Climate Governance Initiative

European Union

3 August 2023

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In 2018, the European Commission adopted an Action Plan on Sustainable Growth to identify future legislative steps on climate change.1 The Commission drew renewed attention to the concept of the ‘carbon bubble’, stating that: “Between 60 and 80 percent of the coal, oil and gas reserves of publicly-listed companies are ‘unburnable’ if the world is to have a chance of keeping global warming well below 2°C and as closely as possible to 1.5°C, as agreed at the COP21 in Paris. [...] a very substantial source of global systemic risk [...] is currently embedded within EU and global financial markets”.2

The EU has made substantial progress in preparing and implementing climate change-related policy and legislation. In June 2021, European Regulation (EU) 2021/1119 (the European Climate Law) entered into force, which includes a legally-binding objective for the EU to reach climate neutrality by 2050, a commitment to negative emissions after 2050, and a target of at least a 55% reduction of net emissions of greenhouse gases by 2030 compared to 1990.3 The EU has also a set of policies and legislation designed to meet these goals, including more stringent emissions standards for vehicles, a carbon border adjustment tax (which will enter into force in a transitional phase from October 2023, and will be fully in force from 1 January 2026), and adjustments to the EU emissions trading scheme (pursuant to which the emissions allowances will reduce at a faster rate).4 These are likely to have significant impacts on the legal and commercial contexts in which companies operate – as developments which are likely to take effect in the short and medium-term, they affect directors’ governance of their companies and disclosure of material risks (on which see below).

Directors' Disclosure Obligations and Climate Change

At present, the disclosure of sustainability-related information under EU is the subject of two main Directives. The Non-Financial Reporting Directive, which has been in force since 2018, is in the process of being phased out and replaced by the Corporate Sustainability Reporting Directive, which entered into force in January 2023, and in respect of which reporting will be required from January 2025 onwards.

The Non-Financial Reporting Directive

With specific reference to corporate law, the Commission has addressed the climate change issue by imposing a disclosure obligation on large corporations (non-financial corporations with over 500 employees) and banks and insurance companies of any size. This was defined by European Directive (EU) 2014/95, also known as the Non-Financial Reporting Directive (the NFRD) – in force since 2018 – and requires the publication, either in the management report or in a separate report, of information on the impact of corporate activity on, among other factors, “environmental matters”, i.e. the “short-term, medium-term and long-term implications” “based on the expected impact of science-based climate change scenarios on corporate strategies and activities”; this information is to be made available in the so-called ‘non-financial statement’. The NFRD does not formally require adoption of disclosure policies in the non-financial statement, but in cases where corporations do not adopt any such policies, their non-financial statement “shall provide a clear and reasoned explanation for not doing so”.5

Accordingly, boards of directors of all affected EU-based corporations must, in the first instance, analyse whether the short, medium and long-term implications of climate change could have any impacts on their corporate strategies and activities, and if so, evaluate such impacts. If it is determined that there is no impact, this must be disclosed in the non-financial statement, clarifying the precise reasoning underpinning this conclusion. If impacts have been identified and evaluated, they must be disclosed together with the measures adopted by directors to manage such impacts, unless they elect not to pursue any policy with reference to climate change – in which case a clear and reasoned explanation of such a decision must be reported as well. The information is organised around four pillars: 

  • the business model;
  • policies and due diligence;
  • the outcomes of such policies; and
  • risks and their management.6

In June 2019, the types of climate-related information to be included in the non-financial statement were specified through non-binding Guidelines issued by the European Commission (the Guidelines).7 In particular, these clarify the scope of the climate information – which is not limited to the impact that climate change poses to the business (referred to as outside-in impacts) but rather includes the impacts of the business’ activities on the climate as well (inside-out impacts), known as ‘double materiality’. The Guidelines specifically integrate the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD), and are inspired by the proposals of the Commission’s Technical expert group on sustainable finance (TEG).8 

The seven key principles set out in the Guidelines state that information shall be:

  • material;
  • fair;
  • balanced and understandable;
  • comprehensive but concise;
  • strategic and forward-looking;
  • stakeholder-oriented;
  • consistent and coherent.

