TerraLex Cross-Border Guide to Cross-Border Guide to ESG and Sustainable Finance

In Spain, the ESG disclosure obligations are found in Law 11/2018, of 28 December, approving the Code of Commerce, the revised text of the Capital Companies Act approved by Royal Legislative Decree 1/2000, of 2 July, and Act 22/2015, of 20 July, on the Audit of Accounts, in relation to the non- financial information and diversity aspects that companies must include in the non- financial information report (hereinafter, “Law 11/2018”). The latter is the Spanish transposition of the Non- Financial Reporting Directive 2014/95/UE. The transitional provision of Law 11/2018 establishes that three years from the entry into force of Law 11/2018, ESG reporting will be applicable to all companies with more than 250 employees that either have the consideration of public interest entities in accordance with legislation on the auditing of accounts, or, for two consecutive financial years, meet, at the closing date of each of them, at least of the following circumstances:

• The total assets exceed 20.000.000 €
• The net annual turnover exceeds 40.000.000 €

The non-financial report must contain the following information:

• Environmental: measures to prevent and minimise carbon emissions, circular economy and recycling practices, sustainable use of resources and protection of diversity.
• Social and personnel issues: working hours, work-life balance, absenteeism figures, occupational safety, social and trade union dialogue, training, accessibility measures for the disabled and gender equality policies.
• Human rights: information on corporate procedures for preventing, reporting, and redressing possible abuses.
• Fight against corruption and bribery: protocols applied by the company in the fight against fraud and money laundering, as well as the contributions made to entities dedicated to eradicating them.
• Commitment to transparency: accreditation of the company's commitment to sustainable local development, ethical criteria in the choice of subcontractors and suppliers, consumer safety and fiscal hygiene.

The Corporate Sustainability Reporting Directive (“CSRD”), that came into force on the 5th of January of 2023 should be transponed into national law by the 6th of July 2024. The Instituto de Contabilidad y Auditorias de Cuentas (“ICAC”) published, last 2023, a preliminary draft of the Law that will transpose the Directive 2022/2464 into Spanish Law. This draft indicates that the new reports will have to be made following the ESRS and taking into account article 8 of Regulation 2020/852.

This Law will affect those companies who for two consecutive financial years meet two of the following criteria:

• 250 average number of employees during the financial year;
• balance sheet total EUR 20 million;
• net turnover EUR 40 million.

Following the publication of the CSRD, the European Commission published the 22nd of December of 2023 the delegated act in compliance with the mandates contained in the Directive. This delegated act, Reglamento Delegado (UE) 2023/2772, adopted the first set of standards (ESRS - European Sustainability Reporting Standards) that companies included in the scope of application of the directive will have to use to prepare their sustainability reports, regardless of the sector in which they operate.

The CRSD will be adopted progressively;

• 2025: first report for large listed companies already subject to the NFRD;
• 2026: first report for large companies;
• 2027: first report for listed SMEs, small and non-complex credit institutions and captive insurance companies;
• 2029: first reports from 3rd-country companies.

The 24th of April of 2024, the European Parliament formally adopted the Corporate Sustainability Due Diligence Directive (“CSDDD”), setting into law obligations for large companies with significant activities in the EU to conduct human rights and environmental due diligence in their own operations and across their chain of activities. This is, companies with more than 1,000 employees and a turnover of more than 450 million euros.

Companies commonly make voluntary ESG disclosures in Spain. Although they are usually marketing driven, they are seldomly neutral from liability. Disclosures are made in different formats, from webpages to specific reports and annual accounts, and cover a wide range of ESG topics, such as:

• Environment: sustainability, decarbonization and circular economy issues, increased use of renewable energy, waste reduction and a general assessment of environmental impact. Calculate the carbon footprint which consists of analysing the amount of greenhouse gases that is an indirect or direct effect of the company and are now starting to register the result in the Ministerio para la Transición Ecológica y el Reto Demográfico “MITECO”. Prepare a Sustainability Plan for the company and designate a person responsible for ESG matters.
• Social: respect for human rights, respect for diversity and no discrimination, equal treatment of employees and a general assessment of social impact.
• Governance: corruption and bribery

If we consider the listed companies of the Spanish selective index, Ibex 35, the most widely used standard when reporting on sustainability issues is the GRI (Global Reporting Initiative).

