure that waste is prevented and the resources used are kept in the EU economy for as long as possible.
On 30 March 2022, the Commission presented a package of proposals to make sustainable products the norm in the EU, boost circular business models and empower consumers for the green transition. This includes the Sustainable Products Initiative (including the proposal for the Ecodesign for Sustainable Products Regulation), a revision of the Industrial Emissions Directive, and a legislative proposal for substantiating green claims made by companies. An important and radical part of the proposal regarding the Industrial Emissions Directive is that the companies and competent authorities will have to assess the feasibility of demanding the lowest level of emission.
The Commission is additionally reviewing the Packaging Waste Directive and the Waste Framework Directive. Current focus point is the reduction of plastics, including micro plastics, packaging and single-use plastics. Action on plastics was identified as a priority in the Circular Economy Action Plan. The EU Strategy for Plastics in the Circular Economy aims at transforming the way plastic products are designed, used, produced and recycled in the EU. We expect this to have a major impact on the European recycling industry in general and the plastics sector in particular.
The Single Use Plastic Directive also materialises this ambition. This directive promotes circular approaches that give priority to sustainable and non-toxic re-usable products and re-use systems rather than to single-use products, aiming to reduce the quantity of waste generated. It tackles in particular the ten single-use plastic items most commonly found on Europe’s beaches, given that marine litter is a growing global problem.
All the above initiatives aim at reinforcing circular business models, affecting how products are designed, used and disposed of in the EU. As waste legislation can be a hindrance in circular projects, we believe this should also be addressed in the legislative proposals.
Reporting and due diligence obligations throughout the entire supply chain
A third important development relates to the increasing reporting and due diligence obligations of companies regarding their environmental performance, among other things, with the aim of supporting sustainable business strategies and creating a level playing field.
On 21 April 2021, the European Commission adopted its Sustainable Finance Package, an ambitious and comprehensive set of measures to help improve the flow of investments towards sustainable economic activities across the EU. The EU Taxonomy, a part of this package, makes it clearer which economic activities can be considered environmentally sustainable, by introducing a classification system in the EU and establishing a list of environmentally sustainable activities to meet objectives such as climate change mitigation and pollution prevention and control.
The Climate Delegated Act of 9 December 2021, applicable since January 2022, entails the first set of technical screening criteria to define which activities contribute substantially to climate change adaptation and climate change mitigation. On 9 March 2022, the Commission adopted a Complementary Climate Delegated Act, including, under strict conditions, specific nuclear and gas energy activities in the list of economic activities covered by the EU taxonomy. The Complementary Climate Act will apply as of January 2023.
In addition, as part of its Sustainable Finance Package, the Commission adopted a proposal for a Corporate Sustainability Reporting Directive (“CSRD”). The CSRD will amend the existing reporting framework of the Non-Financial Reporting Directive (“NFRD”), which includes reporting obligations on environmental issues. The directive will extend these reporting obligations to all large companies and all companies listed on regulated market and introduce more detailed reporting requirements. Moreover, the directive envisages the adoption of EU sustainability reporting standards, developed by the European Financial Reporting Advisory Group.
On 23 February 2022, the Commission adopted a proposal for a directive on corporate sustainability due diligence to that end. The directive will set out a horizontal framework in the EU to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and through their value chains, by identifying, preventing, mitigating and accounting for their adverse human rights and environmental impacts, and having adequate governance, management systems and measures in place. In particular, the directive will:
- improve corporate governance practices to better integrate risk management and mitigation processes of human rights and environmental risks and impacts, including those stemming from value chains, into corporate strategies;
- avoid fragmentation of due diligence requirements in the single market and create legal certainty for businesses and stakeholders as regards expected behaviour and liability;
- increase corporate accountability for adverse impacts, and ensure coherence for companies regarding obligations under existing and proposed EU initiatives on responsible business conduct;
- improve access to remedies for those affected by adverse human rights and environmental impacts of corporate behaviour;
- being a horizontal instrument focussing on business processes, applying also to the value chain, this directive will complement other measures in force or proposed, which directly address some specific sustainability challenges or apply in some specific sectors, mostly within the Union.
The abovementioned developments are only some of the major developments in the field of environmental law in the transition toward a sustainable and carbon-free economy and are therefore key to any sustainable business model. The topics are complex and require a thorough knowledge of the existing legal framework, the upcoming tendencies as well as the correlation between the different issues.
We at Stibbe have the necessary experience, expertise and capacity to guide businesses in this exciting journey towards a sustainable future-proof business model.