ESG Global Vision

Corporate Governance

The CS3D was published in the Official Journal on 5 July 2024 and entered into force on 25 July 2024.

It will apply to in-scope companies on a staggered basis, and Member States have until 26 July 2026 to transpose  it into national law. 

The CS3D will apply to large EU and non-EU companies and parent companies doing business in the EU on a staggered basis, allowing smaller companies more time to make any necessary changes to allow them to properly adhere to the requirements. 

The requirements will come into force on the following timescale:

26 July 2027:

• EU companies with a global turnover of greater than EUR 1,500 million and more than 5,000 employees.
• Non-EU companies with an EU turnover of greater than EUR 1,500 million

26 July 2028:

• EU companies with a global turnover of greater than EUR 900 million and more than 3,000 employees
• Non-EU companies with an EU turnover of greater than EUR 900 million

26 July 2029:

• All other companies in scope:
  • EU companies with a global turnover of greater than EUR 450 million and more than 1,000 employees
  • Non-EU companies with an EU turnover of greater than EUR 450 million
  • EU companies / EU ultimate parent companies of a group with a net worldwide turnover in excess of EUR 80 million and a franchise or licence business model in the EU with royalties amounting to more than EUR 22.5 million
  • Non-EU companies / non-EU ultimate parent companies of a group with a net EU turnover in excess of EUR 80 million AND a franchise or licence business model in the EU with royalties amounting to more than EUR 22.5 million 

The CS3D will only apply to companies who remain in scope for two consecutive financial years. 

Under Article 2 of CSDDD, an ultimate parent company whose main activity is holding shares in operational subsidiaries may apply for an exemption from its CS3D obligations, provided that (i) it does not engage in taking management, operational or financial decisions affecting the group or its operational subsidiaries; and (ii) one of its EU subsidiaries is designated to comply with the CS3D requirements on its behalf. The parent and subsidiary will be jointly liable for compliance. 

Small and medium-sized companies are not covered by the CS3D but may be indirectly affected as business partners in value chains.

The CS3D is a flagship piece of EU legislation, aimed at ensuring companies operating in the EU are performing detailed and comprehensive corporate due diligence across their own operations, those of their subsidiaries, and across their “chain(s) of activities” in a consistent and verifiable manner.

Duties and obligations under the CS3D

The Directive sets out a “duty of due diligence”,  requiring in-scope companies to undertake due diligence for actual or potential adverse human rights and environmental impacts in their own operations, those of their subsidiaries and in their chains of activities (direct and indirect established business relationships). There are a number of ‘core’ obligations that in-scope companies must meet as laid down in Articles 7-16 of the Directive:

• Integrating due diligence into their policies and risk management systems.
• Identifying and assessing actual or potential adverse impacts and, where necessary, prioritising actual and potential adverse impacts.
• Preventing and mitigating potential adverse impacts, and bringing actual adverse impacts to an end and minimising their extent.
• Providing remediation for actual adverse impacts.
• Carrying out meaningful engagement with stakeholders. 
• Establishing and maintaining a notification mechanism and a complaints procedure.
• Monitoring the effectiveness of their due diligence policy and measures.
• Publicly communicating on due diligence. 

The obligations and requirements set out above are expanded upon within the text of the Articles, and qualified and explained by the later Articles and accompanying policy documents/FAQs. 

In-scope companies are also required to adopt and implement a climate change mitigation plan to ensure their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement.  

The Directive is designed to operate in harmony with the Corporate Sustainability Reporting Directive (“CSRD”), and as such, does not impose any significant disclosure obligations for companies that are already compliant with the CSRD. Companies in-scope for the CS3D but not in-scope for the CSRD must publish an annual report, the exact content of which will be specified by the EU through delegated acts, by 2027 at the latest.   

Implementation by Member States

Member States are required to bring the CS3D into national law by 26 July 2026, although it is expected that many Member States will start legislating sooner. Member States will be required to appoint national supervising authorities who will be responsible for supervising the new rules and who will have significant powers 

Each Member State will be required to implement the core requirements of the CS3D into their national law, but the Directive leaves room for the Member States to set more stringent due diligence requirements should they wish. Stakeholders should therefore be careful to make sure they abide by the laws of each Member State (many of which have pre-existing sustainability due diligence laws), as well as the core obligations set out in the EU legislation.

Penalties/Fines

Under the Directive,  Member States’ respective supervisory authorities will have powers enabling them to require companies to provide further information, to conduct compliance investigations, and to allow inspections of the relevant companies.  Failures of compliance will entitle the supervisory authorities to exercise all or any of the following powers:

• To order:
  
  • The cessation of any infringement
  • That the company not repeat the infringement
  • Provision of remediation to any stakeholders affected
• To impose financial or other penalties. The maximum penalty allowable under the legislation is 5% of the worldwide turnover of the entity in question from the preceding financial year.  This penalty may be increased according to the formulation of the laws implemented by particular Member States.
• To impose relevant interim measures to avoid an imminent risk of severe harm arising from the infringement.

The CS3D also creates a regulated civil liability regime whereby natural persons/entities/other stakeholders will have the opportunity to take legal action for damages suffered that could have been avoided with appropriate due diligence measures. 

Financial undertakings

Financial undertakings have an exclusion from part of the CS3D obligations in relation to their downstream chain of activities.