Also, the TCFD recommendations have been widely supported by Spain and the latter has integrated them into their policy and guidance framework.

While the Law 11/2018 establishes a number of mandatory matters, it does not include specific and common rules for disclosures of the provided information. On the contrary, this Law proposes that, when providing information, companies should rely on national frameworks and European Union national frameworks and EU frameworks (such as the Eco-Management and Audit Scheme or EMAS), or on international frameworks, such as the United Nations Global Compact (UNGC, the UN SDGs, the Paris Agreement on the UN SDGs or the GRI's Global Reporting Initiative on Sustainability (GRI), among others.

The main frameworks in Spain are Carbon Disclosure Project (CDP), Climate Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI), Consejo Internacional de Informes Integrados (IIRC) y Consejo de Normas de Contabilidad de la Sostenibilidad (SASB).

Also should be considered the ISO standards. In particular, ISO 26000 on social responsibility and ISO 14001 on environmental management are widely recognised and used to guide responsible and sustainable business practices.

The Spanish National Securities Market Commission (“CNMV”) publishes an annual supervisory report of non-financial information of listed companies. The document details the task of supervising theNon-Financial Statements of the listed companies in Spain. The report assits companies in enchacing their disclosures in areas where they are currently lacking or have room for improvement to meet the standards.

As mentioned we foresee a turn of those standards to the complusory to be (by CSRD) ESRS.

In Spain, the key statutory environmental, social, and governance (ESG) obligations requiring action beyond disclosure include the following:

Environmental obligations:

• Law 26/2007 on Environmental Responsibility: This law imposes obligations on companies to prevent, avoid, and repair environmental damage. Companies must have preventive measures in place and take immediate action to mitigate any environmental harm.
• Law 7/2021, of 20 May, on climate change and energy transition aims to ensure compliance with the objectives of the Paris Agreement and facilitate the decarbonisation of the Spanish economy. With this law and the amendment of Royal Decree 163/2014, of 14 March, which creates the registry of carbon footprint, offsetting and carbon dioxide absorption projects, companies that are required to publish non-financial statements or consolidated non-financial statements will be obliged to calculate their carbon footprint.

Social Obligations:

• Workers stature (Royal Legislative Decree 2/2015): This comprehensive labor law outlines numerous obligations for employers, including fair wages, safe working conditions, and respect for workers' rights.
• Law 31/1995 on Occupational Risk Prevention: Employers must ensure the health and safety of their employees by conducting risk assessments, implementing preventive measures, and providing necessary training.
• Law 45/2015 on Volunteering: This law encourages corporate volunteering and community involvement, promoting social responsibility beyond legal compliance.

Governance obligations:

• Law 10/2010 on the Prevention of Money Laundering and Terrorist Financing: Companies are required to implement robust internal controls, including due diligence and reporting obligations, to prevent money laundering and terrorist financing.
• Royal Legislative Decree 1/2010, of 2 July, Ley de Sociedades de Capital (Corporate Enterprises Act): This law establishes the governance principles and obligations for capital companies in Spain. It includes aspects such as the composition and functions of the governing bodies, shareholders' rights, and transparency of financial and corporate information.
• Good Governance Code: The Good Governance Code establishes recommendations for good corporate governance practices for listed companies in Spain. Although it is not legally binding, compliance with the Code is highly recommended and companies must report on their degree of adherence in their annual reports.

In principle, Spanish rules only apply within Spain. Although, the ESG criteria adopted by Spanish companies can have effects in other countries through their international subsidiaries, their global supply chain, etc.

In Spain, there is currently no specific regulation that exclusively regulates advertising with claims related to ESG (environmental, social and governance) criteria. However, advertising in general is regulated by several laws and codes that contain provisions applicable to any type of advertising claims, including those related to ESG aspects.