The Guidelines are aimed at fostering best practice in climate reporting and are very detailed, despite acknowledging the benefits of companies taking a flexible approach. They also encourage reporting of climate-related information to be integrated with other financial and non-financial information. Taking into account the TCFD recommendations, they identify typical climate-related risks and opportunities that should be considered across the whole value chain, both upstream (e.g. suppliers) and downstream (e.g. customers).

The Corporate Sustainability Reporting Directive

In January 2023, Directive (EU) 2022/2464, more commonly known as the Corporate Sustainability Reporting Directive (CSRD), entered into force. Reporting under the CSRD will become mandatory for companies in different stages: companies which report under the NFRD will be required to comply from 1 January 2025; other large entities will be required to comply from 1 January 2026; SMEs from 1 January 2027, and third-country undertakings with one qualifying subsidiary or branch in the EU from 1 January 2028. The CSRD also expands the scope of the reporting requirement for large companies by extending it to companies with over 250 employees, rather than the 500-employee threshold in the NFRD. The NFRD will continue to apply while the CSRD comes into effect.

The CSRD aims to align sustainability reporting requirements with the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation.9 The CSRD: 

  • requires full assurance of sustainability information by external auditors; 
  • specifies in more detail the information that companies should report, and requires them to report in line with mandatory EU sustainability reporting standards (on which, see below); and
  • requires all information to be published as part of companies’ management reports, and disclosed in digital, machine-readable format.

Reporting under the CSRD must address: 

  • the resilience of the business model and strategy to sustainability-related factors; 
  • opportunities related to sustainability; 
  • plans to align the business model and strategy with the transition to a sustainable economy, defined as limiting the rise in global average temperature to 1.5°C above pre-industrial levels, in line with the Paris Agreement; 
  • stakeholder engagement practices and their implications for the business model and strategy; 
  • implementation of the strategy as it relates to sustainability; 
  • sustainability-related targets, including absolute greenhouse gas reduction targets for at least 2030 and 2050, a statement of whether such targets are based on conclusive scientific evidence, and progress achieved against them; 
  • the role of functional areas and business units, as well as of the board, whether one-tier or two-tier as per local practice in different Member States, with regard to sustainability; 
  • principal actual or potential impacts related to the company’s broader value chain, and any action taken and results achieved to prevent, mitigate or remediate negative impacts
  • the principal sustainability-related risks facing the company, including a description of the company’s dependencies on sustainability factors; and
  • indicators to measure and report on the above.

The European Commission will adopt European Sustainability Reporting Standards (ESRS) regarding: climate change mitigation and adaptation, water and marine resources, resource use and the circular economy, pollution, and biodiversity and ecosystems.

The European Financial Reporting Advisory Group (EFRAG) has prepared a draft set of ESRS, including a draft standard on climate change.10 The draft climate change ESRS contains provisions for entities to disclose their: transition plans; the material impacts, risks and opportunities related to climate change mitigation and adaptation facing them; the financial effects of these risks and opportunities; their policies for managing these risks, impacts and opportunities; their climate-related targets; and their scope 1, 2 and 3 greenhouse gas emissions. 

EFRAG has also released a draft ESRS on general disclosure requirements.11 The draft climate ESRS states that it should be read in conjunction with the general disclosure ESRS. Notably, the general disclosure ESRS states that sustainability disclosures should be made on a ‘double materiality’ basis, which requires companies to disclose both: matters which have a financially material impact on the company, and the company’s impacts on stakeholders. The materiality of the latter is to be assessed by a sustainability due diligence process, and with reference to the relative severity and likelihood of the impact. 

Member States are required to ensure that administrative, management and supervisory bodies of the company are held responsible for ensuring that the company’s annual financial reporting, management report and corporate governance statement are produced in accordance with these standards.

Directors’ Duties and Climate Change

The NFRD and CSRD do not expressly refer to directors’ duty of skill and care in relation to climate change. However, in all European jurisdictions, directors are obliged to oversee the company in compliance with the duty of care and loyalty. The apparent silence of the NFRD and CSRD in respect of directors’ duties is in fact deceptive: by requiring disclosure on, among other factors, climate-related risks and opportunities, the NFRD and CSRD effectively set a clear and robust standard for how the board must govern climate change. Both presume an understanding of, and assessment by, the board of the impact of climate change on the company and likewise of the company on the climate.

