In our country, the Corporate Governance Code provides for binding rules on the governance of listed companies. Its objective is to guarantee transparency of financial and structural information to shareholders.

However, in the international level, there is an increasing emphasis on the fact that listed companies are not only liable in terms of their internal governance, but also in terms of social and environmental factors. This trinity is referred to as "ESG", which stands for "Environmental, Social and Governance". It refers to the three factors used to measure the sustainable, environmental and societal impact of financial investments.

The shift towards higher sustainability standards cannot be reversed. In the long run, all companies, including non-listed companies, have a long-term interest in including ESG standards in their business strategy, even if they are not yet obliged to do so by the applicable regulations.

In this article, we look at the origin of the focus on ESG standards, the recent European developments and the current state of affairs in Belgium.

1. The international call for more sustainability

In 2015, the United Nations General Assembly adopted a new global framework for sustainable development called the 2030 Agenda for Sustainable Development, consisting of 17 Sustainable Development Goals ("SDGs"). They cover the three dimensions of sustainability: economic, social and environmental.

The EU has not slackened its efforts either:

  • In 2016, the European Commission issued a communication linking the SDGs to the EU policy framework, ensuring that all EU regulations would include the SDGs;
  • In 2017, the Council confirmed the commitment of the EU and its Member States to implement the '2030 Agenda' in a full, comprehensive, integrated and effective manner;
  • In 2019, the European Commission published the European Green New Deal.

In parallel to the 2030 Agenda, the United Nations Framework Convention on Climate Change adopted the Paris Agreement, which was approved by the EU on 5 October 2016. This Agreement affirmed the objective of achieving a climate-neutral situation in the Union by 2050.

The role of the private sector in the climate challenge is increasingly being highlighted. The financial sector has been identified as a major leverage point for effective action.

The call for taking into account ESG-related matters also come from other segments of society and are increasingly taken on by a number of companies. It is increasingly common for board members to be offered compensation for reaching some environmental, social and governance (ESG) targets. This will undoubtedly give them a direct incentive to take stakeholders into account.

Previously, stakeholder welfare was generally not taken into account in corporate strategy, as it was often not considered a key element. But if this component is linked with specific targets for managers, things will certainly change.

Some oil companies have already started doing so, which creates a precedent in the industry.

2. What about Europe?

Driven by these developments, the EU is pushing the EU economic and financial sector in a completely new direction.

Following the Paris climate agreement and the UN Sustainable Development Goals (SDGs), the EU has adopted a European Green New Deal (section 2.1).

In addition, the EU has also introduced a set of three normative instruments to direct financial flows towards sustainable investments (see section 2.2).

2.1 The European Green Deal

The EU Green Deal aims to make Europe carbon neutral by 2050.

The Green Deal is not yet completely framed nor came into force. It goes beyond corporate governance or ESG in the financial sector, but it will certainly have a huge impact on both the stock exchange and on companies that are major players in climate change.

It covers the following six areas: clean energy, sustainable industry, building and renovation, farm to fork, eliminating pollution, sustainable mobility and biodiversity.
These cover almost all areas of the modern economy.

The Green Deal will undoubtedly have a major impact on fuel and electricity providers, car manufacturers, agro-industry players, food chains, etc., but also on the financial sector, since long-term return on investment is the main concern of financial investors.

2.2 A clear reorientation of the European financial landscape

The European legislator started from the principle that the first lever for change would be private investment and that there was a need for a shift in the way capitals are invested. According to the EU and the United Nations, government's actions alone could not address climate and social change: they therefore called for the active participation of private funds. A rapid acceleration towards sustainability would only be possible if private investors redirect towards sustainable businesses.

To achieve this, clear and accessible information was needed. That information should also be standardised, easily readable and therefore useful and effective.

To this end, the EU introduced a set of three main legal instruments: (i) the Non-Financial Reporting Directive (NFRD), (ii) the Taxonomy Regulation, and (iii) the Sustainable Finance Disclosure Regulation (SFDR).

ESG-related disclosure requirements will have a major impact on European companies. But they will also undoubtedly stimulate economic development and investment.

2.2.1 The Non Financial Reporting Directive (NFRD)

This directive came into force in 2014 and aims at raising the transparency of disclosure of companies' non-financial information. It applies to large listed companies, banks and insurance companies (public interest entities) with more than 500 employees, requiring them to disclose their ESG policies.

In 2021, the European Commission published a proposal for a new directive, the Corporate Sustainability Reporting Directive (CSRD), which is a revision of the NFDR.