The following are some of the laws and codes that may be relevant for advertising with ESG claims in Spain:

• Ley General de Publicidad: This law establishes the general principles of advertising in Spain, including aspects such as truthfulness, legality, honesty, and commercial loyalty. Advertising must not be misleading, confusing, or deceptive to consumers.
• Ley Competencia Desleal: This law protects consumers and businesses from unfair commercial practices, such as misleading or aggressive advertising. It prohibits the making of false or misleading claims in advertising.
• Código de Conducta de Autocontrol Publicitario: This is a self-regulatory code to which many companies in Spain adhere. The code establishes principles and ethical standards to be followed in advertising, including truthfulness, honesty, and transparency in advertising claims.
• Ley de Servicios de la Sociedad de la Información y de Comercio Electrónico: This law regulates information society services, including online advertising. It establishes information and transparency requirements that must be met in online commercial communications.

Although there is no specific regulation on ESG advertising claims, it is important for companies to be accurate, clear, and transparent in ESG-related advertising claims. They should avoid false, exaggerated, or misleading claims, and ensure that they have adequate documentation and backup to support their claims.

On 14 May 2024, the European Securities and Markets Authority (“ESMA”) published its final guidelines ESMA34-472-440 Final Report on the Guidelines on funds´ names (Europa.eu) using ESG or sustainability-related terms. Those guidelines are intended to tackle greenwashing risk in funds by using quantitative thresholds for the use of ESG and sustainability-related terminology in fund names. This is to ensure, in turn, that marketing communications are fair, clear and not misleading and that fund managers are acting honestly and fairly.

Also it should be considered the Directive 2024/825 that empowers consumers for the green transition through better protection against unfair practices and through better information. Member States shall adopt the measures to comply with this Directive by March 27, 2026.

There is no specific legal obligation that imposes special ESG rights and/or obligations on a company's suppliers.

However, with the transposition of the CSRD into Spanish law the information they will have to report to comply with the law will contain data on the companies' own activities and on their value chain, including their products and services, their business relationships and their supply chain.

Meanwhile many companies are adopting voluntary practices to incorporate ESG considerations into their supply chain and set specific requirements for their suppliers.

In general, shareholders can hold a company or its corporate bodies responsible in certain circumstances including those involving positive ESG efforts, if the latter causes losses to the company, the shareholders can: - Hold the corporate bodies liable if they consider that they have made detrimental decisions to the company.

• Exercise their right to information and transparency: Shareholders have the right to receive full and accurate information about the company’s activities, including aspects related to ESG efforts.
• In some cases, the shareholders may join in collective or class actions to seek redress for damages or liability for harmful actions or omissions by the company in relation to ESG efforts.

Yes, the company should have the duty of care with all rules including ESG rules and can be held liable for the damages caused to the company by that infringement. In this sense, Article 227 of the Corporate Enterprise Act establishes that the administrators of the company shall act in good faith and in the best interest of the company. Therefore, not complying with ESG rules could breach this legal provision. In these cases, the shareholders must prove the lack of care caused to the company.

Yes, Law 26/2007 on Environmental responsibility establishes a framework for preventing and remedying environmental damage. Companies can be held liable for environmental harm, and affected parties (including public authorities) can demand remediation and compensation. Also, Directors and officers have a duty to act in the best interest of the company and its stakeholders. If their failure to comply with ESG obligations results in harm or financial loss, they can be held personally liable under Spanish corporate law. Shareholders, creditors, and other stakeholders can pursue legal action against directors and officers for breach of their fiduciary duties.

If a company fails to meet contractual obligations related to ESG compliance, affected parties (e.g., customers or suppliers) can claim damages for breach of contract. For instance, if a company fails to adhere to agreed-upon environmental standards in a contract and this results in harm, the affected party can seek compensation.

Under the Spanish Civil Code, parties can seek compensation for damages caused by negligence or intentional acts. If non-compliance with ESG standards causes harm (e.g., environmental damage, health impacts, financial losses), affected parties can file a tort claim for damages.

