The European Union has a growing set of sustainability regulations and frameworks that are shaping how organisations measure, manage, and disclose sustainability impacts, risks, and opportunities.
Understanding how these EU regulations fit together is critical. Reporting, classification, due diligence, and sustainable finance requirements are increasingly interconnected, and compliance now depends on consistent data, clear governance, and auditable processes.
This guide explains the most relevant EU sustainability regulations and frameworks, and highlights how KEY ESG supports compliance and sustainability management within a single system.
Understanding ESG regulations and frameworks
EU sustainability regulations are designed to embed environmental, social, and governance considerations into corporate reporting, audited financial statements, risk management, and investment decision-making.
Rather than operating in isolation, these regulations function as a coordinated system. They link disclosure requirements, sustainability definitions, due diligence obligations, and capital allocation.
In this guide, we focus on the following EU regulations and frameworks:
- Corporate Sustainability Reporting Directive (CSRD): Defines which organisations must report sustainability information and how that information is disclosed, using the European Sustainability Reporting Standards (ESRS).
- Corporate Sustainability Due Diligence Directive (CSDDD): Introduces mandatory human rights and environmental due diligence across operations and value chains, linking sustainability reporting with governance and risk management.
- EU Taxonomy Regulation: Provides a common classification system for determining which economic activities are considered environmentally sustainable.
- EU Climate Benchmarks (CTB and PAB): Establish minimum standards for climate-aligned investment benchmarks to support comparability and credibility of sustainable investment products.
- Sustainable Finance Disclosure Regulation (SFDR): Governs sustainability disclosures by financial market participants and shapes the sustainability data requested from companies across investment portfolios and value chains.
These regulations aim to create a sustainable financial system that supports the EU's goal of achieving climate neutrality by 2050. They aim to improve data consistency, reduce greenwashing, strengthen accountability, and enable more informed decision-making by investors, regulators, and other stakeholders.
The sustainability and ESG regulations you should know about
This section outlines the key EU sustainability regulations that organisations must understand to meet reporting, disclosure, and due diligence requirements.
Corporate Sustainability Reporting Directive (CSRD)
The Corporate Sustainability Reporting Directive (CSRD) is a significant advancement in the European Union's legislative measures, expanding the scope of sustainability reporting requirements for entities operating within the EU.
The CSRD mandates comprehensive disclosures on ESG factors, including
- Carbon emissions data
- Waste management
- Diversity and inclusion
- Employee right
- Governance factors
For those already working under the Non-Financial Reporting Directive (NFRD), CSRD is a revision and improvement of existing NFRD regulations. The CSRD extends its reach to include a broader set of large companies, listed SMEs, and, eventually, non-EU companies and their subsidiaries operating in the EU. The requirements have come into effect in a gradual timeline contingent on company classification, with some recent and future changes ahead:
- January 1, 2025: Any company meeting two of the three following criteria will be required to track and collect ESG data under the CSRD directive: 250 employees, €50 million in revenues, or €25 million in balance sheet (reporting year 2026)
- January 1, 2026: Effective date for a law that will require most SMEs (10-250 employees) to commence their reporting (reporting year 2027)
- January 1, 2028: Effective date for CSRD compliance from third-country companies (European subsidiaries of non-European companies with a turnover of more than €150 million)
Read more about CSRD here: The Corporate Sustainability Reporting Directive (CSRD) explained: your need-to-know guide
Corporate Sustainability Due Diligence Directive (CSDDD)
The Corporate Sustainability Due Diligence Directive (CSDDD) introduces mandatory sustainability due diligence obligations for large EU and non-EU companies operating in the European Union.
While CSRD focuses on what organisations must disclose, CSDDD focuses on what organisations must do. It requires companies to identify, prevent, mitigate, and remediate adverse human rights and environmental impacts across their own operations, subsidiaries, and value chains.
Key requirements under CSDDD include:
- Conducting ongoing human rights and environmental due diligence
- Identifying and prioritising actual and potential adverse impacts
- Implementing prevention and remediation measures
- Establishing grievance mechanisms
- Adopting and overseeing climate transition plans aligned with EU climate objectives
CSDDD expands sustainability accountability beyond reporting by embedding sustainability risks into corporate governance and risk management processes. It introduces board-level responsibilities and enforcement mechanisms, including potential civil liability and regulatory penalties for non-compliance.