This new directive is expected to strengthen and standardise so-called extra-financial reporting on environmental, social and governance (ESG) issues.

Sustainability reporting should thus be aligned with financial reporting.

The CSRD is expected to extend the requirements of the current NFRD to all companies with more than 250 employees and to all listed companies.

This will quadruple the number of companies that will be subject to this directive. Indeed, the nearly 50,000 companies subject to the new requirements are themselves at the heart of an economic chain that links suppliers and subcontractors, which will lead to a de facto expansion of the CSRD system.

Importantly, the Commission proposes to establish separate standards that non-listed SMEs can apply on a voluntary basis. These rules will also apply to EU subsidiaries of non-EU companies and subsidiaries of groups of companies.

The Commission proposes that the CSRD be transposed into national law by 1 December 2022.

2.2.2 The Taxonomy Regulation 

The Taxonomy Regulation, which will enter into force in January 2022, establishes a framework for a EU taxonomy of investments. In order to qualify as "environmentally sustainable", an economic activity has to meet four overarching conditions. This will enable comparison between different business activities to take better investment decisions.

The current version contains a first set of six environmental objectives to come into force in January 2022.
1. Climate change mitigation ;
2. Climate change adaptation;
3. Sustainable use and protection of water and marine resources;
4. Transition to a circular economy;
5. Pollution prevention and control;
6. Protection and restoration of biodiversity and ecosystems.

The social and governance objectives will come into force in December 2022.

The taxonomy regulation applies to the financial sector, but also to all public-interest entities headquartered in Belgium that fall under the scope of the NFRD.

Companies will be required to report on the proportion of turnover and expenses related to taxonomy-aligned activities.

2.2.3 The Sustainable Finance Disclosure Regulation (SFDR)

The SFDR applies to financial institutions (banks, investment firms, asset managers and insurers). They will have to classify their funds into three categories (grey, green, dark green).

They will have to disclose information about organisational, service and product levels of the companies in which they invest. This should promote green investments and prevent greenwashing. Greenwashing is the process of conveying a false impression or providing misleading information about a company's products by suggesting that they are more environmentally sound than they actually are.

3. What is Belgium's role in this area?

In 2009, our country adapted the legal framework on the corporate structure of listed companies according to international standards. The focus was on corporate governance, which resulted in the first Belgian Corporate Governance Code that was updated in 2020.

The Code applies to listed companies and contains specific standards to guarantee good governance. Corporate governance is therefore essentially addressed towards investors and shareholders, ensuring them that the companies they are invest in are structurally and financially sound.

However, the sustainability of a company's activity as such is not part of corporate governance issues, which only regulates the functioning of its board of directors, regulating their remuneration, performance and composition. The governance rules also provide for the disclosure of companies' financial information.

The Belgian Corporate Governance Code therefore only deals with the 'G' of ESG. Not a word is said about the environment. Even the social part of the code is limited to unspecific terms. It certainly does not address the ambitious targets of the SDGs and the 2030 Agenda.

4. Conclusion

Focusing merely on corporate governance is not sufficient anymore to understand the disclosure requirements facing listed companies today. The Belgian context is of course subject to European regulation, and Europe is pushing for a focus on ESG in the financial sector.

The Belgian corporate governance code, even in its revised 2020 version, is but a small step towards transparent disclosure towards investors.

Belgian listed companies and financial service-providers will therefore have to prepare, like the rest of European companies, for the new governance reporting requirements that will come into force at the end of this year.

Outside Europe, the trend follows through. It has been reported that 85% of S&P 500 companies have been publishing reports on ESG, CSR and sustainability since 2017, compared to only 20% in 2011. The tide is strong.

We can therefore expect similar developments in regulation and industry practices in Europe in the near future.

One thing is certain: anticipating these changes offers nothing but benefits, namely more transparency for investors, a leading position in moving towards a new economic paradigm, and sustainable business models allowing a resilient and sustainable corporate structure.

Unsustainable business management, on the other hand, increases the cost of doing business, especially in terms of employee welfare and unnecessary staff turnover, environmental penalties, lost opportunities, reputational damage, lawsuits, etc.

The initial investment may seem high, but the returns are rapid, consistent and multi-faceted. This is increasingly important in a changing economy, where corporate resilience and reputation are increasingly at stake.

Seeds of Law has a sustainability unit that informs and assists companies to comply with the ESG regulations. Please do not hesitate to contact us in this regard: +32 (0)2 747 40 07 or via

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Leo Peeters

Leo Peeters

Koen de Puydt

Koen de Puydt