Charting a path through Europe’s sustainability landscape

The possibility of businesses gaming the system and “greenwashing” their operations saw the EU introduce its taxonomy to classify economic activities that are deemed sustainable. This work has proved controversial however, prompting intense debate over the inclusion of energy sources such as gas and nuclear on the approved list.

Among our interviewees, Net Zero transition plans – which feature in several regulatory frameworks, including the Corporate Sustainable Reporting Directive, and are designed to ensure businesses are aligned to the goals of the Paris agreement – were seen by many as the next big challenge they face.

Transition plans represent next big challenge for business

Jurei Yada, Progamme Leader for sustainable finance at climate change think tank E3G, said: “Until now, the EU has been focused on defining ‘green’, but these activities represent just 10% of the economy. The focus is now shifting to transition planning and creating a regulatory framework to guide businesses and investors through the path to Net Zero. Exactly how this debate will play out is likely to become clearer in the next EU mandate, when the technical implementation of transition planning is expected to take shape, including where this meets prudential regulation.”

Our survey revealed that global businesses recognise the strategic importance of sustainability and Net Zero – and are diverting significant investment into planning and implementing sustainability initiatives – but remain unconvinced as to the efficacy of their efforts.

According to our survey, 45% of businesses were investing time, resources and budget in environmental sustainability – including climate disclosures and initiatives to reduce emissions. Just over half (53%) of our respondents were confident that they would achieve their strategic aims, with only 29% saying they were very confident.

Lack of preparation among businesses for forthcoming regulations

Overall, fewer than one in four (24%) of the leaders we questioned said their businesses were well prepared to meet the expected requirements of the CSDDD, possibly because of the difficulty in seeing through their supply chains to get an accurate picture of what’s going on, and, more fundamentally, mitigating any negative impacts.

Our survey also revealed that fewer than one in five (14%) respondents felt well prepared to deliver environmental reporting between global regions that differ in their approach (eg the U.S. and the EU).

In recent years there has been a backlash against ESG investing among Republican states including Kentucky, Texas, Florida and Kansas. Several state attorneys general have launched investigations into whether actions by groups of banks to deny some companies access to services based on their environmental records amount to anticompetitive co-ordination and violate consumer protection laws. There has also been legislation forcing state-sponsored pension funds to divest from entities deemed to be promoting ESG goals, and bills passed requiring government investors to base their decisions only on “pecuniary factors”, often defined to exclude ESG analysis.

Against this backdrop, many global organisations feel under pressure to disclose less about their ESG activities at the same time as European regulations have been requiring ever more specific sustainability information (the Financial Times has highlighted a study of U.S. asset managers in which 30 per cent said they were going to be more circumspect about their ESG-related activities in future public documents). Any asymmetry is a potential source of litigation, with plaintiffs pursuing businesses where they see inconsistencies in reporting.

The increase in sustainability data set to be published under the CSRD – and national duty of vigilance laws – is set to make Europe a more active destination for sustainability-related litigation in future.

The latest research from the Sabin Center for Climate Change Law reveals a steady uptick in climate claims against businesses in Europe, with hotspots in France, Germany and the Netherlands. The Dutch courts in particular have heard a number of high-profile cases, including in 2021 when a judge ordered Shell to slash its carbon emissions by 45% relative to their 2019 levels within a decade (the decision is currently pending an appeal).

The ruling is important because it applies not only to the company’s own emissions but also those created by the use of Shell’s products, and was the first time a court had ordered a business to reduce its carbon output in line with Paris agreement. With the CSRD requiring large organisations to publish transition plans expressly aligned with the Paris goals, more such cases could arise in the future.

Claims are also being brought in Europe under consumer protection and advertising laws, as well as the EU’s Unfair Commercial Practices Directive. Here, lawsuits are testing whether consumers fully understand concepts such as “climate neutrality” or “Net Zero”, which often involve the reduction or offsetting of emissions rather than their eradication. We are also seeing claimants pushing companies to disclose the negative impacts of their operations, instead of simply focusing on the positives.

Net Zero disclosures are increasingly a trigger for greenwashing claims, with energy majors and mining companies targeted over whether their environmental commitments are misleading given their current fossil fuel investments. The EU legislature also introduced the Green Claims Directive to address false environmental claims relating to the environmental aspects of a product or a business itself. Under these rules, companies can only mention offsetting schemes if they have already cut their emissions substantially and only use the schemes for residual emissions. Any carbon credits generated by offsetting schemes will also have to be certified under the EU’s Carbon Removals Certification Framework, which is currently being negotiated. (You can read more about decarbonisation disputes in Europe here.)

Our survey revealed a global business community that is not only underprepared to track and disclose its environmental impact across the world, but also one lacking confidence in the systems it has in place to manage the risks associated with ESG activism and the uptick in sustainability-related class actions.

While 70% of global businesses reported that they had systems in place to mitigate the risk of ESG activism and climate-related mass claims, fewer than three in five (57%) of our respondents were confident these systems mitigated those risks effectively – with only 27% very confident.

Some analysts have predicted that a Parliament with more far-right representation could see the EU’s sustainability rules loosened over the next five-year term. If this in turn causes businesses to backslide on their own low carbon ambitions, it could see an even more hostile litigation landscape as NGOs and civil society groups attempt to redress the balance.

Others have proposed a less-pessimistic outlook, whereby politicians remain convinced of the energy security benefits of increasing renewable investment and reframe Net Zero in the context of job creation. And as our survey shows, many businesses remain committed to Net Zero and recognise the opportunities it brings.