Further Reading

The European Commission has published a helpful set of FAQs here. 

For more information, please see the below articles:

• Human rights due diligence moves apace with the EU Parliament expanded version of the proposed CSDDD
• The interplay of the new CS3D with EU private international law: what lies ahead for businesses
• European Parliament adopts CS3D: New ESG litigation risks in the supply chain
• European due diligence: financial players are not fully excluded from the CS3D Directive

Non-financial reporting

The CSRD entered into force on January 5, 2023.

The rules will start applying between 2024 and 2028 in the following increments:

• For the year commencing 1 January 2024: Large public-interest companies (with over 500 employees) already subject to the non-financial reporting directive, with the relevant reports due in 2025;
• For the year commencing 1 January 2025:  Large companies that are not presently subject to the non-financial reporting directive (with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with the relevant reports due in 2026;
• For the year commencing 1 January 2026:  Listed small and medium sized enterprises (SMEs) and other undertakings (small and non-complex credit institutions and captive insurance undertakings), with the relevant reports due in 2027. SMEs can opt-out until 2028.
• For the year commencing 1 January 2028:  Non-EU companies with net sales in the EU of more than EUR 150 million and at least one subsidiary or  branch in the EU, with the relevant reports due in 2029

Listed companies, and large companies in particular.

The CSRD is a flagship piece of legislation that, once brought into national law, will impose tighter reporting standards and   obligations on in scope companies in relation to their disclosure of pertinent sustainability information.

The CSRD replaces the Non Financial Reporting Directive (NFRD), and is aimed at, amongst other things, addressing shortcomings in the existing legislation, and expanding the scope of the disclosure required by the relevant entities.

The CSRD introduces more detailed reporting requirements in relation to companies’ environmental, social,  and human rights impacts.  The stated aim of the legislation is to “modernise and strengthen the rules concerning the social and environmental information that companies have to report ….. to ensure that investors and other stakeholders have access to the information they need to assess the impact of companies on people and the environment and for investors to assess financial risks and opportunities arising from climate change and other sustainability issues.”

To ensure the relevant companies are providing reliable information, they will be subject to independent auditing and certification. The legislation aims to put financial and sustainability reporting on equal footings, and give investors access to similarly granular sustainability data as they would have financial information.  

The reporting standards required are enshrined in the European Sustainability Reporting Standards (ESRS), which the European commission adopted on 31 July 2023. A detailed article on the ESRS can be found here.

Transposition Status

For a summary of the transposition status of the CSRD, please see the Hogan Lovells CSRD Transposition tracker here . The EU also publishes a list of member states who have transposed the CSRD into national law, as well as links to the underlying legislation (see here).

The European Commission recently published a number of draft FAQs (see here) clarifying the scope of the CSRD, amongst other regulations. See these useful articles “Three months on from the CSRD transposition deadline – where are we now” and “European Commission publishes draft FAQs on EU Corporate Sustainability Reporting Directive (CSRD)” for more information.

Financial reporting

Entry into force: 10 March 2021

Application: 

• Level 1 (high level and principles based requirements on a comply or explain basis) since 10 March 2021.
• Level 2 (more detailed disclosure requirements in relation to regulatory technical standards) since January 2022.

Financial advisers and financial market participants

The SFDR is part of the EU Commission’s “Action Plan on Sustainable Growth”, and is intended to complement the EU Taxonomy Regulations and the EU Regulatory Technical Standards. The SFDR is designed to enable investors and consumers to make informed investment decisions with respect to the ESG credentials of the funds, assets, or products they are investing in/purchasing, with a view to investors making decisions that contribute to sustainable growth in the financial sector. It is hoped that its adoption will provide clarity and consistency as to the language used by FMPs when selling investment products, especially those described as ‘sustainable’ or ‘ESG focused’, or a number of other adjacent terms. In particular, the Commission hopes to eliminate ‘greenwashing’ from the investment landscape, and force FMPs to make undertake proper due diligence as to the nature of the underlying products they are selling and/or providing.

Product level classification

The SFDR requires FMPs, whenever they are offering financial products purporting to be one of the below, to make certain disclosures as to the natures of the relevant products, which will either fall into Articles 8 or 9 of the Regulation:

• Those promoting environmental and/or social characteristics, and those for which the investee company follows ‘good governance practices’ (Article 8 products)
  • The Regulation does not specifically define ‘environmental and/or social characteristics’, nor ‘good governance practices’, but gives a number of examples of activities that would be regarded as contributing to each area. 
• Those having sustainable investments as an objective (Article 9 products)
• Sustainable investments products specifically relating to carbon emissions reductions (Article 9(3) products).

The mandatory disclosure requirements for FMPs to promote Article 8 and Article 9 products differ substantially, with Article 9 products subject to more stringent disclosure obligations.  Distinguishing between Article 8 and Article 9 products is critical for FMPs to ensure they adhere to the requirements of the SFDR.  The disclosure rules are complex, with disclosure at a granular level required, particularly for Article 9 companies, the detail of which is beyond the scope of this note. For more information, see details of the regulation here.

