The 3D Chess of the European Green Deal
A policy web of complex genius
What’s the deal?
The European Green Deal (EGD) is a goal set forth by the European Commission to be a climate-neutral continent. The European Climate Law writes into law the goal set out by the EGD.
It is advanced by a set of proposals to make the European Union's climate, energy, transport and taxation policies fit for reducing greenhouse gas emissions by at least 55% by 2030 compared to a 1990 baseline while also ensuring a just transition.
Appreciating complexity while bristling against it
I’m the first to admit that EGD regulations are seemingly overbuilt with a lot of redundancy and provisions that smack of academia. Most companies have small tiger teams of sustainability professionals who prefer to spend their time doing sustainability rather than twisting to comply with the mandates contained in the suite of EU regulations. There is a very real cost to it.
However, I am also in awe of it! I respect that its heartiness matches the urgency of the climate emergency and the importance of the Sustainable Development Goals it is trying to solve for. It is designed to fundamentally reengineer the EU economy-no, scratch that- the global economy to transition to a low carbon, just, and sustainable one.
The EGD is a web of complexity, genius and consensus. It’s akin to the Star Trek game of Tri-dimensional chess while the US version of climate and sustainability regulation is a more straightforward game of checkers. Other parts of the world are advancing a middle version most commonly based on the IFRS standards that, to continue the analogy, are like Chinese Checkers.Â
US regs, are basically stalled climate financial reporting mandates that are TCFD-light coupled with loads of direct funding, grants and market incentives via the Inflation Reduction Act and the Bipartisan Infrastructure Bill. They are injecting incredible amounts of funding into climate mitigation and adaptation, and it is laudable, especially in the US political climate, however the reporting requirements in the SEC proposal should be table stakes for any company who has been sincerely advancing sustainability, i.e. you probably should already be compliant. (I plan to unpack US sustainability regulations and the IFRS in future articles.)
The rules of the game have changed
Lest US-based companies think the California climate regs or the potential for the SEC sustainability regulations are the only ones to follow, the kicker with the EU regulations is they will have far reaching global impacts by design. Said another way: It doesn't matter if you've been paying attention to or preparing for EU sustainability regulations, they will still impact you whether you are ready for them or not.
For example, the Corporate Sustainability Reporting Directive (CSRD) applies to all companies that trade on European Exchanges or that do significant business or operations within the EU. That pulls in hundreds of US-based companies, but it also, by design, pulls in their global supply chain.Â
The Corporate Sustainability Due Diligence Directive mandates climate and human rights due diligence including additional auditing and governance and leadership accountability.Â
The Green Claims Directive and the Digital Product Passport also require data, disclosures and assurances from a company and deep into its supply chain as well as third party certifications.Â
The EU Taxonomy requires European investors to transparently disclose the alignment of their portfolios with a 1.5-degree climate future that do no significant harm to other aspects of the environment and at the same time, safeguard human rights. Companies who want to be seen as low risk will need to align their business models with the taxonomy and disclose that accordingly with third party verification.
Many companies won’t technically have to report to CSRD or follow the mandates, but if my hunch is correct, they will effectively need to do so anyway as a requirement to do business with their customers or in critical markets.
Charting complexity
I made this chart of the push and the pull of some of the most dynamic EU sustainability regulations. These are raising the bar on transparency, mandating action, creating accountability, requiring veracity and strengthening market penalties and incentives.Â