For sustainability teams within companies, CSDDD increases expectations around structured data collection, documented controls, and evidence of due diligence across operations and value chains. For investors and financial institutions, this translates into greater scrutiny of portfolio companies’ governance, data quality, audit trails, and due diligence practices.
Read more about CSDDD here:
Access the first wave of CSRD reports
Whitepaper: CSRD software buyer's guide
EU Climate Benchmarks (CTB and PAB)
The EU Climate Benchmarks Regulation establishes minimum standards for climate-aligned investment benchmarks used by asset managers and financial market participants.
It introduces two benchmark categories:
- EU Climate Transition Benchmarks (CTB)
- EU Paris-Aligned Benchmarks (PAB)
These benchmarks are designed to support alignment with the EU’s climate objectives by setting clear methodological requirements for index construction, including decarbonisation trajectories and exclusions of certain high-impact activities.
Key requirements include:
- Minimum greenhouse gas emissions reductions relative to the investable universe
- Ongoing decarbonisation targets
- Transparent benchmark methodologies and disclosures
- Alignment with EU Taxonomy criteria and SFDR sustainability objectives
Under the EU Benchmarks Regulation, CTB and PAB remain regulated benchmark categories in 2026, primarily affecting asset managers that use climate-aligned benchmarks within sustainable investment products.
For asset managers offering climate-focused or sustainability-labelled products, the Climate Benchmarks Regulation strengthens the link between SFDR disclosures and the underlying construction of investment strategies.
It also supports market integrity by ensuring that climate-aligned benchmarks are based on measurable, comparable, and verifiable sustainability criteria.
EU Taxonomy
The EU Taxonomy is a classification system designed to provide a streamlined, common language for European sustainable finance regulations. A detailed piece of legislation defines both what is – and, crucially, what isn’t – sustainable.
Created by the EU to foster transparency in sustainability reporting and claims, it helps organisations, investors, and other stakeholders make sound sustainability-related decisions.
Six core environmental objectives make up the EU Taxonomy:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems.
The EU Taxonomy initially took effect in 2022, with reporting requirements for the first two environmental objectives. The Environmental Delegated Act extended the criteria to the remaining four environmental objectives, effective from January 2024, so that all six objectives are now used in sustainability reporting and classification under CSRD and related frameworks.
EU Taxonomy legislation is still in development, with information and updates evolving as it unfolds. For more information on EU Taxonomy and how it specifically applies to fund managers, you can check out this reading:
What does EU Taxonomy mean for fund managers?
How does the EU Taxonomy work with SFDR?
The Sustainable Finance Disclosure Regulation (SFDR)
The Sustainable Finance Disclosure Regulation (SFDR) is a European Union regulation that governs how financial market participants and financial advisers disclose sustainability risks, impacts, and objectives at both entity and product levels.
The SFDR has three main goals:
- Eliminating greenwashing and false claims
- Holding accountable the sustainability claims made by FMPs
- Improving transparency of sustainable investment products in the European Financial Sector
To meet these objectives, SFDR introduces two layers of disclosure.
Level one focuses on how sustainability risks are integrated into investment decision-making and how those risks may affect financial returns. These requirements became applicable in March 2021.
Level two requires disclosures on the principal adverse impacts (PAIs) of investment decisions on sustainability factors, based on the Regulatory Technical Standards (RTS). These disclosures became mandatory in January 2023, with expanded PAI reporting requirements applying from June 2023. PAI indicators cover areas such as greenhouse gas emissions, water use, and human rights impacts.
For sustainability professionals within companies, SFDR is relevant because it influences the data requests, reporting formats, and assurance expectations imposed by investors, lenders, and asset managers. Aligning internal sustainability data with SFDR-related indicators can reduce friction, improve consistency, and support more efficient engagement with capital providers.
SFDR continues to evolve, and both financial institutions and corporates should monitor regulatory developments to ensure ongoing alignment with disclosure expectations.
SFDR Blog Series:
Everything you need to know about SFDR
Introducing the Principal Adverse Impacts (PAIs)
Our top FAQs for all things SFDR
Whitepaper:
How can you ensure sustainability compliance?
Navigating the complexities of sustainability compliance demands a clear understanding and a well-defined strategy.
