Environmental protection standards, including efforts to combat climate change, are regarded as a top priority as they represent the greatest challenge to sustainable development. At the same time, these standards have a crucial impact on all aspects of business operations. While air quality is commonly thought of in the context of these standards, environmental management encompasses many other aspects, such as waste management and handling potentially hazardous substances or those of very high concern (SVHC).
European regulators highlight the connections between ESG reporting requirements and the legal obligations of frameworks like Regulation (EC) No 1907/2006 (REACH) and Regulation (EC) No 1272/2008 (CLP), both of which play a central role in managing chemicals across the European Union. ESG reporting obligations consider the environmental and social impacts of business activities, requiring companies to comply with REACH to accurately report their chemical management practices.
The constantly evolving regulatory landscape presents both opportunities and challenges. Below is a brief discussion of the potential benefits and difficulties in aligning with these requirements, especially in relation to non-financial reporting.
CSRD Directive - Key Concepts and Definitions in the Context of Chemical Management
ESG reporting is not a new concept in environmental law; it evolved from the earlier Corporate Social Responsibility (CSR) framework. However, the difference between CSR and ESG is that the latter covers a broader range of non-financial topics, enabling a more measurable evaluation of goals and requirements, including those related to chemical management, air emissions, and water pollution.
Key Provisions of the REACH Regulation in relation to ESG Reporting
Regulation (EC) No 1907/2006 of the European Parliament and the Council, commonly referred to as REACH, is a regulatory framework applied across the European Union. REACH aims to improve the protection of human health and the environment from risks posed by chemicals while maintaining the competitiveness of the EU's chemical industry.
Main Objectives of REACH
The REACH framework applies to all chemicals, not just those used in industrial processes, but also everyday products like cleaning supplies, paints, and goods such as clothing, furniture, and electrical appliances. These regulations affect most businesses within the EU.
REACH chemical management is structured around four key pillars:
- Registration of substances
- Evaluation of information on substances and/or registration dossiers
- Authorization for substances of very high concern (SVHC)
- Restrictions on the production, marketing, and use of certain chemicals
The primary responsibility of companies is to identify the risks associated with substances they introduce into the EU market and define how these risks will be managed. Businesses must document with the European Chemicals Agency (ECHA) how each substance can be safely used and communicate risk management measures throughout the substance's life cycle. Companies are required to register substances produced or imported, and registrants of the same substance must collaborate and share the costs. REACH establishes procedures for gathering and evaluating data on the properties and hazards of substances, with information requirements dependent on the average annual tonnage.
The European Commission and ECHA, through their scientific committees (Committee for Risk Assessment, Member State Committee, and Committee for Socio-Economic Analysis), assess whether risk management measures are feasible, collaborating with member states. If risk cannot be controlled, restrictions may be imposed, including an outright ban on the substance. In the long term, the most dangerous substances should be replaced by safer alternatives.
Non-compliance with registration requirements results in a ban on trading the substance in the EU. Non-EU companies are not subject to REACH obligations, even if exporting to the EU. The responsibility for REACH compliance lies with EU importers or an appointed representative based in the EU. Ultimately, REACH enhances control over the use and marketing of chemicals within the EU.
ESRS E2 - Chemical Reporting Requirements
The European Sustainability Reporting Standards (ESRS) are mandatory for companies subject to the CSRD directive, excluding SMEs (which have their own standards). Developed by the European Financial Reporting Advisory Group (EFRAG) in the form of a delegated regulation of the EU Commission, these standards are contained within five thematic standards. ESRS E2 focuses on pollution, addressing air, water, and soil pollution, as well as information regarding potentially hazardous substances, substances of very high concern (SVHC), and microplastics.
Objective of Standard E2
The goal of ESRS E2 is to provide an understanding of how a company impacts environmental pollution and what actions are being taken to prevent both actual and potential negative consequences. Disclosures under ESRS E2 also enable report users to understand a company's plans and capabilities for adapting its strategy and business model to sustainable economic requirements, including pollution prevention, control, and elimination efforts.
These disclosures should cover the nature, type, and scope of significant risks and opportunities related to the company’s pollution impact and dependencies.
Disclosure Requirement E2-5
The most important reporting element concerning chemicals is disclosure requirement E2-5, which focuses on potentially hazardous substances and SVHCs.
Potentially hazardous substances, according to the directive, are those that meet the criteria established in Article 57 and have been identified in accordance with Article 59(1) of Regulation (EC) No 1907/2006 of the European Parliament and of the Council, or are classified in Part 3 of Annex VI to Regulation (EC) No 1272/2008 of the European Parliament and of the Council in one of the following hazard classes or categories: including carcinogenicity categories 1 and 2, germ cell mutagenicity categories 1 and 2, or endocrine disruption in relation to human health. Additionally, these substances negatively impact the reuse and recycling of materials in products in which they are present, in accordance with relevant EU ecodesign requirements. |
Substances of very high concern (SVHC) are those that meet the criteria outlined in Article 57 of Regulation (EC) No 1907/2006 (REACH), including substances that are persistent, bioaccumulative, and toxic in accordance with the criteria set out in Annex XIII of this Regulation, and have been identified in accordance with Article 59(1) of the Regulation. |
| Substancje potencjalnie niebezpieczne to, wg. dyrektywy substancje które “spełniają kryteria ustanowione w art. 57 została zidentyfikowane zgodnie z art. 59 ust. 1 rozporządzenia (WE) nr 1907/2006 Parlamentu Europejskiego i Rady lub są sklasyfikowane w części 3 załącznika VI do rozporządzenia Parlamentu Europejskiego i Rady (WE) nr 1272/200836 w jednej z następujących klas lub kategorii zagrożenia (m.in. rakotwórczość kategorii 1 i 2, działanie mutagenne na komórki rozrodcze kategorii 1 i 2 czy zaburzanie funkcjonowania układu hormonalnego w odniesieniu do zdrowia ludzi, a także negatywnie wpływa na ponowne użycie i recykling materiałów w produkcie, w którym jest on obecny, zgodnie z odpowiednimi unijnymi wymogami dotyczącymi ekoprojektu. |
| Substancje wzbudzające szczególnie duże obawy, to Substancje, które spełniają kryteria określone w art. 57 rozporządzenia (WE) nr 1907/2006 (REACH) (czyli m.in. substancje trwałe, wykazujące zdolność do bioakumulacji i toksyczne zgodnie z kryteriami zawartymi w załączniku XIII do niniejszego rozporządzenia) i zostały zidentyfikowane zgodnie z art. 59 ust. 1 tego rozporządzenia. |
Companies must disclose information on the production, use, distribution, commercialization, and import/export of potentially hazardous substances and SVHCs, both in pure form and in mixtures or articles. The aim is to provide insight into the company's environmental and health impact through the use of these substances and to understand the associated risks and opportunities, including regulatory changes.
Summary
From the above, it is clear that the obligation to disclose information under E2-5 of the CSRD directive and the requirement to register substances under the REACH regulation are interconnected. Substances subject to ESG reporting originate directly from REACH, confirming that ESG reporting is based on pre-existing legal regulations. This also shows that ESG reporting obligations are not abstract requirements but rather a logical extension of existing environmental protection regulations. Managing hazardous substances in accordance with ESG standards offers businesses opportunities to enhance transparency and accountability, while also posing new challenges in adapting to integrated legal requirements and reporting standards. However, this is not a requirement without a foundation in previously established environmental regulations.