Firm level classification

Article 3 of the Regulation also requires in scope entities/individuals to publish, on their website, three broad categories of information in relation to the integration of sustainability risks into their investment process, both at the firm and product levels:

1. Principal adverse impact (Article 4) - how investments might create or lead to possible adverse impacts in relation to a range of sustainability factors.  This requirement is by far and away the hardest and most complicated for firms to navigate, as it requires access to detailed ESG data, which most firms do not generate during the normal course of their business.  A notable feature of Article 4 is the requirement to explain the provenance of the ESG data, or, where data is unavailable, explain why the data is unavailable, and provide best estimates in its place. 

Under this heading, in-scope companies must report on 14 different sustainability related factors, ranging across a spectrum of ESG risks.

Included in this is the key requirement for in scope entities to understand and report on the Scope 1, 2, and 3 emissions for companies they have invested in.  As detailed elsewhere on the GVT, Scope 1 emissions are those directly produced by the company, Scope 2 emissions are those produced by energy it purchases for its direct use (for example, the emissions deriving from the purchase of electricity), and Scope 3 emissions are those for which the company is responsible for up and down its value chain. For FMPs, the vast majority of their emissions will be categorised as Scope 3, given their economic activities do not involve energy intensive means of production.

Scope 3 emissions are also the most difficult to track and assess. For more information on Scope 1/2/3 emissions measuring, see here.

2. Remuneration (Article 5) – in scope FMPs must publish a statement stating how sustainability risks are taken into account in their remuneration policy. 

3. Sustainability risk policy (Article 6) - how ESG risk is considered in the investment process and how these risks are taken into account in any and all investment decisions. This must detail the ‘likely impacts’ of those risks on the returns of the products they are providing or advising on.  Even in circumstances where there are no risks identified, or where the risks are ‘not relevant’, FMPs must make clear why these risks are not relevant.

These Article 4-6 disclosures must be made:

• in the relevant documentation for a specific financial product; and
• on the FMP’s website.

Comply or explain policy

Under the comply or explain rule, if an FMP does not consider the ESG/sustainability impact(s) of its decisions/investments, it must publish a statement this effect on their website and give clear and detailed reasons for failing to comply with the requirement under the Regulation.

The Regulation may also require additional disclosure of sustainability information in relation to certain financial products purporting to promote ESG objectives.

Stakeholder consultation

In late 2023, the Commission launched a consultation through which stakeholders could provide feedback on the implementation of the SFDR, alongside their suggestions for future changes/amendments. On 3 May 2024 the Commission published a summary of the responses received, which highlighted the need to ensure consistency across EU sustainability regulation and legislation, as well as providing clarity on the exact disclosures required under the SFDR. For more detail, please see the summary here, as well as this article. It is anticipated that further consultations will follow.

For more information generally, please see these articles (and this analysis piece):

• European Commission seeks industry views in SFDR target consultation
• EU Sustainable Finance Package and development in EU Taxonomy and SFDR interactions
• European Supervisory Authorities update consolidated Q&As on the SFDR
• EU Sustainable Finance Disclosure Regulation and EU Taxonomy: Regulatory Technical Standards Update

Corporate governance policy

Entry into force: 9 June 2017

Companies that have their registered office in the EU and their shares listed on a regulated market in the EU.

SRD II enhances the SRD regime by introducing rules that aim to counter an excessive focus on short-term profits and risk-taking in favour of a longer term, more sustainable model of corporate governance that considers the wider interests of shareholders and stakeholders.

Financial reporting

Published by the EC on 21 April 2021.

Application: rules expected to start applying from around October 2022.

Firms within the scope of MiFID, AIFMD and UCITS.

The proposed amendments set out obligations on investment funds, mutual funds, alternative investment funds (AIFs), investment firms, insurance firms and brokers, and reinsurance companies to provide clients with clear advice on ESG risks and opportunities attached to their investments.

Find out more:

MiFID Delegated Regulation

Delegated Directive

AIFMD Delegated Regulation

UCITS Implementing Directive

Corporate governance policy

Entry into force: 2 August 2022

Management companies and credit institutions

The Delegated Regulation concerns integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms.

Corporate governance policy

Entry into force: 2 August 2022

Any alternative investment fund.

The Delegated Regulation concerns sustainability risks and sustainability factors to be taken into account by alternative investment fund managers.

Corporate governance policy

Entry into force: 2 August 2022

Any insurance and reinsurance undertaking.

The Delegated Regulation concerns the integration of sustainability risks into the governance of insurance and reinsurance undertakings.

The Delegated Regulation provides for the integration of sustainability risks in the prudent person principle. In particular, when dealing with risks arising from investments, insurance and reinsurance undertakings shall take into account sustainability risks. More precisely they shall take into account the potential long-term impact of their investment strategy and decisions on sustainability factors and, where relevant, that strategy and those decisions of an insurance undertaking shall reflect the sustainability preferences of its customers taken into account in the product approval process referred to in Article 4 of Commission Delegated Regulation (EU) 2017/2358 (product oversight and governance requirements for insurance undertakings and insurance distributors).

Corporate governance policy

Entry into force: 2 August 2022

Any insurance undertaking and distributor of insurance products.

The Delegated Regulation concerns the integration of sustainability factors, sustainability risks, and sustainability preferences into product control and product governance requirements for insurance companies and distributors of insurance products and into conduct of business rules and investment advice for insurance investment products.