In particular, the description of the business model required under the NFRD and CSRD assumes that the board of directors has developed a corporate strategy that takes account of climate change, among other factors, in the short, medium and long term. This is a time horizon that is notably longer than the one boards usually consider in strategic planning, and to the extent it takes full account of all risks and opportunities, it has significant implications for financial planning, in terms of both capital expenditures and revenues. The core issue is whether the company’s business is resilient in different climate change scenarios (ranging from 1.5°C average increase over pre-industrial temperatures to business-as-usual, given the high degree of uncertainty surrounding regulatory policy, technology and physical impacts). It falls to the board of directors to make these determinations.

In addition, the disclosure requirement on policies and due diligence processes calls for the board of directors, within its duty of oversight, to institute effective internal controls as regards climate factors. The same duty of oversight likewise applies with respect to the disclosure of the metrics and targets that underpin the climate strategy, which the board must define and the delivery of which it must oversee.

The reporting framework also requires the disclosure and management of material impacts. The board of directors is ultimately responsible for the company’s risk management processes, and in order to properly consider climate-related risks is expected to assess them over the short, medium and long-term. Under the draft climate ESRS, this includes specific reference to different climate scenarios. 

Under the NFRD, the board is expected to identify and fully disclose material risks and opportunities, in line with the recommendations of the TCFD, which are echoed in the European Commission Guidelines of 2019. 

While the draft ESRS, which will inform reporting under the CSRD, do not explicitly require disclosure in line with the recommendations of the TCFD, the requirements in the draft climate ESRS closely follow and extend upon the TCFD recommendations. In particular, the requirement to disclose strategies, policies, risks, impacts and opportunities relating to climate change will bring these issues within the purview of directors’ duties. 

It follows, therefore, that, in order to fulfil their duty of skill and care – which, in all Member States, includes the duty to be fully informed – directors must properly understand and consider climate-related risks and the processes to manage them.

Due to its very nature, climate-related information forces directors to reason in terms of medium and long-term horizons, because the impacts of climate change extend over long periods and cannot be fully understood and assessed by focusing on the typical three- to four-year business planning cycle. This holds even when a jurisdiction does not explicitly contemplate the long term in the provisions addressing directors’ duties. Because of the disclosure requirements under the NFRD and CSRD, effective climate governance means boards are naturally compelled to adopt a long-term perspective in managing the company.

Therefore, although billed as disclosure legislation, the NFRD – and to a greater extent, as it comes info effect, the CSRD – effectively have, and will have, an enormous impact on the manner in which the duty of skill and care are to be interpreted and acted upon: disclosure on climate implies a robust process for identifying and managing risks and opportunities, and thus carries with it the implied directors’ duty properly to manage these risks and embed these opportunities when defining the medium and long-term strategy of the company.

It is therefore through the backdoor of disclosure that climate change has penetrated the management of European corporations across all industries. 

As for enforcement, under the NFRD and CSRD, Member States hold responsibility for determining and enforcing sanctions for non-compliance with disclosure requirements, and regulations vary from one Member State to another. For example, in the U.K. and Germany, it is a criminal offence for directors not to prepare or publish the statement of non-financial information, and not to disclose the actions taken in relation to each area (i.e. including climate change) without giving a justification. In Italy, the sanction is an administrative monetary penalty applied to those who verify the non-financial statement. In France, the only consequence for non-compliance is that any interested party may send a request to a judge for summary proceedings asking for the information to be provided; if the application is granted, the directors are liable to pay the penalty and procedural costs.

Statutory audit boards and audit firms provide an additional lever to drive the effectiveness of climate-related disclosure, insofar as they are required to check whether the non-financial statement or separate report have been provided, although as of yet, their oversight does not extend to its actual contents. However, Member States also have the option of requiring that the information contained in the sustainability reporting required by the CSRD be verified by an independent assurance services provider.

Obviously, under general principles of law and procedures of each Member State, in addition to the specified sanctions, directors’ civil liability for damages applies in cases of material misstatements or breach of the duty of skill and care. As yet, there is no case law under the NFRD or CSRD to gauge the practical application of these Directives.

