The Importance of Environmental, Social, and Corporate Governance (ESG) in the Portuguese Legal Context:

A Strategic Vision for Companies

In an era of growing global awareness, Environmental, Social and Corporate Governance
(ESG) practices have evolved from an ethical trend to a central pillar of business strategy.
With the entry into force of the Corporate Sustainability Reporting Directive (CSRD)
and the acceleration of the European regulatory framework, Portuguese companies face new
and complex juridical imperatives. This transformation is not just a
matter of compliance; it is a strategic opportunity for differentiation,
access to sustainable financing and strengthening business resilience. This
article explores the legal framework for ESG in Portugal, the challenges it
poses and how specialised legal advice can transform
regulatory obligations into competitive advantages.

1. The Turning Point: The New Legal Reality of ESG in Portugal

Corporate sustainability in Europe is undergoing an unprecedented structural transformation.
Driven by the European Green Deal, which
aims for climate neutrality by 2050, the European Union has created a regulatory ecosystem
that directly binds Portuguese companies.
The centrepiece of this new architecture is the Corporate Sustainability Reporting Directive
(CSRD), in force since 2023. Although its
practical effects will begin to be felt in 2025 – when large
companies will have to publish their first audited sustainability reports
for 2024 – its impact is already redefining governance practices

This new paradigm demands radical transparency and imposes
responsibilities that go far beyond traditional reporting and accounts, touching
on all areas of business operations.

2. Demystifying ESG: The Three Pillars and Their Legal Framework
The acronym ESG represents three dimensions that together define
modern corporate sustainability. In Portugal, each pillar has an
increasingly sophisticated legal framework.

A) Environmental Dimension (E): From Responsibility to Opportunity

This pillar covers the company's impact on the environment. Legal obligations
are becoming increasingly stringent:

Mandatory Environmental Reporting: Under the CSRD, companies must
disclose detailed data on carbon emissions, resource use,
waste management and impact on biodiversity.

Access to Sustainable Financing: The Climate Framework Law (Law No.
98/2021) and the EU Taxonomy (Regulation 2020/852) establish scientific criteria
for an activity to be classified as ‘green’. Compliance
is now key to accessing green bonds, tax incentives and
European subsidies, such as those from the PRR.

B) Social Dimension (S): Human Responsibility in the Value Chain

The social component focuses on the company's relationship with its
employees, customers, community and suppliers.

Human Rights Due Diligence: The new CSDDD (Corporate
Sustainability Due Diligence Directive) of 2024 requires large companies
(with phased implementation from 2027) to identify, prevent and mitigate risks
of human rights violations throughout their supply chain,
including child or forced labour.

National Labour Legislation: The Labour Code has been incorporating
ESG elements, reinforcing equal pay, diversity, safety and
health at work.
 

C) Governance Dimension (G): The Structure of Trust

Strong governance is the foundation that ensures ESG practices are more
than just marketing.

Preventing Greenwashing: The IPCG Corporate Governance Code
recommends the integration of ESG criteria into statutes, reports and even
manager remuneration, promoting transparency that combats
misleading practices.

Director Liability: Portuguese law is clear: directors
can be held personally liable, both civilly and
criminally, for environmental damage resulting from negligent management.

Control Structures: It is now essential to create sustainability committees,
implement ESG risk management systems and establish secure
whistleblowing channels, with independent audits to validate the
accuracy of reports.

3. The CSRD in Detail: The New Era of Mandatory Transparency
The CSRD replaces the previous directive (NFRD) and represents a quantum leap in
terms of requirements and scope. The main differences are:

Expanded Scope: The number of companies in the
EU required to report increases from around 11,600 to almost 50,000.

Uniform Standards: It ends the previous flexibility and imposes a set of
12 mandatory technical standards (the ESRS), which dictate exactly how and what to
report.

Double Materiality: Companies must report not only on the impact of their
activities on the planet and society, but also on how ESG risks (e.g. climate change)
affect their own financial performance.

Mandatory Auditing: For the first time, sustainability reports
will have to be audited by an independent entity, giving them the
same level of rigour as financial reports.

Digital Format: Reports will have to be submitted in a standardised digital format
(XBRL), facilitating their analysis and comparison.
Implementation will be phased in, starting in 2025 (for large public interest companies)
and gradually extending to 2029 (for listed SMEs).

4. Legal Challenges and Solutions for Portuguese Companies

The transition to an ESG-compliant model presents significant legal challenges:
- Complexity of Reporting: Collecting and validating the data required by the CSRD
is a Herculean task that requires rigour and technical knowledge.

Complexity of Reporting: Collecting and validating the data required by the
CSRD is a Herculean task that requires rigour and technical knowledge.

Risk of Litigation: Non-compliance or the publication of misleading information
(greenwashing) opens the door to legal action by
shareholders, NGOs and consumers. The Portuguese Constitutional Court has
been reinforcing the right to a healthy environment, paving the way for
class actions.

Impact on M&A: In a merger or acquisition, ESG due diligence is now
decisive. Unidentified environmental risks can translate into
future financial liabilities, such as the remediation of contaminated
soils.

As a law firm, our approach is preventive and
strategic. We offer solutions that include ESG compliance audits,
drafting of internal policies, negotiation of sustainability clauses in
contracts, and representation in litigation, ensuring that our clients not
only comply with the law but also take advantage of available tax incentives.

5. Conclusion: Turning Obligation into Competitive Advantage

ESG practices represent an irreversible transformation. Ignoring them is to
risk losing competitiveness and becoming irrelevant in the market. Embracing them
with the right legal support paves the way for innovation,
resilience and sustainable growth.

Companies with high ESG standards more easily attract institutional investors,
benefit from reduced financing costs and are in a privileged position to access
funds from the Recovery and Resilience Plan (PRR). Integrating ESG into your strategy is, today, one of the
smartest investments a company can make.

If your company is looking to navigate this new reality with confidence and a vision
for the future, we invite you to contact our office in Lisbon. Our
team is ready to assess your needs and develop an
ESG strategy tailored to your business.

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