EU sustainability agenda: what to expect over the next five years

EU sustainability agenda: what to expect over the next five years
 

Who is this blog for?
 

Board members, senior executives, Chief Sustainability Officers, and those working on sustainability in financial services firms and corporates.
 

At a glance
 

• Following EU elections, we anticipate that pro-European centrist parties will continue to set the agenda on sustainability. We expect the key pillars of the EU’s sustainability agenda to remain in place and continued commitment to the European Green Deal. Nevertheless, there is likely to be increasing political divergence on sustainability across the Parliament, including increasing influence from parties critical of the European Green Deal.
• While there are new sustainability policy proposals in Ursula von der Leyen’s political guidelines, and more legislation and guidance still to come under the existing European Green Deal, we anticipate a slowdown in the pace of level one legislation and instead a focus on implementation and investment.
• Whilst sustainability will maintain its high importance, it will increasingly be seen as a means to support EU competitiveness and energy security, rather than as an end in itself. Making a success of the green (and digital) transitions is an important way the European Council plans to achieve a “prosperous and competitive Europe”. Sustainability will therefore increasingly be embedded across EU legislation. The EU’s biggest initiatives will focus on investment and finance for clean energy.
• We also expect increasing emphasis on reducing the regulatory burden on business (e.g. reducing red tape and reporting, and simplifying implementation) and supporting business, particularly SMEs, in the transition.
• Sustainability will need to remain a priority for corporates and financial services firms. They need to continue progressing transition planning to meet sustainability targets and enhancing risk management. Firms can use the anticipated slowdown in the flow of significant new level one sustainability legislation to focus on implementation. They can also track opportunities arising from the EU’s focus on competitiveness, investment, and transition finance.
  
  

Introduction

This summer has seen European Parliament elections and the re-election of Ursula von der Leyen as European Commission President. With the recent publication of von der Leyen’s Mission Letters to Executive Vice-President-designates and Commissioner-designates, we have assessed what these post-election changes are likely to mean for the sustainability agenda in the EU over the course of the next five-year mandate.

This note covers the following topics:

i. Recap on what has happened.

ii. What these changes are likely to mean for the EU sustainability agenda over the next five years.

iii. Key sustainability priorities set out in Ursula von der Leyen’s political guidelines and Mission Letters.

iv. What does this mean for corporates and financial services firms?
 

i. Recap on what has happened
 

• The results of the European Parliament elections (held in June) are that the three pro-European centrist parties (European People’s Party (EPP), Progressive Alliance of Socialists and Democrats (S&D) and Renew Europe) retained their majority. Right-wing parties also made gains, with the newly formed, Patriots for Europe party, now the third largest party in the European Parliament.
• The European Council published its Strategic Agenda 2024-29 in June. While sustainability is no longer a headline priority, making a success of the green and digital transitions is an important way the European Council plans to achieve a “prosperous and competitive Europe”.
• Ursula von der Leyen was re-elected in her role as Commission President for a further five-year term. Her political guidelines setting out her vision draw on the European Council’s Strategic Agenda and on von der Leyen’s consultations with parties in the European Parliament. It is an important document in setting out expected EU policy.
• Ursula von der Leyen unveiled the prospective College of Commissioners in September, setting out portfolios and Mission Letters ahead of hearings expected in October / November. The new Commission is expected to take office in December / January and its detailed Work Programmes to be published next year.
• In April 2024, former Italian Prime Minister, Enrico Letta, published a High-Level Report on the future of the Single Market. In September 2024, Mario Draghi also published two reports on the future of European competitiveness. Both reports will influence policymakers.
   

ii. What these changes are likely to mean for the EU sustainability agenda over the next five years
 

1. Pro-European centrist parties will continue to set the agenda on sustainability, but with increasing divergence and influence from parties critical of the Green Deal.

We anticipate that pro-European centrist parties will continue to set the agenda on sustainability. Nevertheless, achieving consensus between these parties will be challenging, with those on the left typically focused more on delivery of the Green Deal and just transition, and those on the right typically focused more on competitiveness and reducing the burden on business.

