Landmark new EU rules on transition plans and corporate due diligence addressing environmental and human rights risks at global level
The CSDDD (Corporate Sustainability Due Diligence Directive) is a critical piece of the European Union regulatory landscape puzzle. The European Commission unveiled its proposal as part of its “Just and sustainable economy” package last February 2022.
The Directive aims to establish a due diligence duty for companies to integrate risk management and mitigation processes of human rights and environmental impacts in their value chains. More concretely, the Directive introduces duties for companies’ directors -who are supposed to act in the best interest of the company- to set up and oversee the implementation of due diligence processes and integrate due diligence into corporate strategy. In addition to this, the proposed Directive will legally oblige EU corporations under scope to develop transition plans.
“Trilogue” negotiations between EU institutions (European Commission, European Parliament, and European Council) could conclude with a final agreement as soon as by end 2023. Then, the Directive will require implementation via national laws in each EU Member States and could have some immediate effect on companies under scope as soon as the EU norm is finalised.
The CSDDD will very decisively complement existing corporate disclosure rules in the EU, i.e., the CSRD (Corporate Sustainability Reporting Directive) that entered into force in January 2023. While CSRD establishes reporting obligations, CSDDD will establish sustainability-related content of firms’ reporting (most importantly, on transition plans), as well as broader obligations such as aligning corporate governance with environmental and human sustainability.
Specifically, CSDDD will introduce the legal obligation for firms to develop transition plans and detail requirements to do so and specific information to be included. According to the European Parliament stance, all companies over 1000 employees would need to publish detailed Paris-aligned transition plans (i.e., compatible with 1.5 degrees Celsius) and the variable pay of directors would be linked to achieving progress on those plans.
CSDDD will also likely bring important changes for institutional investors and asset managers. Specifically, the European Parliament aims to introduce an obligation for them to “induce their investee companies to bring actual adverse impacts caused by them to an end”. This means that institutional investors and fund or asset managers (and possibly the funds which they control) should be required to engage with investee companies, namely by exercising voting rights to induce companies’ managers to minimise or end any negative impacts to human rights and the environment. In this regard, the IIGCC (Institutional Investors Group on Climate Change) deems that the European Parliament stance on the CSDDD is encouraging for net-zero committed investors since it specifies their due diligence requirements and, concretely, recognises the primary role of stewardship and engagement activities in emissions reduction rather than simply divesting from high-emitting industries.
Negotiations are underway…
The inclusion of the financial services sector as a whole is one of the major contentious issues to be agreed in current Trilogue discussions between EU institutions (European Commission, European Parliament, and European Council). Concretely, the European Council is in favour of generally excluding them from the CSDDD scope while allowing individual EU Member States to include parts of their financial sector under the Directive’s reach. This is opposed by the European Parliament, which deems that the whole EU financial sector must be covered by the CSDDD.
Another point of debate is the issue of Director’s duty of care, to be further discussed in Trilogues given the different stances by EU institutions and policymakers. The European Parliament favours a general duty of care for directors requiring that environmental and climate risks are addressed in the company’s strategy. Specifically, the European Parliament lead negotiator Rapporteur MEP Wolters expects support from the European Commission to her views on establishing level obligations for Directors at this regard .
Given that the next EU elections will take place in June 2024, this means that EU institutions face multiple diverging points in their final deliberations before that date. In principle, discussions are expected to be finalised by the last quarter of 2023 or first quarter of 2024.
In a nutshell, the CSDDD is a key element of the EU regulatory framework for the transition of EU corporations to climate neutrality. The importance of this piece of legislation for the transition of not only EU corporations, but of the whole economic system globally, adds pressure to the need of an agreement in the coming months. The Directive should, however, not be watered down to bridge the diverging views of European Council and the European Parliament, namely on the inclusion of the financial services industry under the CSDDD scope, since to fully effective the CSDDD must target both companies as well as the financial sector that manages end investors’ assets. Pressure from the financial sector, especially through engagement (that should not be limited to the exercise of voting rights) is key to induce companies to transition. To this end, the transition objective must be as well at the core of Directors’ duties. Finally, the generalisation of transition plans should support investment decisions in clean technologies that needs to happen in the investment cycle until 2030, especially in the case of EU hard-to-abate sectors.
