The Visionaries - IR Global

• EMBRACING ESG

BELGIUM

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“ESG challenges include company cultures impeding ESG advancements, the underdeveloped nature of ESG in terms of regulations, standards and data availability, as well as the quest for suitable ecosystem partners.”

Agio LEGAL is a major Belgian independent law firm, boasting a strong team of lawyers with specialisations in areas including corporate, commercial, labour, IT/privacy, insolvency, administrative, sports, real estate, environmental, corporate criminal, and tax law, in advice and litigation. Agio LEGAL is much more than just a team of specialised lawyers. Entrepreneurs benefit more from a legal partner who is interested in their growth and success. Together we look at your goals and along the way, we get to know your business.

talent, and augmenting overall company value. Notably, ESG is perceived as an avenue for expanding into new business realms. This expansion might involve reimagining the core business by offering alternative products to the existing customer base, introducing new products in related markets, or establishing entirely new ventures aimed at different customer segments while leveraging existing internal knowledge. Realising ESG ambitions does not inherently create value and is confronted by notable hurdles. Challenges include company cultures impeding ESG advancements, the underdeveloped nature of ESG in terms of regulations, standards and data availability, as well as the quest for suitable ecosystem partners. Moreover, navigating trade-offs between short-term profitability and long-term objectives is also a hurdle. These challenges are compounded by immediate pressures such as ongoing geopolitical conflicts, high inflation, and constraints within global supply chains. The EU Directive 2022/2464 on Corporate Sustainability Reporting (the “CSRD”) The primary obligation outlined by the CSRD for companies within its scope is the disclosure of sustainability information in conformance with the European Sustainability Reporting Standards (ESRS), which were adopted by the Delegated Regulation (EU) 2023/2772 on July 31, 2023. The ESRS comprises theme-specific standards (Environmental, Social, Governance) tailored to address the most important aspects of these themes (e.g. climate for ‘Environment’, human rights protection for ‘Social’, anti-corruption compliance for ‘Governance’). The ESRS also aims to develop sector-

specific standards tailored to address unique topics within specific sectors. Simultaneously, it includes cross-cutting standards applicable, irrespective of the sector. These cross-cutting standards require a substantial range of information categories to be disclosed, including details such as the description of the business model and strategy, sustainability risks, and transition plans. This encompasses information on sustainability policies, incentive schemes on sustainability issues, as well as measures devised to prevent and mitigate adverse impact on sustainability. Noteworthy is the principle of “double materiality,” necessitating reporting on the impact of sustainability on the company and vice versa. Cross-cutting standards also introduce reporting within the value chain, with a 3-year grace period. Furthermore, the CSRD introduces two key reporting rules applicable to all companies within its scope. The first emphasises transparent reporting, requiring information to be clear, relevant, verifiable, and comparable. The second, the “materiality requirement,” mandates the disclosure of only relevant information. This principle is especially pertinent for topical standards, necessitating a comprehensive explanation if, after conducting a materiality assessment, a company considers

particularly when the company is not engaged in that specific field. The CSRD leaves sanctions for non-compliance to member states. Expected sanctions include financial penalties, warnings or correction orders, and criminal sanctions. Many member states are likely to retain similar sanctions from the Directive (EU) 2014/95 on Non-Financial Reporting. Strengthening Resilience: Navigating ESG Expectations in M&A Transactions Besides publicly listed companies, the CSRD applies to EU-based companies that satisfy at least two of the following criteria: 250 employees, a total balance sheet of EUR20m, or a net turnover of EUR40m. It includes certain qualified Small and Medium Enterprises, and exempts certain micro-enterprises. For non-EU companies, it covers EU subsidiaries or branches with a group turnover exceeding 150 million Euro in the last two years, and either an EU branch with over 40 million Euro turnover or a subsidiary meeting the EU-based criteria. In my opinion, companies

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be required to do so if their customers fall under the scope of the CSRD and prefer their respective supply chains to accommodate them in their respective CSRD compliance programs. According the Belgian 2023 M&A Monitor conducted by the Vlerick Business School, there is a growing emphasis in Belgium on ESG during the due diligence of an M&A transaction and selection of partnerships. This includes the review of material agreements, examination of target companies’ ESG policies and initiatives, a target’s activities and supply chain, and scrutiny of compliance frameworks. Beyond mere legality, there is a growing interest in understanding whether the target’s current business practices align favourably with the expectations of key stakeholders, most notably investors and customers. This scrutiny extends particularly to the intricacies of the supply chain, where the perception of ethical and sustainable practices can significantly impact the overall desirability of a potential transaction. This is exacerbated by the cross-cutting

falling outside the scope of the CSRD could voluntarily adhere to European Sustainability Reporting Standards (the

“ESRS”). This would make them more attractive to partnerships and M&A transactions with these large companies and certain qualified SMEs. Furthermore, they may

a specific topical standard as not material to its operations,

standards imposed by the CSRD which require sustainability reporting about companies with which they have direct and indirect business relations in the upstream or downstream value chain. The transformative industry shift posed by ESG necessitates close collaboration not only among different legal disciplines (i.e. environmental, social, corporate, regulator etc.) but also with non-legal experts such as financial

or technical advisers. Furthermore, there is an anticipation that ESG considerations will gain increased prominence in the negotiation of transactional documents, such as sale and purchase agreements. This will be particularly notable concerning representations, warranties and covenants related to relevant standards, akin to how anti-money laundering processes are addressed.

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