Overall, while the specific legal avenues and outcomes can vary based on the circumstances, there are multiple ways through which customers, creditors, and other affected parties can hold companies and their representatives accountable for losses resulting from non-compliance with ESG rules in Spain.

Not applicable since we do have ESG rules in Spain.

Not specifically, but the revision of the legislation is an ongoing process.

As a commitment to responsible corporate governance, Spain has introduced non-financial reporting for certain Spanish companies that fulfill the requirements regarding ESG indicators. Spanish-based entities that offer their investment products/services in the EU or to EU citizens are also affected by EU regulations and Directives, such as the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy.

Please find below some voluntary sustainable finance and investment frameworks followed in Spain: - Code of Best Practice for Institutional Investors, asset institutional investors, asset managers and proxy advisors in relation to their duties in respect of the assets vested in them or services provided: it establishes that investors should integrate ESG factors in their decision-making as well as considering the possible sustainability risks.

• National Securities Market Commission's (Comisión Nacional del Mercado de Valores, or “CNMV”) quick guide to sustainable finance: it’s a quick guide which recommends the integration of ESG factors and lays out the different sustainable products available in the market and how to acquire them.
• EU green bond standard, which creates a voluntary, high-quality standard for bonds that finance sustainable investments.
• General Guidelines for a Sustainable Development Strategy: establishes that actions and progress towards sustainability in the different productive sectors must continue to be supported and the real change towards sustainable and responsible finance, aligned with the objectives of the 2030 Agenda and the Paris Agreement, must be promoted.

Sustainability has traditionally been closely linked to economic segments with a greater impact on the environment, leaving financial institutions somewhat on the sidelines. However, various initiatives in recent years have led to greater involvement in the field of sustainable finance, with the United Nations Environment Programme Finance Initiative, of which almost all significant institutions in Spain form part, being undoubtedly the most noteworthy.

In recent years, financial institutions have become increasingly aware of the need to consider ESG factors in their business model and investment strategy to be socially responsible. In this sense, the European Central Bank recently published an advisory guidance on climate-related and environmental risks, while not strictly binding, is a major step towards being able to integrate environmental and climate-related criteria into decision-making.

The financial sector is expected, although not obliged, to analyse the extent to which their current management and disclosure practices with respect to climate-related and environmental risks are safe and prudent considering the expectations set out in the guidelines. Furthermore, environmental, social and governance (ESG) risks are, for the second year in a row, one of the priorities within the Single Supervisory Mechanism framework.

In Spain, there are some initiatives and tax benefits aimed at encouraging the integration of ESG factors in the investment decisions of financial institutions. These measures seek to promote sustainable and responsible investment.

Within the framework of the +SE Plan (Energy Security Plan), in 2022 two tax incentives were approved to encourage energy transition aimed at corporate income tax and personal income taxpayers who carry out economic activities: (i) the free depreciation of investments that use energy from renewable sources and (ii) the accelerated depreciation of certain electric vehicles. It is important to note that the drive for sustainable investments isn´t limited to tax benefits. More and more investors and companies are considering ESG criteria as key elements to make financial decision-making, as it is recognized that a sound management of these factors could have a positive impact on long-term financial performance and risk management.

In this sense, integrating ESG factors into investment decisions creates value for the institution: revenue growth (clients are willing to pay to be green), cost reduction (costs of operations, raw materials and utilities can be reduced if ESG criteria are applied), reduction of regulatory and legal interventions (an ESG strategy helps minimize a company´s risk of adverse government action and can even make the Government support the initiative), increase employees productivity (ESG criteria attracts and retain valuable employees by increasing their motivation) and investment and asset optimisation (a sound ESG approach can improve return on investment by allocating capital to more promising and sustainable opportunities). Also, companies are implementing voluntary initiatives in their financial decisions like considering the Principles for Responsible Investment of the United Nations (PRI).

In Spain, due to the lack of specific regulation in this matter unfair competition and consumer protection legislation applies in these cases. In general terms, consumers have the right to receive truthful, effective, and sufficient information about products or services in order to facilitate informed consumer decisions. Unsubstantiated advertising practices like “greenwashing” could be qualified as misleading, which could lead – in addition to possible actions under the Unfair Competition Act - to administrative fines under consumer protection regulations, as well as reputational risks.