We expect increasing influence from the right, where the outcome of national elections are likely to have a bearing on EU policy and, within the European Parliament, the newly formed Patriots for Europe party is now the third largest party in the European Parliament. Based on the known views of the party’s members, it is likely to be highly critical of the Green Deal. However, so far, none of its MEPs hold Chair or Vice-Chair positions on European Parliament Committees.

2. We expect the key pillars of the sustainability agenda to remain in place and continued commitment to the European Green Deal.

The EU Climate Law, the Fit for 55 package introducing targets for Member States and certain industries, and other key pieces of legislation under the European Green Deal have already entered into force. In her political guidelines, Ursula von der Leyen has stated that “we must and will stay the course on the goals set out in the European Green Deal”.

Therefore, the goals and overarching sustainability strategy to 2030 and 2050 are established and unlikely to be unpicked. Von der Leyen also plans to press ahead with introducing in law a 90% GHG emissions reduction target for 2040, relative to 1990, expected early 2025. What we don’t know is how much resistance this may receive. Even legislation which has already entered into force, such as the EU Deforestation Regulation, is subject to calls for delay.

3. Continuation in policy, slowdown in the pace of legislation, and focus on implementation.

A significant amount of legislation under the European Green Deal was introduced under the previous European Parliament. Therefore, a slowdown in the pace of level one legislation was always anticipated and already underway prior to the elections.

While there are new sustainability policy proposals in Ursula von der Leyen’s political guidelines and Mission Letters (see below) and there is more legislation still to come under the European Green Deal, Ursula von der Leyen’s political guidelines largely set out a continuation in policy approach and a focus on implementation and investment.

As the practical realities of implementation become more apparent, how Member States and companies do so and the consequences of poor progress against targets or poor compliance, will be a key test of EU ambition on sustainability. It is notable that in von der Leyen’s Mission Letters she tasks each Executive Vice-President-designate and Commissioner-designate with preparing an annual progress report on enforcement and implementation.

Another key test will be whether the required funding will be forthcoming. In the Draghi reports, the investment needs are described as “massive and unprecedented from a historical perspective.” Achieving the energy transition makes up more than half of the 750 to EUR 800 billion minimum annual additional investment needed to meet the objectives in the report (based on Commission estimates).

4. EU competitiveness

EU priorities have shifted since the last elections in 2019. In her speech to the European Parliament, Ursula von der Leyen emphasised competitiveness as her “first priority”. The European Council’s Strategic Agenda has achieving a “prosperous and competitive” EU as a key priority. Security and defence, democracy and social fairness, and the cost of living will also feature highly in the future EU agenda. Sustainability still maintains high importance but is increasingly being seen as a means to support EU competitiveness and energy security, rather than as an end in itself.

Rather than key new sustainability legislation, we will increasingly see sustainability embedded across legislation and responsibilities related to sustainability embedded across the Commission. Each Executive Vice-President-designate and Commissioner-designate has responsibilities in relation to achieving the EU’s climate objectives and delivering the European Green Deal, and 19 out of 26 of them have specific responsibilities related to the sustainability agenda. Ensuring coordination within the Commission will be important for the EU to make progress on its sustainability agenda.

While initiatives on nature and just transition are planned, the focus in the political guidelines is on clean and affordable energy and the finance and investment required to achieve it.

In its expected legislative reviews, level two legislation, and guidance, we may see a reduction in ambition on climate as the EU seeks to pursue its other priorities, such as competitiveness. For example, as part of the review of the 2035 phase-out of Internal Combustion Engines cars or vans, a targeted amendment is expected, aimed at ensuring a technology-neutral approach in which e-fuels have a role to play.

5. Reducing the burden on business

As part of the competitiveness agenda, we expect increasing emphasis on reducing the burden on business and supporting business, particularly SMEs, in the transition.

In her Mission Letters, Ursula von der Leyen has given each Executive Vice-President-Designate and Commissioner-designate a responsibility to “table proposals to eliminate any overlaps and contradictions” in EU legislation, ensure “existing rules are fit-for-purpose and focus on reducing administrative burdens and simplifying legislation”, and “contribute to reducing reporting obligations by at least 25% - and for SMEs at least 35%.”