Corporate governance and financial policy

Entry into force: Member States shall implement the Directive by 22 November 2022.

Any Member State

The Delegated Directive concerns the integration of sustainability factors into product governance obligations (safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits).

Corporate governance and financial policy

Entry into force: Member States shall implement the Directive by 2 August 2022

Any Member State

The Delegated Directive concerns sustainability risks and sustainability factors to be taken into account for undertakings for collective investment in transferable securities (UCITS).

In particular, management companies should, when identifying the types of conflicts of interest the existence of which may damage the interests of a UCITS, include conflicts of interest that may arise as a result of the integration of sustainability risks in their processes, systems and internal controls. Those conflicts may include conflicts arising from remuneration or personal transactions of relevant staff, conflicts of interest that could give rise to greenwashing, mis-selling or misrepresentation of investment strategies and conflicts of interests between different UCITS managed by the same management company.

Social policy

Entry into force: 8 December 2020

Consolidated version adopted on 22 March 2021.

EU persons, companies incorporated or constituted under the law of an EU Member State, non-EU companies in respect of any business done in whole or in part within the EU.

In December 2020, the Council adopted the EU’s first global human rights sanctions regime. This new regime allows the EU to impose travel bans and financial sanctions on individuals, entities and bodies (including state and non-state actors) responsible for, involved in or associated with serious human rights violations and abuses worldwide, irrespective of where they occurred.

Social policy

Directive entered into force on 6 June 2023 and Member States must implement within three years, by 7 June 2026

Employers in the public and private sectors

This Directive aims to improve equal pay between men and women through greater pay transparency and better access to justice in the event of unequal pay.

The Directive provides for a reporting obligation for employers with 100 or more employees on the gender pay gap between female and male workers in their organisation. Companies with more than 250 employees will be required to report annually to the relevant national authority (to be determined). For smaller organisations (initially those with over 150 employees), the reporting obligation should take place every three years.

The Directive also provides for better access to information for job applicants, workers and their representatives, a shift of the burden of proof (of equal pay) to the employer in pay discrimination cases, and an obligation for Member States to introduce effective and appropriate sanctions for non-compliance, including fines.

Social Policy

In force (Member States are required to implement the Directive)

Any member State

Under the new rules, workers are, inter alia, entitled to greater predictability regarding assignments and working hours. They will also be entitled to receive timely and more complete information about essential aspects of their work, such as their place of work and pay. The new rules will particularly benefit some 2-3 million workers with precarious forms of employment.

Environmental policy

Entry into force: 5 May 2022

Companies based in Spain

The aim of this new Royal Decree 309/2022 is the following: to avoid the relocation of production activity in those sectors most exposed to a significant risk of carbon leakage to third countries that are not subject to European Union (EU) regulations, which would entail a loss of production activity in Spain and the EU, as well as the danger of producing an overall increase in greenhouse gas emissions due to fewer restrictions in non-EU countries.

Financial reporting

Entry into force: 10 December 2019

Benchmark administrators

The Benchmark Regulations require benchmark administrators to disclose ESG factors, and include disclosure in their benchmark statement on how their methodology aligns with the target of carbon emissions reduction or attains the objectives of the Paris Agreement.

Taxonomy, financial reporting and non-financial reporting

Applies from 1 January 2022.

The following delegated acts were approved by the Commission for scrutiny by the co-legislators:

Delegated Act on sustainable activities for climate change adaptation and mitigation objectives

Delegated act supplementing Article 8

• Financial market participants who offer financial products and market these as environmentally sustainable
• Organisations covered by the NFRD and SFDR

The Taxonomy Regulation sets out an EU-wide framework and classification system according to which investors and businesses can assess whether certain economic activities are environmentally sustainable.

The Taxonomy Regulation introduces amendments to disclosure requirements under SFDR and NFRD.

Financial reporting

In force

EU Institutions and national governments.

The European Climate Law writes into law the goal set out in the European Green Deal – for Europe’s economy and society to become climate-neutral by 2050.

Taxonomy, financial reporting and non-financial reporting

Entry into force: 29 December 2021.

Application from 1 January 2022.

1. Financial market participants who offer financial products and market these as environmentally sustainable
2. Organisations covered by the NFRD and SFDR

The Net Zero Investment Framework provides recommended methodologies and actions which asset owners and asset managers should utilise to assess and undertake alignment of their portfolios towards net zero, in order to maximise their contribution to the decarbonisation of the real economy. The Framework puts forward metrics to assess investments and measure alignment, and requires investors to set concrete targets at portfolio and asset level.

The key recommendations revolve around governance and strategy, portfolio reference targets, strategic asset allocation, asset class alignment, policy advocacy, and stakeholder and market engagement.

Investors are encouraged to publish information annually on how they consider their targets to be aligned to a pathway to achieve global net zero emissions by 2050, and the strategy and actions they have implemented across all asset classes, and performance against the objectives and targets over time.

