Brief introduction to European legislation on "ESG" - Environmental, Social and Corporate Governance

The steps

European legislation regarding environmental, social and governance’s goals for companies dates back in particular to the last decade and has developed mainly since 2015, following the European Union’s signing and ratification of the Paris Agreement[1].
The most significant European Union measures on the topic are listed below.

1 – Communication of the European Commission of 8 March 2018, entitled "Action Plan for Financing Sustainable Growth".

This document is based on the final report of a group of experts appointed by the European Commission, and presents the measures aimed at achieving the objectives of European promotion for a so-called "sustainable finance", defined as the investment that, in the decision-making process, takes into due consideration, environmental and social factors.

Specifically, the action plan aims to:

  • redirect capital flows towards sustainable investments in order to achieve sustainable and inclusive growth;
  • manage financial risks arising from climate change, resource depletion, environmental degradation and social issues;
  • promoting transparency and long-term vision in economic and financial activities.

The Commission emphasizes the need for a unified European taxonomy for the definition of 'sustainability' and the creation of EU labels for sustainable financial products.


2 – European Commission Communication of 11 December 2019, called “European Green Deal”.

This document renews the intentions of the 2018 Commission Communication and represents the new growth strategy of the European Union.

The proposed strategy aims to make the EU 'carbon-neutral' by 2050, with the aim of protecting, preserving and improving natural capital and protecting the health and well-being of citizens from environmental risks.

3 – EU Regulation 2019/2088 on sustainability disclosures in financial services.
The aforementioned regulation has a very broad subjective scope of application, addressing all financial providers of investment, management and advisory services to clients and introducing the concepts of "sustainability preference", "sustainability factors", and "sustainability risk".

It should be noted, in particular, that 'sustainability preference' becomes part of the adequacy assessment of products offered by intermediaries to clients, who may therefore request that products with certain sustainability characteristics become part of their investment.

In addition, financial market players are required to establish, implement and maintain risk management policies and procedures, including 'sustainability risk': i.e., climate and environmental events that, if verified, could cause a significant, actual or potential negative impact on the company and managed portfolios.

4 - EU Regulation 2020/852 establishing a framework for sustainable investment.
This Regulation, amending EU Regulation 2019/2088, introduces at European level a uniform sustainability criterion, according to which an economic activity can be qualified as 'environmentally sustainable'.

This provision applies to:

  • measures adopted by Member States or by the European Union that establish obligations for financial market participants or issuers in relation to financial products or corporate bonds made available as environmentally sustainable;
  • financial market participants who make financial products available;
  • companies entitled to publish a non-financial statement or a consolidated non-financial statement, respectively pursuant to Article 19-bis a or Article 29-bis of Directive 2013/34/EU.


5 – EU Regulation 2019/2089 on EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and Communications on Sustainability Benchmarks.

This Regulation, which amends the previous EU Regulation 2016/1011, introduces two types of climate benchmarks applicable to the equity and bond market: i) the EU Climate Transition Benchmarks and ii) the EU Paris-aligned Benchmarks.

The EU Climate Transition Benchmarks must be constituted by selecting securities according to the issuers' emission reduction targets, in order to pursue portfolios’ decarbonization, meeting the requirements of the Regulation.

EU Paris-aligned Benchmarks, on the other hand, must take into account underlying assets that meet the Paris Agreement emissions targets, i.e., must be compatible with a scenario of a global average temperature increase of no more than 1.5°C.


6 – Directive (EU) 2022/2464 on corporate sustainability reporting.

On 5 January 2023, EU Directive 2022/2464, known as the Corporate Sustainability Reporting Directive (CSRD), came into force.

This directive represents the most ambitious instrument adopted at EU level in order to pursue ESG objectives. It integrates and amends EU Regulation 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU by extending the sustainability reporting requirements already existing for large (public interest) listed companies to large companies and small and medium-sized enterprises, with the exception of micro-enterprises, which are public interest entities as defined under the new Article 19-bis.

Moreover, these reporting obligations will be supplemented by additional criteria established by the Commission through specific delegated acts (i) by 30 June 2023 for companies participating in financial markets, and (ii) by 30 June 2024 for other unlisted companies covered by the directive.

Finally, the directive introduces the concept of ‘value chain'. Companies subject to the directive will be required to disclose not only their own information regarding environmental (e.g., emissions, resource use, biodiversity protection), social (e.g., equal treatment of workers, respect for human rights) and governance (e.g., business ethics, ESG objectives of the company and competence of the directors) factors, but also the ESG compliance of their commercial partners.

All required information will have to be clearly set out by the competent administrative bodies of the companies in the annual management report.

The directive will be applicable to the companies concerned according to a four-stage transitional regime:

  1. from 1 January 2024 for companies that already produce the non-financial statement under Directive 2014/95/EU;
  2. from 1 January 2025 for large companies that fall within the scope of the CSDR Directive and were not obliged to produce the non-financial statement under Directive 2014/95/EU;
  3. from 1 January 2026 (with the possibility of exemption until 2028 for justified reasons) for listed SMEs falling within the scope of the CSDR Directive;
  4. from 1 January 2028 for all companies with net revenues from sales and services exceeding €150 million in the EU and having at least one subsidiary company or branch in the EU.


[1] The Paris Agreement was signed by 195 States. It is the first universal global climate agreement that strongly face climate change and aim at containing climate warming within 1,5°C.