Asia Newsletter #3 – Navigating the EU ESG regulatory landscape in Asia (Introduction)

The European Union (“EU”) has been a driving force in environmental, social and governance (“ESG”) regulations. The EU’s environmental policies are part of a broader commitment to the Sustainable Development Goals (“SDGs”), adopted by the United Nations General Assembly[1] in 2015. These goals address critical global challenges such as climate change, environmental degradation, and social inequality.

In 2019, the EU announced the European Green Deal, setting an ambitious target of achieving zero net greenhouse gas (“GHG”) emissions by 2050. This initiative underscores the EU’s dedication to becoming the world’s first climate-neutral continent.

To support this goal, the EU has implemented a series of regulatory measures designed to promote sustainability and mitigate the impacts of climate change, including:

• The Directive 2022/2464 on corporate sustainability reporting (“CRSD”),
• The Regulation (EU) 2023/1115 on the making available on the Union market and the export from the Union of certain commodities and products associated with deforestation and forest degradation (“EUDR”),
• The Regulation (EU) 2023/956 establishing a carbon border adjustment mechanism (“CBAM”),
• The proposed Regulation (EU) on prohibiting products made with forced labour on the Union market (“Forced Labor Regulation”).

Together, these initiatives seek to drive a more sustainable economy by ensuring that companies adhere to stringent environmental standards and provide clear, reliable information to investors and consumers.

While these regulations are EU-driven, their impact extends globally. Companies worldwide that wish to do business in the EU or with EU-based companies must adapt to these standards. This requirement to adopt the EU standards has a cascading effect, pushing global supply chains towards greater sustainability and ethical practices.

The ASEAN Taxonomy Board (“ATB”), set up under the auspices of the ASEAN Finance Ministers and Central Bank Governors’ Meeting also participates to the creation of ESG guidelines by developing, maintaining and promoting a multi-tiered guide on ASEAN Taxonomy for Sustainable Finance (“ASEAN Taxonomy”) which identifies economic activities that are sustainable and help direct investment and funding towards a sustainable ASEAN.

The ASEAN Taxonomy (Version 3 published on 27 March 2024) is an overarching guide for all ASEAN Member States (“AMS”), complementing their respective national sustainability initiatives and serving as ASEAN’s common language for sustainable finance. It is designed to ensure that AMS have a framework that suits their economic and social structures that other frameworks may not be able to address.

In this newsletter, we aim to provide:

• A better understanding of the EU’s sustainability reporting landscape;
• How it compares to five key Asian jurisdictions: China, Indonesia, India, Vietnam and Singapore; and
• Steps to take to comply with the new EU regulations.

Below is an overview of our Asia-based team’s national approaches to China, India, Indonesia, Singapore and Vietnam:

• China – Navigating the European ESG regulatory landscape in Asia
• India – Navigating the European ESG regulatory landscape in Asia
• Indonesia – Navigating the European ESG regulatory landscape in Asia
• Singapore – Navigating the European ESG regulatory landscape in Asia
• Vietnam – Navigating the European ESG regulatory landscape in Asia

I. Understanding the EU’s sustainability reporting landscape

1. Key definitions and timeline

A. Key Definitions

2. Timeline of the EU legal context

3. CSRD

The CSRD is a critical part of the EU’s environmental strategy. It replaces Directive 2014/95 on disclosure of non-financial and diversity information by certain large undertakings and groups (“NFRD”) and aims to enhance the reliability and accessibility of sustainability information through standardized and comprehensive reporting. Since 1^st January 2024, the CSRD mandates companies that meet certain thresholds to report on Environmental, Social, and Governance (ESG) criteria, integrating sustainable finance and green taxonomy principles. It introduces the concept of “dual materiality,” ensuring that companies report on how sustainability issues affect them and their impact on society and the environment. This standardized reporting aims to improve the reliability and transparency of sustainability data, guiding investors, and stakeholders towards more informed decisions.

A. Comparison with other international initiatives

In comparison with the other international regulations, the CSRD can be considered as the most ambitious of the ESG information standardisation initiatives.