Financial reporting

Entry into force: 23 December 2020

Benchmark administrators

The three Delegated Acts required by the Low Carbon Benchmarks Regulation and adopted by the EC, set out (i) the environmental, social, and governance (ESG) disclosure requirements for benchmarks provided in accordance with the EU Benchmarks Regulation (Regulation (EU) 2016/1011), and (ii) sustainability criteria in order for a benchmark to qualify as an EU Climate Transition Benchmark or EU Paris-aligned Benchmark. Those are:

Commission Delegated Regulation (EU) 2020/1816

Commission Delegated Regulation (EU) 2020/1817

Commission Delegated Regulation (EU) 2020/1818

Environmental policy

Entry into force : Member States shall bring into force the provisions of the Directive by 10 March 2020

Any EU Member State

This Directive presents some amendments to Directives 2010/31 and 2012/27 to better address and ensure that sustainability requirements are met in building construction activities, new building characteristics and building energy performance aspects.

Social policy, due diligence obligation

Entry into force: 8 June 2017.

New consolidated version adopted on 19 November 2020.

Application: 1 January 2021

EU-based importers of tin, tantalum, tungsten and gold

The regulation requires EU importers of the four minerals – tin, tantalum, tungsten and gold – to ensure they use only responsible and conflict-free sources.

They need to comply with, and report on, supply chain due diligence obligations if the minerals originate (even potentially) from conflict-affected and high-risk areas.

Companies from outside the EU are also impacted as EU-companies will need to make sure they source from responsible smelters and refiners.

Social policy

Entry into force: 23 March 2022

Companies based in Spain

The aim of this new Act 2/2002 is the following: to amend some of the provisions of core Spanish legislation, including but not limited to the Judiciary Act or the Civil Procedure Act, in order to improve the protection of orphans who are victims of gender-based violence.

Social policy; environmental policy; Corporate governance; Government-led standard

In force since 21 May 2021

Companies based in Spain

The aim of this law is to facilitate the decarbonisation of the Spanish economy, and its transition to a circular model, so as to guarantee the rational and supportive use of resources; and promote adaptation to the impacts of climate change and the implementation of a sustainable development model that generates employment opportunities and contributes to the reduction of inequalities.

Social policy; environmental policy; Corporate governance; Government-led standard

In force since 21 May 2021

Companies based in Spain

The aim of this law is minimising the negative impacts of waste generation and waste management on human health and the environment.

Social policy; Corporate governance policy; Government-led standard

Not yet in force

Workers and companies based in Spain

The aim of this draft law (not yet in force) is to implement in Spain the Directive (EU) 2019/1152, which lays down minimum requirements aimed at achieving gender equality as regards labour market opportunities and treatment at work by making it easier for workers who are parents or carers to balance family and working life. It establishes individual rights to be introduced into Spanish national law which relate to: (i) paternity leave, parental leave and leave for carers; and (ii) flexible working arrangements for workers who are parents or carers.

Social policy; Corporate governance policy; Government-led standard

Not yet in force

Workers and companies based in Spain

The aim of this draft law (not yet in force) is to implement in Spain the Directive (EU) 2019/1152 on transparent and predictable working conditions in the European Union, which aims to improve working conditions by promoting employment that offers greater transparency and predictability, while ensuring the adaptability of the labour market. It establishes minimum rights applicable to all workers with an employment contract or employment relationship, taking into account the case law of the EU Court of Justice.

Social policy; Corporate governance policy; Government-led standard

Not yet in force

Companies based and operating in Spain

The aim of this draft law (not yet in force) is to  regulate, in a binding and general manner, the obligation of Spanish companies or groups and those companies operating in the Spanish market, to respect human rights and environmental rights in all the activities carried out throughout their global value chains.

Environmental policy: Government-led standard

In force since 30 April 2007, amended by 2015 Environmental Act

Economic or professional activities that may cause environmental damage or whose actions imminently threaten to cause such damage

The purpose of this law is to ensure the fulfilment of national climate protection targets in compliance with European environmental standards, with the aim of protecting and preventing the effects of global climate change.

For this purpose, this law regulates the liability of those whose activities may cause environmental damage, seeking to prevent, avoid and repair said environmental damage.

In addition to the provisions of European and international legislation, it is grounded on article 45 of the Spanish Constitution, which establishes the right of everyone to enjoy the environment as essential for individual’s development, as well as everyone’s duty to preserve it.

In essence, the main tenet of this law is to legally materialise the idea of “the polluter pays”.

Social policy; Corporate governance policy

In force

Workers and companies based in Spain

This law establishes the general regulations concerning the rights and duties of workers, as well as the rights and duties of companies towards workers in Spain.

In relation to ESGs, this law includes several provisions with a strong social dimension, such as: non-discrimination for any reason; the right to rest; the right to suspension of the employment contract for reasons of pregnancy, with the right to return to the same position afterwards; collective representation rights; worker protection in terms of health and safety at work; equal payment regardless worker’s sex; workers’ right to privacy in relation to the digital environment and the right to disconnection (particularly on the rise since the arrival of COVID-19).

Social policy; environmental policy; Corporate governance; Government-led standard

In force since 5 March 2011

Spanish public and private entities

The main purpose of this law is to ensure economic, social and environmental development in the framework of a productive and competitive economy, while preserving the environment and ensuring that a rational use of natural resources is made.

Some important points in connection with ESGs:

• Public administrations shall encourage companies, organisations and other entities to develop social responsibility policies. To this end, the government will provide them with a series of indicators for self-assessment in this area.

Companies can make public their corporate social responsibility policies and performance. Besides, any company may voluntarily apply to be recognised by the Spanish government as a socially responsible company.