Whether you represent a financial institution, a publicly traded company, or a private enterprise, adhering to standards is crucial for fostering sustainable business practices and mitigating climate-related financial risks.
Below are 3 essential steps to ensure effective compliance.
1. Establish a robust ESG strategy
Creating a robust sustainability strategy starts with defining key performance indicators (KPIs) aligned with international sustainability standards, such as those from the Global Reporting Initiative and the International Sustainability Standards Board.
This strategy should also incorporate climate-related financial disclosures and targets for reducing GHG emissions. By embedding ESG factors into corporate governance, companies can ensure ESG considerations are integrated into strategic decision-making.
2. Implement effective data management practices
Compliance relies heavily on accurate and timely data. Implementing robust data management practices is crucial for tracking and reporting sustainability metrics, including carbon emissions and environmental health.
This involves investing in technologies that support the collection and verification of sustainability data to ensure transparent, reliable disclosures. Organisations, including companies and financial institutions, should enhance their capacity to handle large datasets, enabling detailed analysis and informed decision-making on climate-related risks and opportunities.
3. Conduct regular ESG audits and reporting
Regular audits and reporting are vital to maintaining compliance with regulations such as CSRD, SFDR, and other applicable sustainability disclosure requirements.
These audits help identify areas for improvement and ensure alignment with ESG regulatory landscapes. Organisations should prepare their annual reports to include detailed sustainability disclosures, ensuring they meet regulatory standards and address due diligence obligations under applicable disclosure regulations.
By following these steps, companies can better manage their sustainability obligations, contribute to sustainable finance, and position themselves favourably in a marketplace that increasingly values sustainability and transparency.
How KEY ESG can help
KEY ESG supports organisations and investors in meeting sustainability obligations across disclosure, classification, and due diligence requirements. This includes CSRD-aligned reporting, EU Taxonomy mapping, SFDR data collection, and portfolio-level oversight to support emerging requirements under CSDDD and climate-aligned investment frameworks.
KEY ESG enables companies, investors, and financial market participants to automate and centralise their sustainability data collection, KPI calculations, reporting and management. Notably, the software is updated for the latest legislative developments.
Contact a member of our team to learn more. Alternatively, book a free demo to see how our software could simplify sustainability management.
The European Union has a growing set of sustainability regulations and frameworks that are shaping how organisations measure, manage, and disclose sustainability impacts, risks, and opportunities.
Understanding how these EU regulations fit together is critical. Reporting, classification, due diligence, and sustainable finance requirements are increasingly interconnected, and compliance now depends on consistent data, clear governance, and auditable processes.
This guide explains the most relevant EU sustainability regulations and frameworks, and highlights how KEY ESG supports compliance and sustainability management within a single system.
Understanding ESG regulations and frameworks
EU sustainability regulations are designed to embed environmental, social, and governance considerations into corporate reporting, audited financial statements, risk management, and investment decision-making.
Rather than operating in isolation, these regulations function as a coordinated system. They link disclosure requirements, sustainability definitions, due diligence obligations, and capital allocation.
In this guide, we focus on the following EU regulations and frameworks:
- Corporate Sustainability Reporting Directive (CSRD): Defines which organisations must report sustainability information and how that information is disclosed, using the European Sustainability Reporting Standards (ESRS).
- Corporate Sustainability Due Diligence Directive (CSDDD): Introduces mandatory human rights and environmental due diligence across operations and value chains, linking sustainability reporting with governance and risk management.
- EU Taxonomy Regulation: Provides a common classification system for determining which economic activities are considered environmentally sustainable.
- EU Climate Benchmarks (CTB and PAB): Establish minimum standards for climate-aligned investment benchmarks to support comparability and credibility of sustainable investment products.
- Sustainable Finance Disclosure Regulation (SFDR): Governs sustainability disclosures by financial market participants and shapes the sustainability data requested from companies across investment portfolios and value chains.
These regulations aim to create a sustainable financial system that supports the EU's goal of achieving climate neutrality by 2050. They aim to improve data consistency, reduce greenwashing, strengthen accountability, and enable more informed decision-making by investors, regulators, and other stakeholders.
The sustainability and ESG regulations you should know about
This section outlines the key EU sustainability regulations that organisations must understand to meet reporting, disclosure, and due diligence requirements.