B. Scope of application and road map

CSRD will be implemented in phases as illustrated below:  

C. Controls and penalties:

Statutory auditor or audit form must carry out the assurance of sustainability reporting. As most of the European regulations, each member state must ensure that the provisions of the directive are implemented by providing an effective, proportionate, and dissuasive sanction to auditors and audit firms.

3. CBAM

The CBAM aims to prevent carbon leakage by ensuring equivalent carbon pricing for imports and EU products. It gradually phases out free allowances under the EU Emissions Trading System (ETS) and introduces a carbon pricing mechanism for imports, ensuring that non-EU products are not favored over EU products. This mechanism supports the goal of climate neutrality and aligns with international climate commitments, such as the Glasgow Climate Pact and the Paris Agreement. These regulations aim to reduce the EU’s carbon footprint and promote sustainable economic activities that do not exacerbate climate change.

A. Scope of application:

The CBAM creates new regulatory obligations for importers and will initially apply only to the following sectors: cement, aluminum, nitrogen fertilizers, electricity and hydrogen.

The CBAM places the main liability on the EU importer, however the regulatory obligations will require concerns all economic operators and strong cooperation between producers or  suppliers and buyers involved in the supply chain concerned in international trade from or to of products imported in the EU. The CBAM provides a transition phase and an effective operating period:

B. Obligations under CBAM

First, every importer of products covered by CBAM has to register on the CBAM register and issue quarterly reports until January 2026. Until this date, every importer will have to apply for authorized declarant status. Starting 2026, imports of CBAM products will need to be made with a CBAM certificate, whose price will be related to the carbon emissions embedded in the products imported, as calculated by the producer/supplier. From 2026, before 31^st May of each year, authorized CBAM declarants will issue the CBAM register to submit a CBAM declaration for the previous calendar year.

C. Effects of non-compliance

4. EUDR

The EUDR aims to tackle global deforestation, a major contributor to climate change and biodiversity loss and imposes strict rules in terms of due diligence to all companies wishing to market affected products in the EU or to export them. The EUDR is part of the EU’s broader strategy to protect biodiversity, as reflected in its commitments under the Convention on Biological Diversity (CBD) and the European Green Deal. Companies have until 30 December 2024 to be compliant, except for micro and small undertakings for which the EUDR will apply from 30 June 2025.

A. Scope of application

The products concerned by the EUDR are those from the following sectors: cattle, rubber, wood, soya, cocoa, coffee and palm oil. They will only be authorised to be placed on the EU market or exported if they are deforestation-free, produced in accordance with relevant local legislation and covered by a due diligence statement. Any of those product’s export to the EU, found in the food, luxury or automobile industry, in any level of the value chain (not only raw product) are concerned except if they fall into the category of recycled basic and used products that would otherwise be disposed of as waste.

To prevent and dissuade potential deforestation resulting from anticipated acceleration in the activities causing deforestation, any production activity occurring after the 31 December 2020 will be affected. Concerning the transformed goods, this regulation will apply to any products for which the production date is prior to the 29 of June 2023 and 30 December 2024 for wood.

B. Corrective measure and penalties

In case of non-compliance, companies will have to address and solve the non-compliance and may face the following sanctions:

5. Forced Labor regulation

The Forced Labour Regulation aims at preventing products made with forced labor from entering the EU market, prohibiting the import of goods produced using forced labor, requiring companies to ensure their supply chains are free from forced labor and to provide transparency about their sourcing practices, and establishing mechanisms for monitoring and enforcing compliance, including inspections and penalties for violators. The Forced Labour Regulation goal is to combat forced labor globally by leveraging the EU’s market power to encourage ethical labor practices.

A. Scope of application

This regulation will apply to all products entering into the EU market and all parties (economic operator, producer, supplier, importer, etc.) on the supply chain are concerned.

B. Controls and sanctions

Compliance with the Forced Albor Regulations will be monitored by customs authorities and non-compliance will have the following consequences:

This new EU sustainability reporting landscape is part of a broader effort to promote sustainable development and address global environmental challenges, including in Asia. For several years, Asia has been undergoing significant developments: many nations have implemented their own environmental regulations, reflecting varying levels of commitment and approaches to sustainability.

But how is Asia EU-ESG ready and how will the EU regulations impact companies in China, Indonesia, India, Vietnam and India?