Social policy; Corporate governance policy; Government-led standard

In force since 23 March 2007

Public and private entities, with the aim of avoiding any type of discrimination based on gender.

With the aim of achieving effective equality between women and men, this law includes measures such as:

• Public authorities shall endeavour to take into account the principle of balanced presence of women and men in positions of responsibility.
• To improve employability and performance of women, enhancing their level of training and their adaptability to the requirements of the labour market.
• In order to contribute to a more balanced sharing of family responsibilities, fathers are entitled to paternity leave and paternity allowance.
• Companies must adopt measures aimed at avoiding any type of discrimination between women and men in the workplace.
• Companies with 50 or more employees must draw up and implement a plan setting out specific objectives and strategies to achieve effective equality between women and men.

Besides, the Spanish Ministry of Labour may award recognition those companies that stand out for their implementation of equal treatment and equal opportunities for their employees, as regulated on the Act on Equality in the Workplace.

Social policy; Corporate governance

In force since 23 July 2016

Local legislation, each Spanish Autonomous Region may enact this type of legislation (this one in particular is from the Autonomous Region of Madrid)

In order to avoid discrimination based on sexual orientation, this law foresees some measures such as encouraging the progressive implementation of equality to measure the inclusion of LGTBI people in both public and private sector, so that companies that stand out for the application of equality and non-discrimination policies can be recognised.

Non-financial reporting; Corporate governance policy; social policy

In force since 29 December 2018

Companies based in Spain

This law amends the main Spanish commercial laws, including the Spanish Commercial Code, the Spanish Companies Act and the Spanish Audit Act, on non-financial reporting and diversity.

It impose information disclosure obligations in connection with human rights, as well as the implementation of human rights due diligence procedures and the elimination of the possibility for companies to omit certain information on the grounds that the management body considers that disclosure may harm its commercial position. Besides, if a company has no policy on any of these matters, it should provide a clear and reasoned explanation on why not.

Furthermore, in accordance with the Spanish Companies Act, directors have a duty to avoid situations of conflict of interest. Therefore, directors should refrain from: engaging in transactions with the company; using the company’s name or invoking their position as director to unduly influence the conduct of private transactions; using company assets for private purposes, including confidential company information; taking advantage of business opportunities of the company. In the event that a director is in a situation of conflict, they shall disclose this to the rest of directors, as well as to the board of directors and the shareholders

Prudential measures

Entry into force: 30 December 2019

Institutions subject to supervision by the EBA, EIOPA and ESMA

The Omnibus Regulation establishes ESG-related factors as part of the EBA, EIOPA and ESMA’s "scope of action" and assigns each with the task of monitoring and assessing ESG-related developments in their areas of competence.

The Omnibus Regulation also modifies Article 23 (1) of each regulation, requiring each authority to develop criteria for the identification and measurement of systemic risk, including environmental risks, and Article 29 (1) of each regulation, requiring each authority to put in place a monitoring system to assess material ESG-related risks, taking into account the Paris Agreement.

Prudential measures

In progress

Report on Environmental, Social and Governance (ESG) risks management and supervision published on 23 June 2021

Credit institutions and investment firms

Article 98(8) of Directive 2013/36/EU (“CRD IV”) and Article 35 of Directive (EU) 2019/2034 (“IFD”) requires the EBA to develop a report providing uniform definitions of ESG risks, and appropriate qualitative and quantitative criteria for the assessment of the impact of ESG risks on the financial stability of institutions in the short, medium and long term. They also mandate the EBA to assess whether to include ESG risks in its annual prudential supervisory review and evaluation process undertaken by Member State prudential regulators (“SREP”).

Prudential measures

In progress

Report on Environmental, Social and Governance (ESG) risks management and supervision published on 24 October 2022

Credit institutions and investment firms

In June 2021, the EBA published a Report on the management and supervision of ESG risks for credit institutions and investment firms in accordance with Article 98(8) of Directive 2013/36/EU (Capital Requirements Directive - CRD) and Article 35 Directive (EU) 2019/2034 (Investment Firms Directive - IFD).

Following the publication of the EBA Guidelines on SREP for investment firms, the Report published on 24 Oct 2022 fulfils the mandate under point (d) of Article 35 of the IFD and complements the Report on the management and supervision of ESG risks for credit institutions and investment firms, published in June 2021.

Point (d) of Article 35 of IFD mandates the EBA to develop a report providing the criteria, parameters and metrics by means of which supervisors and investment firms can assess the impact of short, medium and long-term ESG risks for the purposes of the supervisory review and evaluation process. The Report has been transmitted to the EU Parliament, the Council and the European Commission.

Non-financial reporting

The CSRD entered into force on January 5, 2023.

The rules will start applying between 2024 and 2028 in the following increments:

• For the year commencing 1 January 2024: Large public-interest companies (with over 500 employees) already subject to the non-financial reporting directive, with the relevant reports due in 2025;
• For the year commencing 1 January 2025:  Large companies that are not presently subject to the non-financial reporting directive (with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with the relevant reports due in 2026;
• For the year commencing 1 January 2026:  Listed small and medium sized enterprises (SMEs) and other undertakings (small and non-complex credit institutions and captive insurance undertakings), with the relevant reports due in 2027. SMEs can opt-out until 2028.
• For the year commencing 1 January 2028:  Non-EU companies with net sales in the EU of more than EUR 150 million and at least one subsidiary or  branch in the EU, with the relevant reports due in 2029

Listed companies, and large companies in particular.