Companies in Spain have relied on existing self-regulatory codes, which can shed light on how they should conduct their environmental considerations. For example, the Código de autorregulación sobre argumentos ambientales en comunicaciones comerciales of Autocontrol (the self-regulatory body for advertising in Spain), published in 2009, serves as a guide for companies in the development, implementation and dissemination of advertising messages that include environmental considerations.

Bear in my mind that although it has to be transposed into national law by March 2026, the Council of the European Union passed the definitive Greenwashing Directive (Directive (EU) 2024/825 of the European Parliament and of the Council of 28 February 2024 amending Directives 2005/29/EC and 2011/83/EU as regards empowering consumers in the green transition through better protection against unfair practices and through better information) whose main objective is to protect consumers from all misleading commercial practices and deceptive business practices. To this end, this new regulation foresees a ban on the use of environmental terms such as "environmentally friendly", "biodegradable" or "eco", as well as the use of sustainability labels, among others, without any kind of control or comparable reference.

No, but from this year onwards a key aspect will be the control and sanctioning of bad practices in sustainability, including green, social and impact washing. I would like to highlight the importance of solving the problems that affect the proper understanding of the regulatory framework, differentiating between voluntary bad practices and those derived from exogenous factors. It is essential to contemplate this reality, avoiding a binary, exclusionary approach, considering the grey aspects of the transition period and applying the appropriate rigor.

Regarding future ESG disclosure requirements, there is a project to implement the recently approved Corporate Sustainability Reporting Directive (CSRD) that has amended the existing reporting requirements of the Non-Financial Reporting Directive (NFRD). The CSRD: (1) extends the scope of the NFRD to all large companies and all companies listed on regulated markets (except listed micro-enterprises); (2) introduces more detailed reporting requirements and a requirement to report according to mandatory EU sustainability reporting standards; and (3) requires companies to digitally “tag” the reported information, so it is machine readable and feeds into the European single access point.

Recently, the Council of the EU and the European Parliament reached a provisional political agreement on the CSRD. It is expected that the new regulation will come into application in three stages: (1) 1 January 2024 for companies already subject to NFRD; (2) 1 January 2025 for large companies that are not presently subject to the NFRD; and (3) 1 January 2026 for listed SMEs, small and non-complex credit institutions, and captive insurance undertakings. Also, it is expected to set mandatory EU standards and focus on climate change disclosure (e.g., transition plans and specific targets).

ESG criteria applied to the M&A market are shaping up in the near future as a fundamental lever for growth, competitiveness, and access to available capital. They will be key to decision-making, to gaining and maintaining the trust of stakeholders and, ultimately, to generating value and reducing risks in the long term.

For corporate and fund-based dealmakers, decisive steps are needed in risk reduction and in long-term value generation. Organizations that rapidly embrace ESG in M&A will be better positioned to grow both resolutely and sustainably.

The ESG factors add complexity to the M&A due diligence considering the noteworthy growing emphasis on emissions and supply chain management. Companies may soon expect to be required to disclose comprehensive and accurate data on their emissions profiles, signaling their commitment to environmental stewardship and readiness for a low-carbon economy. Transparency in supply chain management is becoming equally essential. Companies are held accountable for operations within their supply chains, and a robust, ethical supply chain system can mitigate risks related to labour rights, human rights, and environmental impact, thereby protecting potential acquirers from legal, financial, and reputational damage.

By proactively incorporating ESG practices into their operations and strategies, companies of all sizes and sectors can position themselves for success in the long term.

This not only benefits the companies themselves but also contributes to a more sustainable and responsible global business environment. Embracing the evolving legal perspective and the growing emphasis on positive contributions to society and the environment can help companies enhance their market reputation and drive long-term value creation.

It would be a good idea to carry on with the proposed Directive on Corporate Sustainability Due Diligence which aims to promote sustainable and responsible business behavior and to anchor human right and environmental consideration in operations and corporate governance of companies.