Corporate Sustainability Due Diligence Directive

A further significant development is the February 2022 proposal for a Directive on Corporate Sustainability Due Diligence (the Due Diligence Directive), which introduces a duty for certain companies to conduct supply chain due diligence on human rights and environmental issues.12 In December 2022, the European Council finalized its position13 and the Due Diligence Directive is now moving through the European Union legislative process which is expected to be completed by the end of 2023.14The European Commission’s original proposal envisages the new obligations to apply to EU companies with more than 500 employees and more than €150 million in turnover, and non-EU companies with turnover of more than €150 million generated in the EU15. The Council on the other hand wants to narrow the scope to large EU companies with more than 1,000 employees and minimum turnover of €300 million and non-EU companies with turnover of more than €300 million16 Smaller companies, with over 250 employees and over €40 million in turnover, in specific industries will need to comply two years later than companies meeting the 500-employee threshold.17 All these companies will be required to integrate due diligence into their policies, identify actual or potential adverse environmental and human rights impacts, and prevent, mitigate or minimize these, as well as publicly communicate how they are fulfilling these obligations.18 

Under the proposed Due Diligence Directive, Member States are to provide for measures to make directors of these companies responsible for putting in place and overseeing their companies’ due diligence policies and related actions.19 The Due Diligence Directive also envisages Member States clarifying the scope of directors’ duty to act in the best interest of their companies, stating that for the companies covered by the proposed Directive, directors must take into account the consequences of their decisions for sustainability matters, including climate change and human rights, in the short, medium and long term.20 Member States are also required to ensure that companies covered by the proposed Directive shall adopt a plan to ensure that their business model and strategy are compatible with the transition to a sustainable economy and the limiting of global warming to 1.5°C in line with the Paris Agreement.21

At present, these developments remain a proposal. Indeed, in the negotiating position adopted by the Council of Europe, the articles relating to directors’ duties have been removed, due to concerns that it would interfere with national law regarding directors’ duty of care.22 It remains to be seen what the position taken in the final Due Diligence Directive will be.

Green Claims Directive:

Worth mentioning in this regard is another new proposal brought forward by the European Commission on 22 March 2023 aimed at the practice of greenwashing.23 As part of the European Green Deal, the Proposal for a Directive on substantiation and communication of explicit environmental claims seeks to regulate which green claims companies are allowed to make and enhance transparency in this area. Companies will have to prove transparently and comprehensibly that they actually comply with their "green claims” and an evaluation system will be used to measure the ecological footprint of products or companies as objectively as possible. Additionally, companies will no longer be allowed to create their own environmental labels. Instead, independent third-party authorities will become responsible for awarding such labels in the future. The proposal provides for severe penalties for violations of these rules. Against the backdrop of this intended strict enforcement, the Green Claims Directive puts another ESR aspect into focus which directors are advised to keep in mind particularly regarding operations of their companies.

Additional provisions for banks: 

In addition to the foregoing, directors of European banks (regardless of size) shall consider the Guide on climate-related and environmental risks issued by the European Central Bank in November 2020, which sets out thirteen supervisory expectations relating to risk management and disclosure of climate risks. These all fall within the board’s duty of oversight, and consist of: 

  • understanding the impact of climate-related risk on the business over the short, medium and long term, in order to make informed strategic and business decisions; 
  • integrating climate risk when developing and implementing the bank’s strategy; 
  • considering climate risk in the context of the overall business strategy and objectives, and embedding it within the risk management framework; 
  • ensuring the bank’s setting of risk appetite framework properly accounts for climate risk; 
  • ensuring responsibility for climate risk is properly allocated to management within the organizational structure; 
  • incorporating aggregate climate risk data within internal reporting process so as properly as to reflect the bank’s exposure; 
  • identifying, quantifying and integrating climate risk within the overall capital adequacy framework; 
  • embedding climate risk assessment within the bank’s credit risk management process at all relevant stages (from credit-granting to portfolio-monitoring); 
  • integrating climate risk in the assessment of business continuity, reputation and liability; 
  • ongoing monitoring of the effect of climate risk on the bank’s market positions and future investments, and incorporating climate risk into stress-testing methodology; 
  • evaluating, and where appropriate revisiting, the bank’s stress testing methodology to ensure that climate risk is included in baseline and adverse scenarios; 
  • assessing whether climate risk could cause net cash outflows or depletion of liquidity buffers; and
  • publishing meaningful and material information and key metrics in accordance with the above-referenced European Commission Guidelines of 2019 and therefore aligning with TCFD Recommendations.

