With fines expected to be comparable to those imposed for violations of competition and data protection laws the companies that operate in or trade with the EU might face financial exposure for up to 10% of their global turnover. Other sanctions mentioned in the draft law include suspension of operations and seizure of commodities.
Another proposal that sparked a lot of controversy and will affect cross-border corporate strategies relates to sustainable corporate governance. The EU is exploring board accountability options where directors would be required to integrate sustainability considerations into the decision-making process as part of their duty of care. Furthermore, the Commission considers different approaches to aligning directors’ remuneration with a longer-term perspective, including attention to sustainability risks and opportunities and establishment of corporate sustainability metrics and KPIs.
Another initiative with an extraterritorial outreach is the Methane Strategy. This proposal envisages a series of measures aimed at reduction of methane emissions that occurred in and outside of the EU in relation to fossil fuels used by the Member States. While the European Union is the world’s largest importer of natural gas the majority of associated emissions are generated outside of its borders. The Commission therefore believes that the EU can play an important role in ensuring worldwide reductions of methane emissions by supporting or requiring actions by its trading partners.
Several other initiatives under the Green Deal also have a considerable international dimension. Biodiversity and Forest Strategies propose measures to support deforestation related to imported agricultural products, while the Industrial Strategy and Circular Economy Action Plan aim to promote resource efficiency and waste reduction in the EU and on a global scale. In practice this will require the EU to develop sustainability standards for products sourced from the third countries.
Lastly, the EU has the ambition to spearhead international climate diplomacy. The EU Green Deal stipulates that adherence to the Paris Agreement will be proposed as “an essential element for all future comprehensive trade agreements” and notes that “the EU’s most recent agreements all include a binding commitment of the Parties to ratify and effectively implement the Paris Agreement”.
The picture that emerges from the above is that the Europe’s Green Deal will make a significant mark on the way businesses conduct their global operations. The EU is taking on a mission to improve global sustainability via a suite of regulatory tools ranging from support and encouragement through monitoring of foreign activities, imposing binding standards and border adjustments to penalties and sanctions.
While such measures might trigger scrutiny under the WTO rules, especially under the Technical Barriers to Trade Agreement, in their absence the EU might face credibility challenges if the Green Deal delivers on its promises domestically but raises questions about potential offshoring of environmental impacts. Such concerns might soon be shared among all the nations who aspire to lead the transition to climate neutrality and sustainable development. Therefore, the world of international trade seems to be inevitably trending towards greater consideration given to environmental safeguards.
As businesses prepare to operate in this new environment, they should consider taking the following steps:
First, be sure to closely follow policy developments and influx of new regulations coming from the EU that will have impact on global operations. They should also consider participating in public consultations that the EU is conducting regarding most of these new policies
Next, businesses should quantify the impact of the new policies on business (applies to CBAM) and other financial instruments. And, they should start thinking through a compliance strategy regarding corporate governance, supply chain accountability and other standard-setting regulations.