While the Mission Letters do not specifically refer to sustainability legislation, the Draghi reports referenced the EU’s sustainability reporting and due diligence framework as a “major source of regulatory burden”. Therefore, we anticipate that the Corporate Sustainability Reporting Directive (CSRD), EU Taxonomy, and Corporate Sustainability Due Diligence Directive (CSDDD) will be key pieces of legislation where the EU will look to enhance usability.

The International Sustainability Standards Board (ISSB) is positioned as the global standard setter on sustainability reporting, taking over various responsibilities in relation to work by the Task Force on Climate-related Financial Disclosures (TCFD), the UK’s Transition Plan Taskforce, and the Taskforce on Nature-related Financial Disclosures (TNFD). As the EU looks to increase interoperability, as it did with its May 2024 ESRS-ISSB interoperability guidance, its future legislation and guidance is likely to be influenced, to some extent, on what the ISSB and other international organisations do.

iii. Key sustainability priorities set out in Ursula von der Leyen’s political guidelines and Mission Letters
 

• Introduce a legislative proposal amending European Climate Law and introducing a 90% GHG emissions reduction target for 2040 relative to 1990.
• Complementing the European Green Deal, adopt a new Clean Industrial Deal in the first 100 days of the mandate to decarbonise and bring down energy prices, and put forward an Action Plan for Affordable Energy Prices.
• To support sustainable and transition finance, create a new EU Savings and Investment Union, including banking and capital markets, explore ways to promote the development and transparent categorisation of financial products and services with sustainability features, and put forward risk-absorbing measures to make it easier for commercial banks, investors, and venture capital to finance fast-growing companies.
• Introduce a new European Competitiveness Fund to invest in strategic technologies, including clean tech, and Important Projects of Common Interest.
• Develop the governance needed for an EU Energy Union, intended to strengthen the internal market for affordable and clean energy.
• Scale-up and prioritise investment in clean energy infrastructure and technologies, including renewables and low-carbon technologies, grid infrastructure, storage capacity and transport infrastructure for captured CO2, as well as invest in energy-efficiency measures, the digitalisation of energy systems, and the deployment of a hydrogen network.
• Adopt an Industrial Decarbonisation Accelerator Act to support industries and companies in the clean-energy transition, in particular, channelling investment for energy intensive sectors.
• Level the energy taxation playing field and introduce taxation measures to incentivise the uptake of clean technology (this action was taken forward from the Draghi reports into the Mission Letters).
• Introduce a new Circular Economy Act to create market demand for secondary materials and a single market for waste, and a new chemicals industry package to simplify REACH and provide clarity on “forever chemicals”, or PFAS (a large group of synthetic, widely used, long lasting chemicals).
• “Significantly increase” funding for a just transition across the next long-term budget, including through a Just Transition Fund.
• Roll-out a Social Climate Fund, intended to help with renovations and access to affordable and energy-efficient housing.
• Present a Vision for Agriculture and Food in the first 100 days looking at how to ensure the long-term competitiveness and sustainability of the farming sector.
• Protect nature, with a European Oceans Pact and focus on reaching international biodiversity commitments.
• Introduce a European Climate Adaptation Plan and European Water Resilience Strategy.

iv. What does this mean for corporates and financial services firms?
 

Overall, we anticipate considerable continuity in policy over the next five years, with continued focus on the European Green Deal and achieving sustainability targets. Firms should use the anticipated slowdown in level one legislation to focus on implementation.

We also anticipate focus on climate and sustainability by European supervisors and other authorities, such as the European Central Bank (ECB), European Supervisory Authorities (ESAs), and European Financial Reporting Advisory Group (EFRAG), to continue, and, in some cases, intensify, especially in the event of increasing transition risks and extreme weather events.

It will be several months before we understand in detail the priorities of the new Commission. As part of regulatory horizon scanning, firms should track expected new legislation, legislative reviews, level two legislation, and guidance. They should understand the impact on their firm’s operations and strategy and where there might be uncertainties.

Firms should identify opportunities that may arise from the EU’s focus on competitiveness, investment, and transition finance. They should also monitor market developments, including in technology necessary for the transition, which we expect will increasingly be driven more by market dynamics and less by regulation.

Ultimately, we believe that sustainability will remain a key priority for corporates and financial services firms and there should be no slowdown in progressing transition planning to meet sustainability targets and enhancing risk management.