The CSRD is a flagship piece of legislation that, once brought into national law, will impose tighter reporting standards and   obligations on in scope companies in relation to their disclosure of pertinent sustainability information.

The CSRD replaces the Non Financial Reporting Directive (NFRD), and is aimed at, amongst other things, addressing shortcomings in the existing legislation, and expanding the scope of the disclosure required by the relevant entities.

The CSRD introduces more detailed reporting requirements in relation to companies’ environmental, social,  and human rights impacts.  The stated aim of the legislation is to “modernise and strengthen the rules concerning the social and environmental information that companies have to report ….. to ensure that investors and other stakeholders have access to the information they need to assess the impact of companies on people and the environment and for investors to assess financial risks and opportunities arising from climate change and other sustainability issues.”

To ensure the relevant companies are providing reliable information, they will be subject to independent auditing and certification. The legislation aims to put financial and sustainability reporting on equal footings, and give investors access to similarly granular sustainability data as they would have financial information.  

The reporting standards required are enshrined in the European Sustainability Reporting Standards (ESRS), which the European commission adopted on 31 July 2023. A detailed article on the ESRS can be found here.

Transposition Status

For a summary of the transposition status of the CSRD, please see the Hogan Lovells CSRD Transposition tracker here . The EU also publishes a list of member states who have transposed the CSRD into national law, as well as links to the underlying legislation (see here).

The European Commission recently published a number of draft FAQs (see here) clarifying the scope of the CSRD, amongst other regulations. See these useful articles “Three months on from the CSRD transposition deadline – where are we now” and “European Commission publishes draft FAQs on EU Corporate Sustainability Reporting Directive (CSRD)” for more information.

Corporate governance policy and financial and non-financial disclosures

In force since 2013

New consolidated version adopted on 30 September 2021.

Large institutions with securities traded on a regulated market of any EU Member State

Regulation (EU) 2019/876 amending Capital Requirements Regulation includes under article 449a the requirement to disclose prudential information on environmental, social and governance risks, including transition and physical risk, addressed to large institutions with securities traded on a regulated market of any Member State. These disclosure requirements are applicable from June 2022 on an annual basis during the first year and biannually thereinafter. 

Non-financial reporting

Voluntary standards

Financial institutions such as pension funds and asset managers

The Net Zero Investment Framework provides recommended methodologies and actions which asset owners and asset managers should utilise to assess and undertake alignment of their portfolios towards net zero, in order to maximise their contribution to the decarbonisation of the real economy. The Framework puts forward metrics to assess investments and measure alignment, and requires investors to set concrete targets at portfolio and asset level.

The key recommendations revolve around governance and strategy, portfolio reference targets, strategic asset allocation, asset class alignment, policy advocacy, and stakeholder and market engagement.

Investors are encouraged to publish information annually on how they consider their targets to be aligned to a pathway to achieve global net zero emissions by 2050, and the strategy and actions they have implemented across all asset classes, and performance against the objectives and targets over time.

Financial and non-financial reporting

Voluntary standards

Asset managers

The code focuses on socially responsible investment (SRI) funds distributed publicly in Europe and has been designed to cover a range of assets classes, such as equity and fixed income.

The principle driving the Code is that asset manager signatories should be open and honest, and disclose accurate, adequate and timely information to enable stakeholders, in particular retail investors, to understand the policies and practices of a given SRI fund.

Signatories need to make several commitments such as respecting the order and exact wording of the questions of the code, updating responses at least on an annual basis, and making the responses to the code easily accessible from the fund’s and/or fund manager’s website.

Sustainability standards

Voluntary standards

All companies

The Commission adopted on March 2022 draft revised Guidelines on the assessment of Horizontal Agreements. Such guidelines will enter into force on 1 January 2023. Chapter 9 of the guidelines concerns “sustainability agreements”. According to chapter 9, agreements which meet certain standards of sustainability can outbalance negative effects under a competition standpoint and can thus be exempted from the application of competition rules.

Corporate Governance

In force

EU financial services firms

The EU has introduced amendments to various Delegated Acts (see link) which will integrate sustainability issues into a number of key financial services Directives.

Entities will be:

• Required to integrate sustainability factors into their assessment of client suitability for certain financial products and when undertaking product approval of instruments.
• Subject to new obligations to integrate sustainability risks into risk management and conflict procedures
• Subject to new fiduciary duties, making sure that they encompass sustainability risks such as the impact of climate change.
   

Support of SMEs and organisations projects

Entry into force: 26 March 2021.

Application: 1 January 2021

EU SMEs and organisations with difficulties when accessing finance because of their perceived high risk (in particular after COVID-19 crisis).

This Regulation establishes the InvestEU Fund, which shall provide for an EU guarantee to support financing and investment operations carried out by the implementing partners that contribute to objectives of the Union’s internal policies. The Regulation also establishes an advisory support mechanism to provide support for the development of investable projects and access to financing and to provide related capacity building assistance.