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EU legislation |
Key aims |
Entered into force |
Who appliable to |
Content |
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CSRD (Corporate Sustainability Reporting Directive) |
Establishes reporting requirements for sustainable corporate governance |
5 January 2023 |
EU 'public interest entities' with regulated market listed securities, credit institutions and insurance companies with more than 500 employees |
Rules on principal, actual or potential adverse impacts relating to the company's value chain (that is, its operations, products and services, business relationships and supply chain), as well as rules on actions taken, and the result of such actions, to prevent, mitigate or remediate actual or potential adverse impacts |
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EU Taxonomy Regulation |
Provides a classification system for environmentally sustainable economic activities ('green list'), Serves as the framework for the subsequent development, and update of the EU taxonomy through delegated acts. |
12 July 2020
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Companies over 500 employees that fall under the CSRD
EU and non-EU financial market participants that offer and distribute financial products in the EU EU and its member states when setting public measures, standards or labels for green financial products or corporate bonds |
Obligations for economic activities to qualify as environmentally sustainable related to four overarching conditions: a) substantially contributes (SC) to one or more of the six environmental objectives b) does no significant harm (DNSH) to any of the environmental objectives c) is carried out in compliance with the minimum social safeguards d) complies with technical screening criteria (TSC) established by the Commission For each of the six environmental objectives defined by the Regulation (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 Regulation defines broadly how an economic activity may provide a substantial contribution to the objective or may significantly harm it. The Regulation tasks the Commission with establishing, through delegated acts, the TSC to determine the conditions under which a specific economic activity qualifies as contributing substantially to the objective, and whether an economic activity significantly harms an objective, in application of the DNSH principle. |
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SFDR (Sustainable Finance Disclosure Regulation) |
Sets requirement for information to investors about sustainability risks that can affect the value and return of investors are considered and the adverse impacts that such investments have from an environmental and social perspective.
Market participants have to make this information available with regard to specific products, but also relating to their respective firm as a whole.
The Regulation does not force market participants to consider green criteria when investing. Rather, it sets out rules that require them to justify the sustainability claims that they make in relation to their financial products. |
10 March 2021 |
Financial market participants managing money on behalf of end investors in the EU (asset managers, insurance undertakings, occupational and other pension providers, as well as investment firms)
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Establishes mandatory disclosure in order to reduce the asymmetry of information between financial entities and end-investors in funds.
Establishes harmonised rules on transparency to financial market participants, both in the investment decision-making process and the advisory process.
Financial market participants would be asked to publish their policies on integrating sustainability risks in the investment decision-making process or advisory process (Article 3), on their websites. |
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CSDDD (Corporate Sustainability Due Diligence Directive) |
Complement the Taxonomy Regulation and the SFDR by imposing obligations on companies to provide data and information on risks within their value chains that are linked to the respect of human rights or environmental impacts. |
Expected Q4 2023 or 2024 |
EU corporations (thresholds to be specified) |
Establish obligations for companies regarding adverse impacts on 'actual and potential' human rights and the environment, with respect to their own operations, the operations of their subsidiaries, and the value chain operations carried out by entities with which the company has a business relationship. The proposal also includes penalties and civic liability for violations of the obligations.
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Based on information published by the European Parliament Research Service:
https://www.europarl.europa.eu/RegData/etudes/BRIE/2022/698935/EPRS_BRI(2022)698935_EN.pdf
https://www.europarl.europa.eu/RegData/etudes/BRIE/2022/729424/EPRS_BRI(2022)729424_EN.pdf
https://www.europarl.europa.eu/RegData/etudes/BRIE/2019/635572/EPRS_BRI(2019)635572_EN.pdf