Corporate Sustainability Reporting Directive (CSRD)
The Corporate Sustainability Reporting Directive (CSRD) is a significant advancement in the European Union's legislative measures, expanding the scope of sustainability reporting requirements for entities operating within the EU.
The CSRD mandates comprehensive disclosures on ESG factors, including
- Carbon emissions data
- Waste management
- Diversity and inclusion
- Employee right
- Governance factors
For those already working under the Non-Financial Reporting Directive (NFRD), CSRD is a revision and improvement of existing NFRD regulations. The CSRD extends its reach to include a broader set of large companies, listed SMEs, and, eventually, non-EU companies and their subsidiaries operating in the EU. The requirements have come into effect in a gradual timeline contingent on company classification, with some recent and future changes ahead:
- January 1, 2025: Any company meeting two of the three following criteria will be required to track and collect ESG data under the CSRD directive: 250 employees, €50 million in revenues, or €25 million in balance sheet (reporting year 2026)
- January 1, 2026: Effective date for a law that will require most SMEs (10-250 employees) to commence their reporting (reporting year 2027)
- January 1, 2028: Effective date for CSRD compliance from third-country companies (European subsidiaries of non-European companies with a turnover of more than €150 million)
Read more about CSRD here: The Corporate Sustainability Reporting Directive (CSRD) explained: your need-to-know guide
Corporate Sustainability Due Diligence Directive (CSDDD)
The Corporate Sustainability Due Diligence Directive (CSDDD) introduces mandatory sustainability due diligence obligations for large EU and non-EU companies operating in the European Union.
While CSRD focuses on what organisations must disclose, CSDDD focuses on what organisations must do. It requires companies to identify, prevent, mitigate, and remediate adverse human rights and environmental impacts across their own operations, subsidiaries, and value chains.
Key requirements under CSDDD include:
- Conducting ongoing human rights and environmental due diligence
- Identifying and prioritising actual and potential adverse impacts
- Implementing prevention and remediation measures
- Establishing grievance mechanisms
- Adopting and overseeing climate transition plans aligned with EU climate objectives
CSDDD expands sustainability accountability beyond reporting by embedding sustainability risks into corporate governance and risk management processes. It introduces board-level responsibilities and enforcement mechanisms, including potential civil liability and regulatory penalties for non-compliance.
For sustainability teams within companies, CSDDD increases expectations around structured data collection, documented controls, and evidence of due diligence across operations and value chains. For investors and financial institutions, this translates into greater scrutiny of portfolio companies’ governance, data quality, audit trails, and due diligence practices.
Read more about CSDDD here:
Access the first wave of CSRD reports
Whitepaper: CSRD software buyer's guide
EU Climate Benchmarks (CTB and PAB)
The EU Climate Benchmarks Regulation establishes minimum standards for climate-aligned investment benchmarks used by asset managers and financial market participants.
It introduces two benchmark categories:
- EU Climate Transition Benchmarks (CTB)
- EU Paris-Aligned Benchmarks (PAB)
These benchmarks are designed to support alignment with the EU’s climate objectives by setting clear methodological requirements for index construction, including decarbonisation trajectories and exclusions of certain high-impact activities.
Key requirements include:
- Minimum greenhouse gas emissions reductions relative to the investable universe
- Ongoing decarbonisation targets
- Transparent benchmark methodologies and disclosures
- Alignment with EU Taxonomy criteria and SFDR sustainability objectives
Under the EU Benchmarks Regulation, CTB and PAB remain regulated benchmark categories in 2026, primarily affecting asset managers that use climate-aligned benchmarks within sustainable investment products.
For asset managers offering climate-focused or sustainability-labelled products, the Climate Benchmarks Regulation strengthens the link between SFDR disclosures and the underlying construction of investment strategies.
It also supports market integrity by ensuring that climate-aligned benchmarks are based on measurable, comparable, and verifiable sustainability criteria.
EU Taxonomy
The EU Taxonomy is a classification system designed to provide a streamlined, common language for European sustainable finance regulations. A detailed piece of legislation defines both what is – and, crucially, what isn’t – sustainable.
Created by the EU to foster transparency in sustainability reporting and claims, it helps organisations, investors, and other stakeholders make sound sustainability-related decisions.
Six core environmental objectives make up the EU Taxonomy:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems.