Social policy; Corporate governance policy

In force since 14 April 2021

Men and women workers, and companies based in Spain

Royal Decree provides for the incorporation of a series of instruments that, in application of the principles of transparency of remuneration, make effective the right to equal treatment and non-discrimination between women and men in matters of remuneration.

All companies must have a remuneration register for their entire workforce, including management personnel and senior executives. The second obligation is to have a remuneration audit to verify compliance or non-compliance with the principle of equality between men and women in terms of remuneration. Companies that must carry out an audit will have the obligation to carry out a diagnosis of the remuneration situation. They must also establish an action plan for the correction of pay inequalities, with the determination of objectives, specific actions, timetable and person responsible. The last obligation is to establish a job evaluation system. It is stated that one job has the same value as another when the nature of the functions, the conditions and the factors strictly related to its performance are in fact equivalent.

Social policy; Corporate governance policy; Government-led standard

In force since 14 July 2022

Workers, companies and other employer entities based in Spain.

The purpose of the Law is to guarantee and promote the right to equal treatment and non-discrimination, respecting the equal dignity of persons. This law extends protection to more situations of discrimination by adding, to the six grounds included in the Spanish Constitution (discrimination on the grounds of birth, race, sex, religion, opinion or any other personal or social condition or circumstance), the right of all persons to equal treatment and non-discrimination regardless of their nationality, whether they are minors or adults or whether or not they enjoy legal residence not to be discriminated against on the grounds of: age, disability, sexual orientation or identity, gender expression, disease or health condition, serological status and/or genetic predisposition to suffer pathologies and disorders, language, socioeconomic status. It is important to point out that the law has explicitly and specifically referred to illness in order to make it clear that differences in treatment based on this circumstance cannot be protected.

Social policy; Corporate governance policy

In force since 2 March 2023

Workers, companies and other employer entities based in Spain.

The Law establishes the organization of public employment policies and regulates the set of structures that make up the National Employment System. It aims to contribute to job creation and unemployment reduction, improve employability, reduce structural gender gaps and promote social and territorial cohesion. The Law transforms the State Public Employment Service into the Spanish Employment Agency and establishes a series of commitments to be assumed in order to be able to access the guaranteed services. In addition, exceptionally, specific working and employment conditions for women and young workers are allowed in order to guarantee real and effective equality in the access to and consolidation of employment. It also introduces amendments to the Workers’ Statute Act.

Social policy; Government-led standard

Approved the 16 March 2023

Families and their social protection and reconciliation rights.

The main novelties it contains are based on four pillars:

Firstly, the extension of social protection to families and support for upbringing, which extends the upbringing income to a greater number of families, and the range of protection for large families is extended. In the advance in guaranteeing the right to conciliation for all families, it creates three types of care leave. Likewise, full legal recognition is given to the different types of families, such as unions and unmarried couples and the protection of families with members with disabilities, adoptive and multiple families, among others. Ultimately, it guarantees the recognition and protection of the children and adolescents, through respect for family diversity as a principle of the educational system, and improves the Child Support Guarantee Fund.

Social policy; Corporate governance; Government-led

In force since dd 17 March 2023

Workers nearing retirement age

The main objective pursued throughout this regulatory process has been to deal with the retirement of the largest generation in Spain (baby boomers). The focus has been on the following aspects: shielding the revaluation of present and future pensions, revaluing minimum and non-contributory pensions and not penalizing workers who have had irregular careers.

The first measure is the gradual increase in the maximum contribution bases, increasing the mass of wages subject to contribution, together with a correlative increase in the maximum pensions. Secondly, it establishes the creation of a 6% solidarity quota for the highest salaries. On the other hand, the Intergenerational Equity Mechanism (MEI) is modified so that it will grow by one tenth of percentage point each year. It also establishes a new calculation formula so that the most beneficial contribution is applied to the worker. The regulation also provides for an increase in the gender gap supplement and seeks to reinforce and improve minimum pensions, including in the lowest minimum and non-contributory pensions.

Social policy

In force since 30 June 2023

Workers, especially with regard to the protection and the exercise of their rights.

The Royal Decree includes various labor-related measures. Among them, the transposition of the European Directive on the reconciliation of family and professional life, and the amendment of the Workers’ Statute. The main new features are related to the recognition of domestic partners for the purpose of reconciliation rights; the extension of the adaptation of the working day due to the need to care for a child, partner or family members; new permits such as caregivers’ leave or leave for urgent situations; new grounds for suspension of the contract due to parental leave; simultaneous exercise of certain reconciliation rights and extension of the nullity of dismissal.

Social Directive

In force since 6 June 2023

Workers, companies, public and private entities

The Directive reinforces the application of the principle of equal pay for men and women for equal work of equal value. Its most relevant aspects are, first of all, the description of the gender-neutral criteria used to determine pay and career advancement. It devotes a section to the right of information for female workers on their individual pay levels and on the average pay levels. It also provides that job applicants have the right to receive information from the potential employer on the starting pay level or starting pay range, and the objective and gender-neutral criteria for the position for which they are applying and the duty for employers to ensure that job vacancy announcements are gender-neutral, and that recruitment processes are carried out in a non-discriminatory manner. Furthermore, provides for compensation of victims of pay discrimination and the reversal of the burden of proof when the principle of equal pay has been violated.