In 2022, the ECB carried out a full supervisory review of banks’ climate practices under the SREP (Supervisory Review and Evaluation Process), with a view to taking concrete remedial measures where needed. The ECB concluded that banks do not fully meet the ECB’s expectations on disclosure of climate and environmental risks, with significant gaps remaining in disclosures.24 The ECB published a report on good practices for climate stress testing following this, in December 2022.25 

Practical Implications for Directors

Given the European Commission’s adoption of world-leading climate disclosure regulations for non-financial companies, and additional very detailed and advanced regulations governing the management of climate risk by banks, well-counselled boards will:

  1. allocate identification of climate risks and opportunities and their evaluation to a clearly-identified team in management that reports directly to the board; 
  2. considering in particular the legal and policy developments in relation to EU climate goals, and the potential direction of travel of these developments, put on the agenda for the board to review, within 3 or 6 months, a process to initiate the development of a climate transition roadmap to 2050, with transparent carbon neutrality targets, clear interim targets to 2040, 2030 and near-term within the current rolling multi-medium and long-term targets, and at least annually thereafter report back to the board;
  3. ensure that all relevant departments, such as legal and compliance, risk management, scenario-planning, strategy, audit, procurement, human resources, government relations, investor relations, stakeholder relations, reach a clear understanding of their functional contribution to the design and delivery of the company’s climate transition plan, coordinate their efforts under the leadership of the CEO, and are jointly accountable to the board;
  4. allocate to the appropriate committee(s) of the board, such as risk, audit, governance, scenarios/strategy, nominations/remuneration, or sustainability/corporate responsibility, the task of translating the long-term strategy into a clear decision-making process for each aspect that is relevant to each committee before its final approval by the board as a whole; and
  5. discuss with disclosure counsel, in order to develop an external engagement and communications plan.


  • Dr. Sabrina Bruno, Full Professor of Comparative Corporate Law, University of Calabria - Luiss G.Carli
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End notes:

1Regulation (EU) 2018/1999 of the European Parliament and of the Council on the Governance of the Energy Union and Climate Action planning 2030 targets and a transition to a climate neutral economy of 11 December 2018, L 328/1.
2:  Committee on Economic and Monetary Affairs of the European Parliament Draft Report, 2 February 2018.
3Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999, L 243/1.
4:  European Commission, European Green Deal: Commission proposes transformation of EU economy and society to meet climate ambitions (14 July 2021) <>; European Commission, Delivering the European Green Deal <>.
5:  Article 1(1) inserting art. 19a(1), EU Directive 2014/95.
7:  European Commission Communication, ‘Guidelines on Non-financial Reporting: Supplement on Reporting Climate-related Information’, 2019/C 209/1 (20 June 2019) <>.
8:  In January 2019, the European Commission set up a Technical expert group on sustainable finance (TEG) to assist it in developing, in line with the Commission's legislative proposals of May 2018: an EU classification system – the so-called EU taxonomy – to determine whether an economic activity is environmentally sustainable; an EU Green Bond Standard; methodologies for EU climate benchmarks and disclosures for benchmarks; and guidance to improve corporate disclosure of climate-related information.
9Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainabilityrelated disclosures in the financial services sector; Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088.
10:  EFRAG, Draft European Sustainability Reporting Standards ESRS S1 Climate Change (November 2022) <>.
12:  Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937.
15:  Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, art. 2.
16:  Council of the European Union, Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, art. 2.
18:  European Commission, Just and sustainable economy: Commission lays down rules for companies to respect human rights and environment in global value chains (23 February 2022) <>.
19:  Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, art. 26.
20Ibid, art. 25.
21Ibid, art. 15.
23:  Proposal for a Directive on substantiation and communication of explicit environmental claims <>
24:  European Central Bank, Supervisory assessment of institutions’ climate related and environmental risks disclosures (14 March 2022) <>.
25:  European Central Bank, ECB report on good practices for climate stress testing (December 2022) <>.