The EU Taxonomy initially took effect in 2022, with reporting requirements for the first two environmental objectives. The Environmental Delegated Act extended the criteria to the remaining four environmental objectives, effective from January 2024, so that all six objectives are now used in sustainability reporting and classification under CSRD and related frameworks.
EU Taxonomy legislation is still in development, with information and updates evolving as it unfolds. For more information on EU Taxonomy and how it specifically applies to fund managers, you can check out this reading:
What does EU Taxonomy mean for fund managers?
How does the EU Taxonomy work with SFDR?
The Sustainable Finance Disclosure Regulation (SFDR)
The Sustainable Finance Disclosure Regulation (SFDR) is a European Union regulation that governs how financial market participants and financial advisers disclose sustainability risks, impacts, and objectives at both entity and product levels.
The SFDR has three main goals:
- Eliminating greenwashing and false claims
- Holding accountable the sustainability claims made by FMPs
- Improving transparency of sustainable investment products in the European Financial Sector
To meet these objectives, SFDR introduces two layers of disclosure.
Level one focuses on how sustainability risks are integrated into investment decision-making and how those risks may affect financial returns. These requirements became applicable in March 2021.
Level two requires disclosures on the principal adverse impacts (PAIs) of investment decisions on sustainability factors, based on the Regulatory Technical Standards (RTS). These disclosures became mandatory in January 2023, with expanded PAI reporting requirements applying from June 2023. PAI indicators cover areas such as greenhouse gas emissions, water use, and human rights impacts.
For sustainability professionals within companies, SFDR is relevant because it influences the data requests, reporting formats, and assurance expectations imposed by investors, lenders, and asset managers. Aligning internal sustainability data with SFDR-related indicators can reduce friction, improve consistency, and support more efficient engagement with capital providers.
SFDR continues to evolve, and both financial institutions and corporates should monitor regulatory developments to ensure ongoing alignment with disclosure expectations.
SFDR Blog Series:
Everything you need to know about SFDR
Introducing the Principal Adverse Impacts (PAIs)
Our top FAQs for all things SFDR
Whitepaper:
How can you ensure sustainability compliance?
Navigating the complexities of sustainability compliance demands a clear understanding and a well-defined strategy.
Whether you represent a financial institution, a publicly traded company, or a private enterprise, adhering to standards is crucial for fostering sustainable business practices and mitigating climate-related financial risks.
Below are 3 essential steps to ensure effective compliance.
1. Establish a robust ESG strategy
Creating a robust sustainability strategy starts with defining key performance indicators (KPIs) aligned with international sustainability standards, such as those from the Global Reporting Initiative and the International Sustainability Standards Board.
This strategy should also incorporate climate-related financial disclosures and targets for reducing GHG emissions. By embedding ESG factors into corporate governance, companies can ensure ESG considerations are integrated into strategic decision-making.
2. Implement effective data management practices
Compliance relies heavily on accurate and timely data. Implementing robust data management practices is crucial for tracking and reporting sustainability metrics, including carbon emissions and environmental health.
This involves investing in technologies that support the collection and verification of sustainability data to ensure transparent, reliable disclosures. Organisations, including companies and financial institutions, should enhance their capacity to handle large datasets, enabling detailed analysis and informed decision-making on climate-related risks and opportunities.
3. Conduct regular ESG audits and reporting
Regular audits and reporting are vital to maintaining compliance with regulations such as CSRD, SFDR, and other applicable sustainability disclosure requirements.
These audits help identify areas for improvement and ensure alignment with ESG regulatory landscapes. Organisations should prepare their annual reports to include detailed sustainability disclosures, ensuring they meet regulatory standards and address due diligence obligations under applicable disclosure regulations.
By following these steps, companies can better manage their sustainability obligations, contribute to sustainable finance, and position themselves favourably in a marketplace that increasingly values sustainability and transparency.
How KEY ESG can help
KEY ESG supports organisations and investors in meeting sustainability obligations across disclosure, classification, and due diligence requirements. This includes CSRD-aligned reporting, EU Taxonomy mapping, SFDR data collection, and portfolio-level oversight to support emerging requirements under CSDDD and climate-aligned investment frameworks.
KEY ESG enables companies, investors, and financial market participants to automate and centralise their sustainability data collection, KPI calculations, reporting and management. Notably, the software is updated for the latest legislative developments.
Contact a member of our team to learn more. Alternatively, book a free demo to see how our software could simplify sustainability management.
