Food production affects the surrounding environment and ecosystem, and can even contribute to hazardous anthropogenic climate change. Furthermore, food production raises other concerns throughout the supply chain, such as the violation of fundamental and social rights.
In light of this, the European Union (EU) and its Member States have adopted measures to address the aforementioned issues. In this article, we provide an overview of the recent Environmental, Social, and Governance (ESG) provisions that are relevant for the food sector. This includes: the Regulation on Deforestation-free Supply Chains, the Corporate Sustainability Reporting Directive 2022/2464, and proposed Corporate Sustainable Due Diligence Directive; all EU ESG instruments that highly impact the entire food sector.
Regulation on Deforestation-free Supply Chains
Last December, the European Council and European Parliament reached an agreement about the Proposed Regulation on Deforest-free supply chains of 17 November 2021 (Regulation) by the European Commission. In short, this Regulation imposes further mandatory due diligence obligations to ensure that goods sold in the EU have not been produced on ‘deforested or degraded land’ anywhere in the world. This strengthened due diligence obligation means that operators and traders will have to prove that the products are both ‘deforestation-free’ (pursuant to the new text of the approved trialogue agreement of the said Regulation, ‘deforestation’ means: “the conversion of forest to agricultural use, whether human-induced or not) after 31 December 2020 and comply with all relevant applicable laws in force in the country of production. However, small operators can rely on due diligence declarations prepared by larger operators.
According to the European Commission:
“(…) all relevant companies will have to conduct strict due diligence if they place on the EU market, or export from it: palm oil, cattle, soy, coffee, cocoa, timber and rubber as well as derived products (such as beef, furniture, or chocolate). These commodities have been chosen on the basis of a thorough impact assessment identifying them as the main driver of deforestation due to agricultural expansion.”
Furthermore, companies will also be required to collect precise geographical information on the farmland where the commodities that they source have been grown, so that these commodities can be checked for compliance. Therefore, the European Commission will set up a benchmarking system that will assess countries or parts thereof and their level of risk of deforestation and forest degradation. The Regulation also observes the protection of human rights and introduces a judicial compliance mechanism through the means of public enforcement.
The European Parliament and the Council will now formally have to adopt the new Regulation before it can enter into force.
Corporate Sustainability Reporting Directive 2022/2464
The Corporate Sustainability Reporting Directive 2022/2464 (CSRD) was adopted on 28 November 2022 following final approval by the Council of the European Union (EU). Subsequently, the CSRD has entered into force on 5 January 2023. The CSRD has to be transposed into national legislation on 6 July 2024 and will apply to companies pursuant to the following implementation stages and categories below:
| Overview application CSRD | ||
| Category | Criteria | Implementation date |
| Large EU ‘public interest entities’ – already subjected to the NFRD | A balance sheet/assets total of at least 20 million EUR or a net turnover of at least 40 million EUR; andMore than 250 employees | Financial years starting on or after 1 January 2024; the companies concerned report in 2025 over 2024 |
| Large EU undertakings and EU parent undertakings of large groups – currently not subjected to the NFRD | A balance sheet/assets total of at least 20 million EUR or a net turnover of at least 40 million EUR; andMore than 250 employees | Financial years starting on or after 1 January 2025; the companies concerned report in 2026 over 2025 |
| Listed SMEs, small and non-complex credit institutions, and captive insurance | Admitted to the stock exchangeA balance sheet/assets total of at least 350.000 EUR or a net turnover of at least 700.000 EURMore than 10 employees; | Financial years starting on or after 1 January 2026; the companies concerned report in 2027 over 2026 (although SMEs can opt out until 2028) |
| Non-EU parent company with:an EU-established large subsidiary or a listed SME subsidiary; ora large EU branch | Net turnover above 150 million EUR in the EU;One subsidiary or branch in the EU exceeding certain thresholds. | Financial years starting on or after 1 January 2028; the companies concerned report in 2029 over 2028 |
In addition to the CSRD, we note that the mandatory EU sustainability reporting standards (ESRS) are being drafted by the European Financial Reporting Advisory Group (EFRAG). The disclosure requirements stemming from these ESRS apply to all companies regardless of their sector. Following the submission of the first draft ESRS by EFRAG on 22 November 2022, the European Commission started with consulting EU bodies and Member States on these draft standards. The European Commission has to finalise the submitted ESRS on 30 June 2023 by adopting a ‘delegated act’. Moreover, additional ESRS for specific sectors, SMEs, and third-country companies are also being drafted. These additional ERSG will be implemented by delegated acts before the end of June 2024.
In short, the CSRD imposes a more detailed reporting obligation on a whole range of sustainability issues relevant to the company’s business in comparison to the Non-Financial Reporting Directive (NFRD). Companies will have to report on how their business model affects their sustainability throughout their own supply chain, and on how external sustainability factors (such as climate change or human right issues) influence their activities. Furthermore, companies have to formulate long-term ESG targets and annually publish their progress on these targets. The sustainable targets, and performance linked to those targets, must also be incorporated into the annual report, which is subjected to an independent audit. Finally, reporting under the CSRD is based on the concept of ‘double materiality’. This means that companies not only have to report on sustainability risks affecting the company (financial materiality), but also on the company’s own impacts on society and the environment (impact materiality).
Finally, we point out that the final version of the CSRD dropped all binding penalties, but EU member states still have a discretion to impose sanctions.
More to come…
For completeness, we note that the proposed Corporate Sustainable Due Diligence Directive (CSDD) of 23 February 2022 is being debated by the European Parliament and the Council. On 1 December 2022, the Council adopted its negotiating position (‘general approach’), which provides them with a mandate to start negotiations with the European Parliament.
In brief, the CSDD lays down rules on obligations for large companies regarding actual and potential adverse impacts on human rights and the environment, with respect to their own operations, those of their subsidiaries, throughout their global supply chain. The CSDD not only imposes environmental and human rights due diligence monitoring but also imposes a combination of administrative enforcement and civil liability to ensure overall compliance.
Curious about the impact of these ESG measures on your company? Our team can advise on your company’s ESG plans and ambitions.
